Operations Management Study Guide Essay

Labor is the single largest driver of costs. Tools of operations management can be applied in different ways: Operations management tools can be applied to ensure that resources are used as efficiently as possible; that is, the most is achieved with what we have. Operations management tools can be used to make desirable trade-offs between competing objectives. Operations management tools can be used to redesign or restructure our operations so that we can improve performance along multiple dimensions simultaneously. – Introduction Powering Operations Management definition: Applied to ensure that resources are used as effectively as possible. Used to make desirable trade-offs between competing objectives. Used to redesign operations so that we can improve performance along multiple dimensions simultaneously. An area of management concerned with overseeing designing, and controlling the process of production and redesigning business operations in the production of goods and services – Wisped Historically used in manufacturing.

First with the Model T, today with Tests Model S. Operations management tools are also used in sports. Create schedules for major pro and college organizations. They also use operations management tools to dynamically price tickets to maximize revenue (called revenue management). Plane ticket prices. UPS uses operations management to make deliveries. They use a process called ORION – On-Road Integrated Optimization and Navigation – aims to deliver the best answer yet to the traveling sales problem.

Apple – Gardner has ranked Apple as having the number one supply chain for six consecutive years. Supply-demand mismatch: Having a great product is not sufficient for profitability. Needs to be available for purchase when customers want it (directly impacts revenues) Is of high quality (indirectly impacts revenues) – Process Analysis Powering Why are there mismatches between supply & demand Example: receiving radiology procedure at Presbyterian Hospital in Philadelphia Giant Chart – displays process steps and durations.

Illustrates dependence of activities. Supply is not unlimited – have to wait on room prep because someone is currently having the procedure (and there’s only one room) The patient views his/her day as a sequence of activities leading to one outcome The resource views his/her day as a set of tasks that are part of a larger process Flow Unit: what is tracked through the process and generally defines the process output of interest.

Metrics of process analysis: = Inventory = how many flow units are in the process R = Flow Rate = rate at which flow units enter or leave the process T = Flow Time = total time a flow unit is in the process Littlest Law: Inventory = Flow Rate x Flow Time 1=Rest How might inventory relate to the financial position of a firm? How might it relate to the quality of products sold? R Flow Rate rate at which flow units enter or leave the process How might the flow rate relate to the revenues a firm realizes?

T = Iowa Time = total time a flow unit is in the process A shorter flow time reduces delay between demand and fulfillment; can that impact sales? Four different ways to count inventory: In terms of flow units (The “I” in – I-Rest): Number of wetsuits, patients, tons of wheat, semiconductor chips, etc. Useful when the focus is on one particular flow unit. Less useful when firm has multiple products (think retail store). In terms of As (The “l” in R x n: The $ value of inventory This is an intuitive measure of a firm’s total inventory.

In terms of days-of-supply: The average number of days a unit spends in the system. Also, the number of days inventory would last at the average flow rate if no replenishments arrive. In terms of turns: The number Of times the average amount Of inventory exits the system. Days-of-supply: “T” in I = Rig T Days-of-supply I / R *Note: if you have a yearly COGS, make sure you divide it by 365 first in order to use the Days-of-Supply equation. Ex: I 33,160, R COGS $304,657 Days-of-supply = I / R = 33, 160 / (304,657 / 365) = 39. O’Neill annual turns R = 15,000 / month R = 15,000 x 12 = 180,000/year 30,000 T = 2 month = 1/6 per year Cost of Goods Sold (COGS) – The costs incurred to produce or acquire items that are then sold as revenue. R = COGS = Flow Rate The Flow Rate is not Sales (which was $405,046) because inventory is assured in the cost to purchase goods, not in the sales revenue that may be earned from the goods. Note: Some companies use the term “Cost of sales” to mean COGS Why are high inventory turns a good thing? A low inventory turnover implies poor sales and, therefore, excess inventory.

A high ratio implies either strong sales or ineffective buying. High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall. Turning over inventory quickly also improves your company’s liquidity, or ability to keep up with the near-term debt obligations. Other side – high inventory may also be a sign that you are buying too little inventory to keep up with customer demands. Buying smaller inventory amounts regularly means you pay high price points. This inflates your COGS, which makes for a higher turnover ratio.

PROCESS ANALYSIS Understanding the actual capacity of the current process – process mapping & analysis Steps to Process Mapping (1) Define the process boundaries When we analyze our capacity to make hot dogs, do we include shipping capacity? (2) List the steps (3) Sequence the steps 4) Complete the map using appropriate symbols to describe the actions, flow, and waiting. Narrowest part of the pipe (bottleneck) determines capacity of whole pipe… Process Capacity – how much input can be changed into an output in a given unit of time Note this is a theoretical amount, not the actual = Min {Capacity of Resource 1, Capacity of Resource 2, … Flow Rate = Min {Available Input, Demand, Process Capacity} Supply constrained – customers want more than we can make Demand constrained – we can make more than customers want Capacity calculations: Find the capacity of each process step, which is the maximum flow rate (R) wrought that process step. Express each process steps capacity in the same units. Capacity of the entire process: The capacity of a process is the minimum capacity of the sub processes: The sub process that constrains the entire process is called the bottleneck. The bottleneck is always at 100% utilization.

Utilization: Process utilization = Flow rate / Process capacity Measures gap between how much was produced and how much could have been produced Does not capture demand Implied Utilization: Capacity requested by demand/available capacity Basically, implied utilization is where we take DEMAND into account… Captures mismatch between demand and capacity Can be greater than 100% – do not have enough of a resource to meet demand Important for multiple products Implied utilization is the ratio of demand on a task to its capacity When does the implied utilization analysis not work?

It doesn’t work when the amount of time for each activity varies. Therefore, you just need to define a different flow unit, which should give you the same implied utilizations. (Slide 71 ) Defining the flow unit as “one minute of work” yields the same implied utilizations as defining the flow unit as “one application. In other words, the implied utilization does NOT depend on how the flow unit is defined as long as all demands and capacities are defined with the same flow unit. Us m Mary: In a process with a series of tasks: The bottleneck’s capacity determines the maximum flow rate through the process.

Adding capacity to the bottleneck Will increase the capacity of the total process, but may cause the bottleneck to move to another task/ resource. Line balancing (I. E. , reallocating tasks from the bottleneck to another resource) can improve the capacity of the total process without adding resources. Integrating work improves line balancing. Implied utilization of a resource can be evaluated even if there are different types of flow units. Chapter 2 (MAWS) Giant Chart -? allows us to see the process steps and their durations, which are called activity times or processing times.

Illustrates the dependence between the various process activities. Critical path – composed of all those activities that – if delayed – Valued lead to a delay in the overall completion time of the project, or – in this case – the time the patient has completed his or her stay in the radiology unit. Waiting – symptom of supply-demand schismatic Process – can be thought of as a “black box” that uses resources (labor and capital) to transform inputs (undiagnosed patients, raw materials, unseeded customers) into outputs (diagnosed patients, finished goods, served customers).

Three measures of process performance: (1) The number of flow units contained within the process is called the inventory (in a production setting, it is referred to as work-in-process (WIPE) ). (2) The time it takes a flow unit to get through the process is called the flow time. (3) The rate at which the process is delivering output (measured in [flow units / unit of time], e. . Units per day) is called the flow rate or throughput rate. What reduces demand-supply mismatches?

Increasing the Max flow rate (capacity) avoids situations where we have insufficient supply to match demand. Shorter flow times reduce the time delay between the occurrence of demand and its fulfillment in the form of supply. Lower inventory results in lower working capital requirements as well as many quality advantages that we explore later in this book. Thus, a reduction in inventory also yields a reduction in flow time. Littlest Law: Inventory is an asset for an accountant, but should be viewed as a liability, cause you need to get rid of it.

Unused inventory is wasted money. Measuring inventory in a common monetary unit facilitates the aggregation of inventory across different productions. Inventory requires substantial financial investments. Moreover, the inventory holding cost is substantially higher than the mere financial holding cost for a number of reasons: Inventory might become obsolete (think of the annual holding cost of a microprocessor) Inventory might physically perish Inventory might disappear (theft, example) Inventory requires storage space and other overhead cost

Per unit Inventory Costs Annual Inventory Costs / Annual Inventory Turns Five Reasons to Hold Inventory: Pipeline Inventory Reflects the time a flow unit has to spend in the process in order to be transformed from input to output. Seasonal Inventory Occurs when capacity is rigid and demand is variable. As long as it is costly to add and subtract capacity, firms will designer to smooth production relative to sales, thereby creating the need for seasonal inventory. Cycle Inventory Ex: scale economics in transportation processes. A truck often carries more product than can be immediately sold.

Hence, it sakes some time to sell off the entire truck delivery. During that interval of time, there will be inventory. This inventory is labeled cycle inventory as it reflects that the transportation process follows a certain shipment cycle (e. G. A shipment every week). The major difference between cycle inventory and seasonal inventory is that seasonal inventory is due to temporary imbalances in supply and demand due to variable demand (soup) or variable supply (beets) while cycle inventory is created due to a cost motivation (I. E. Gas costs).

Decoupling Inventory/Buffers Inventory between process steps can serve as buffers. An inventory buffer lows management to operate steps independently from each other. Buffers can absorb variations in flow rates by acting as a SOUrce Of supply for a downstream process step, even if the previous operation itself might not be able to create this supply at the given moment in time. Means people can take breaks and the entire process does not shut down. Safety Inventory Stochastic demand – the most challenging Refers to the fact that we need to distinguish between the predicted demand and the actually realized demand.

Stochastic demand can be present along with seasonal demand. Ex: January sales can be known to be higher than hose for other months (seasonal demand) and there can be variation around that known forecast (stochastic demand). The product-process matrix stipulates that over its life cycle, a product typically is initially produced in a job shop process. It is neither economical to produce very high volumes in a job shop nor does it make sense to use an assembly line in order to produce only a handful of products a year.

The usefulness of the product-process matrix lies in two different points: Similar process types tend to have similar problems. Ex: Assembly lines tend to have the problem of line balancing. Batch-flow recesses tend to be slow in responding to customer demand. Thus, once you know a process type, you can quickly determine what type of problems the process is likely to face and what solution methods are most appropriate. The “natural drift” of industries toward the lower right enables you to predict how processes are likely to evolve in a particular industry.

Chapter 3 (MAWS) process capacity – maximum amount that a process can produce in a given unit of time. Not only can capacity be measured at the level of the overall process, it can also be measured at the level of the individual resources that constitute the process. This measures how much the process can produce versus what the process actually produces. Process flow diagram – a graphical way to describe the process. Helps structure information that we collect during the case analysis or process improvement project. Process boundaries – focusing on the part of the process we want to analyze in greater detail.

Bottleneck Process capacity = Minimum {Capacity of resource 1, Capacity of resource n} Time to fulfill X units = X/ Flow rate Utilization is a measure of how much the process actually produces relative to how much it could produce if it were running at full speed (I. . Its capacity). Given that the bottleneck is the resource with the lowest capacity and that the flow rate through all resources is identical, the bottleneck is the resource with the highest utilization. Given that the process might not always be capacity- constrained, but rather demand-constrained, even the bottleneck might not be 100 percent utilized.

Utilization can never exceed 100%. Thus, utilization only carries information about excess capacity, in which case utilization is strictly less than 100%. Implied Utilization Captures the mismatch between what could flow through the resource demand) and what the resource can provide (capacity). Sometimes the demand that could flow through a resource is called the workload. Unlike utilization, implied utilization can exceed 100%. Any excess over 100% reflects that a resource does not have the capacity available to meet demand. If a resource has an implied utilization over 100%, this does NOT make it the bottleneck.

This just means that these resources have excess capacity. Might want to read over peg. 44 again… Flow unit: Must be able to express all demands and capacities in terms of the chosen flow unit. Product mix -? different types of customers flowing through one recess. Chapter 5 (CA) Process: any part of an organization that takes inputs and transforms them into outputs that, it is hoped, are of greater value to the organization than the original inputs. Cycle time: the average time between completions of successive units in a process (this is the definition used in this book).

The term is sometimes used to mean the elapsed time between starting and completing a job. Buffering refers to a storage area between stages where the output of a stage IS placed prior to being used in a downstream stage. Buffering allows the stages to operate independently. If one stage feeds a second stage with no intermediate buffer, then the assumption is that the two stages are directly linked. Blocking – occurs when the activities in the stage must stop because there is no place to deposit the item just completed. Starving – occurs when the activities in a stage must stop because there is no work.

Productivity – the ratio of output to input. Ex: dollar value of output divided by cost of all the inputs. Efficiency – ratio of the actual output of a process relative to some standard. Used to measure losses or gains in a process. Run time – time required to produce a batch of parts. Calculated by multiplying the time required to produce each unit by the batch size. Setup time – time required to prepare a machine to make a particular item. Operation time – sum of the setup time and the runtime for a batch of parts that are run on a machine.

Throughput time – includes the time that the unit spends actually being worked on together with the time spent waiting in a queue. Throughput rate – output rate that the process is expected to produce over a period of time. Throughput ratio – ratio of the total throughput time to the value-added time Value-added time – time in which useful work is actually being done on a unit. Littlest Law -? Throughput time = Work-in-process / Throughput rate Chapter 4 (MAWS) The objective of any process should be to create value (make profits), not to maximize the utilization of every resource involved in the process.

Analyzing an Assembly Operation Capacity = Number of resources / Processing time Time to Process a Quantity X starting with an empty process Cycle time: time between the completions of two subsequent flow units Time through an empty worker-paced process = sum of the processing times Time through an empty machine-paced process Number Of resources in sequence x Processing time of the bottleneck step Time to finish X units starting with an empty system = Time through an empty process + (X – 1 unit / Flow rate) abort Content and Idle Time Labor Content – sum of processing times with labor To correctly compute the cost of direct labor, we need to look at two measures: The number of scooters produced per unit of time (the flow rate) The amount of wages we pay for the same time period Cost of direct labor total wages per unit of time / flow rate per unit of time Cycle time = 1 / Flow rate Example: produce 1 scooter ever 6 minutes, the cycle time is 6 minutes Idle mime for a single worker = Cycle time – Processing time of a Single worker Idle time across all workers at resource I = Cycle time (Number of workers at resource I) -? Processing time at resource I Average labor utilization = Labor content / Labor content + Total idle time Increasing Capacity by Line Balancing Imbalances within a process provide micro-level mismatches between what could be supplied by one step and what is demanded by the following steps. Nine balancing is the act of reducing such imbalances. It provides the opportunity to: Increase the efficiency of the process by better utilizing the arioso resources, in this case labor.

Increase the capacity of the process (without adding more resources to it) by reallocating either workers from neutralized resources to the bottleneck or work from the bottleneck to neutralized resources. Scale Up to Higher Volume use the exact same layout and staffing plan, we could replicate the – now balanced – process and add another (and another… ) worker-paced line with three workers each. We could assign additional workers to the three process steps, which would increase the capacity of the steps and hence lead to a higher overall process capacity. We could divide up the work currently reformed by three workers, thereby increasing the specialization of each step (and thus reducing processing times and hence increasing capacity). Chapter 7 (MAWS) Batching: a process of repeating production cycles where parts are made in batches.

The precise definition of a batch is – a collection of flow units. Throughout our analysis, we assume that batches are produced in succession. That is, once the production of one batch is completed, the production of the next batch begins and all batches contain the same number and type of flow unit. Break things up into “component sets” Nothing is produced while the resource is in setup mode. The capacity of a resource can be increased by increasing the batch size. Capacity given batch size – Batch size / Setup time + Batch size x Processing time B – The batch size is the number of flow units that are produced in one “cycle” (I. E. Before the process repeats itself).

S – The setup time includes all setups in the production of the batch. It can also include any other nonproductive time associated with the production of the batch. P – The processing time includes all production time that is needed to produce one complete flow unit Of output at the milling machine. No matter how large a batch size we choose, e will never be able to produce faster than one unit every p units of time. Thus, l/p can be thought of as the maximum capacity the process can achieve. Interaction between Batching and Inventory While large batch sizes are desirable from a capacity perspective, they typically require a higher level of inventory, either within the process or at the finished goods level.

A higher inventory level also will lead to longer flow times. This is why batch-flow operations generally are not very fast in responding to customer orders. Producing in large batches leads to a mismatch between the rate of supply and the rate of demand. The larger the batch size, the longer the time the flow unit waits for the other “members” of the same batch. Notice that the example in the book (peg. 120) includes idle time. Why is there idle time? Without the idle time, the milling machine would produce too quickly given the batch size of 200 units. Choosing a batch size I the presence of setup times Large batches lead to large inventory; small batches lead to losses in capacity.