POM

1. Introduction
Operations is defined as the activities that go in an organization in the creation of goods and services.
Operations management (OM) is defined as the set of activities that create value in the form of goods and
services by transforming inputs into outputs.
Manufacturing creates tangible outputs that are usually quite obvious.
Tangible vs Intangible outputs.
Typical Manufacturing Chain: Tier 3,2,1 Supplier  Manufacturer  Warehouse, Dealer, Distrubutor, Direct
Sales  Customer
Web Site
Why Study OM? Business Edu, Career Opportunities, Systematic Approach to Org. Processes, Cross-Functional
Applications
Operations: Manufacturing, Production control, Quality assurance, Engineering, Purchasing, Maintenance, etc.
What is a Transformation Process? A transformation process is defined as a user of resources to transform
inputs into some desired outputs. Eg., Physical—manufacturing, Locational—transportation, Exchange—
retailing, Storage—warehousing, Physiological--health care, Informational—telecommunications . . . .
Attributes of Goods: Resaleable, inventoried, measureable aspects of quality of good, selling and prodn. are
distinct, transportable, Site of facility is imp for cost, easy to automate, generation of revenue primarily from
the tangible product.
Attributes of Services: Usually not resaleable/inventoried, non-measureable (most services), selling and
prod happen together, provider not product is transeferrable, site of facility is imp for cust, difficult to
automate, revenue from the intangible.
• Emerging Trend: Every organization is in the service business. Manufacturing operations
as well as other parts of the organization are also in the service business.
• Core services are basic things that customers want from products they purchase.
• Core Services Performance Objectives: Quality, Speed, Flexibility, Price (or cost
Reduction).
• Value-added services differentiate the orgn from competitors and build relationships that
bind cust to the firm in a +ve way
• Value-Added Service Categories: Problem Solving, Sales Support, Field Support,
Information.
• The Importance of Operations Management: Synergies must exist with other functional
areas of the organization; Operations account for 60-80% of the direct expenses that burden a firms profit.
• Historical Development of OM: Early Concepts (Labor Specialization, standardized parts),
Scientific Management, Mass Production, Lean Production, Mass Customization, JIT and TQC, Manufacturing
Strategy Paradigm, Service Quality and Productivity, TQM and Quality Certification, Business Process
Reengineering, SCM, Electronic Commerce.
• Current Issues in OM: Coordinate the relationships between mutually supportive but
separate organizations, Optimizing global supplier, production, and distribution networks, Increased co-
production of goods and services, Managing the customers experience during the service encounter, Raising
the awareness of operations as a significant competitive weapon (empowered employee, teams …), Highly
ethical standards and social responsibility, Environmentally sensitive production, green manufacturing,
recycled materials, remanufactur-ing (ISO 14000).
• ---------------------------------------------------------------------------------------------------------------------------------
------------------------------------------
• 2. Operations Strategy and Competitiveness
• Strategy: How a firm intends to create and sustain value for its shareholders - Corporate
Financial Value.
• Strategy Process: Customer Needs  Corporate Strategy  Operations Strategy 
Decisions on Processes and Infrastructure
Eg., More Product  Increase Org. Size  Increase Production Capacity  Build New Factory
• Competitive Dimensions: Cost or Price (Make the Product or Deliver the Service Cheap);
Quality (Make a Great Product or Deliver a Great Service); Delivery Speed (Make the Product or Deliver the
Service Quickly); Delivery Reliability (Deliver It When Promised); Coping with Changes in Demand (Change Its
Volume); Flexibility and New Product Introduction Speed (Change It); Other Product-Specific Criteria (Support
It).
• Dealing with Trade-offs: For example, if we reduce costs by reducing product quality
inspections, we might reduce product quality or if we improve customer service problem solving by cross-
training personnel to deal with a wider-range of problems, they may become less efficient at dealing with
commonly occurring problems.
•
• Order qualifiers are the basic criteria that permit the firms products to be considered as
candidates for purchase by customers
• Order winners are the criteria that differentiates the products and services of one firm
from another.
• Strategy Development: Finance, Marketing, & Operations are the core functions;
Comprehensive strategy must integrate the three functions.
• Strategy Design Process: Financial Perspective  Customer Perspective  Internal Perspective
 Learning and Growth Perspective
• Expl: Improve Shareholder Value  Customer Value Proposition  Build-Increase-Achieve
 A Motivated and Prepared Workforce
• Any Strategy Development template helps to: Define value proposition, Identify the
competencies necessary to achieve the value, Define strategy to develop/employ the competencies, Define
the activities and task to execute the strategy.
• This approach helps foster a Cause and Effect mentality
• Kaplan and Norton’s Generic Strategy Map: Under the Financial Perspective, the
Productivity Strategy is generally made up from two components - Improve cost structure (Lower direct and
indirect costs) and Increase asset utilization (Reduce working and fixed capital) the Revenue Growth Strategy
is generally made up from two components - Build the franchise (Develop new sources of revenue) and
Increase customer value (Work with existing customers to expand relationships with company). Under the
Customer Perspective, there are three ways suggested as means of differentiating a company from others
in a marketplace - Product leadership (price, quality, performance, time/space) and Customer intimacy
(service, relationships) and Operational excellence (Executing the core processes cost efficiently). Under the
Internal Perspective, we identify the desired outcomes, and how these outcomes will be achieved through
the strategies. Under the Learning and Growth Perspective, there are three principle categories of
intangible assets needed for learning - Strategic competencies (skills & knowledge), Strategic technologies
(materials, process technologies, IT, IS, databases, tools, network) and Climate for action (motivation,
empowerment, align workforce behind strategy).
• Michael Porter states: The essence of strategy is in the activities – Choosing to perform
activities differently or to perform different activities than rivals. The activities of an organization, embedded
within the business processes defining the value chain, align with the three customer perspectives of Product
leadership, Customer Intimacy, & Operational Excellence. A fourth perspective to align with is Regulatory and
Environmental Considerations
• Strategies associated with Operational Excellence: Quality Initiatives, Process
Redesign and Technology Investments. Operations Strategy involves decisions that can be divided
into three broad areas: 1) LT – Strategic - What product, Make/Buy, What infrastructure, Facility location,
Capacity, Scaling of capacity, Developing skills, knowledge, Identifying and developing technologies. (Impact:
Determines the firm’s long range effectiveness in terms of how it can address the customer’s needs) 2) IT –
Tactical - How many employees at each skill level needed, When and where do we need them, Over time work
or additional shift, When and where should the materials be delivered, Decisions on Inventory – RM/FG/WIP. 3)
ST – Operational (Planning and Control) - What jobs to work on today/this period, Whom do we assign to the
job to, Which jobs have priority.
• Operations Strategy Framework: Customer Needs  New product : Old product 
Competitive dimensions & requirements  Quality, Dependability, Speed, Flexibility, and Price  Enterprise
capabilities (Operations and Supplier Capabilities: R&D, Technology, Systems, People, Distribution)  Support
Platforms (FM, HRM, Information Mgmt)
• Steps in Developing a Manufacturing Strategy: Overlying the Operations Strategy
framework is the strategic vision of the firm - target market, product line, core competencies, and operational
capabilities. (Segment the market according to the product group, Identify product requirements, demand
patterns, and profit margins of each group, Determine order qualifiers and winners for each group, Convert
order winners into specific performance requirements).
• Service Strategy Capacity Capabilities: Process-based capacities that transform
material or information and provide advantages on dimensions of cost and quality, Systems-based capacities
that are broad-based involving the entire operating system and provide advantages of short lead times and
customize on demand and Organization-based capacities that are difficult to replicate and provide abilities to
master new technologies. Internet Complements Strategy (The benefits and the perils).
• Productivity is a common measure on how well resources are being used. In the broadest
sense, it can be defined as the following ratio – Total Measure Productivity = Outputs/Inputs or Goods and
services produced/ All resources used
• Partial Measure Productivity = Output/Labor or Capital or Materials or Energy. Multifactor
Measure Productivity = Output/ Labor + Capital + Energy or Materials. Example of Productivity Measurement:
You have just determined that your service employees have used a total of 2400 hours of labor this week to
process 560 insurance forms. Last week the same crew used only 2000 hours of labor to process 480 forms.
Which productivity measure should be used? Answer: Could be classified as a Total Measure or Partial
Measure. Is productivity increasing or decreasing? Answer: Last week’s productivity = 480/2000 = 0.24, and
this week’s productivity is = 560/2400 = 0.23. So, productivity is decreasing slightly.
• Activity System Maps: Balanced Scorecard - How do customers see us? (customer
satisfaction, price & value/price relative to competition, market share); What must we excel at? (what internal
processes will ensure that we continually meet customer expectations? – delivery, quality, productivity); How
can we continually improve & create value (on-time delivery, ability to learn and innovate).
• Strategy & Sustainability: Sustainability – Ability to meet the current needs without
compromising the ability of future generations to meet their own need. This concept expands from just
creating value to being environmentally and socially responsible. Socially Responsible - No child labor, Pay fair
wages, Equal opportunity employment, Maintain safe work environment, Tolerable work hours, otherwise not
exploit the labor force or the community. Environmentally Responsible - Protect the environment, Cause no
harm, Reduce ecological footprint by carefully managing consumption of natural resources, Reducing waste,
Reducing carbon footprint by controlling emissions, Cradle to grave assessment of products environmental
costs.
• ---------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------
• 4) Strategic Capacity Management
• Capacity can be defined as the ability to hold, receive, store, or accommodate. Strategic
Capacity Planning is an approach for determining the overall capacity level of capital intensive resources,
including facilities, equipment, and overall labor force size.
• Capacity Utilization Rate = Capacity Used/ Best Operating Level. (Capacity used = rate of
output actually achieved; Best operating level = capacity for which the process was designed).
• Economies & Diseconomies of Scale: As Volume increases, average unit cost of output
decreases (economies of scale) to some extent and then starts increasing. This is where diseconomies start
working.
• The Experience Curve: As plants produce more products, they gain experience in the best
production methods and reduce their costs per unit.
• Capacity Focus: The concept of the focused factory holds that production facilities work
best when they focus on a fairly limited set of production objectives. Plants Within Plants (PWP). Extend focus
concept to operating level.
• Capacity Flexibility: Flexible plants, Flexible processes and Flexible workers.
• Capacity Planning: Maintaining System Balance, Frequency of Capacity Additions and
External Sources of Capacity.
• Capacity Planning: Balance – Unbalanced (Output of one stage is the exact input
requirements for the next stage) and Balanced stages of production.
• Capacity Planning: Frequency of Capacity Additions and External Sources of Capacity
• Determining Capacity Requirements: Forecast sales within each individual product line,
Calculate equipment and labor requirements to meet the forecasts, Project equipment and labor availability
over the planning horizon.
• Planning Service Capacity vs Manufacturing Capacity: Time - Goods cannot be stored
for later use and capacity must be available to provide a service when it is needed. Location - Service goods
must be at the customer demand point and capacity must be located near the customer. Volatility of Demand
- Much greater than in manufacturing.
• Capacity Utilization & Service Quality: Best operating point is near 70% of capacity.
From 70% to 100% of service capacity, what do you think happens to service quality?
• ----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------
• 5) Aggregate Sales and Operations Planning
• Process planning  Strategic capacity planning (LONG RANGE) Sales and operations
(aggregate) planning  Sales plan/ Aggregate operations plan  [Forecasting & demand management] (i)
Master scheduling (ii) Material requirements planning (a) Weekly workforce and customer scheduling
(INTERMEDIATE RANGE)  (iii) Order scheduling  (b) Daily workforce and customer scheduling (SHORT
RANGE)
• Sales and Operations Planning Activities: Long-range planning (Greater than one year
planning horizon and Usually performed in annual increments). Medium-range planning (Six to eighteen
months and Usually with weekly, monthly or quarterly increments). Short-range planning (One day to less
than six months and Usually with weekly or daily increments).
• The Aggregate Operations Plan: Main purpose - Specify the optimal combination of
production rate (units completed per unit of time) workforce level (number of workers) inventory on hand
(inventory carried from previous period); Product group or broad category (Aggregation); This planning is done
over an intermediate-range planning period of 3 to18 months.
• Balancing Aggregate Demand and Aggregate Production Capacity: What we want to
do is balance out the production rate, workforce levels, and inventory to make these figures match up.
• Required Inputs to the Production Planning System: External capacity,
Competitors’behavior, Raw material availability, Market demand, Economic conditions (EXTERNAL
to the FIRM); Current physical capacity, Current workforce, Inventory levels, Activities required
for production (INTERNAL to the FIRM).
• Key Strategies for Meeting Demand: Chase, Level and Some combination of the two.
• Production Planning Strategies: Pure Strategy - Either a chase strategy when product
exactly matches demand or a level strategy when production remains constant over a specified number of
periods. Mixed Strategy - A combination of chase and level strategies to match supply and demand.
• Aggregate Production Planning: Relevant Costs, Basic production costs (fixed and
variable), Costs associated with changes in the production rate (e.g., labor costs), Inventory holding costs,
Backlog (stockout) costs.
• Aggregate Planning Techniques: Trial and Error (Costing out the production alternatives
and choosing the one with the lowest cost), Linear Programming, Linear Decision Rule, Various Heuristic
Methods. Full Costs: All of the actual, out-of-pocket costs associated with a particular aggregate plan; Used for
developing a labor and material budget. Marginal (Incremental) Costs: Unique costs attributable to a particular
aggregate plan that are above and beyond those required to build the product by its most economical means.
• Chase Strategy (Hiring & Firing to meet demand) and Level Workforce Strategy
(Surplus and Shortage Allowed)
• Yield (Revenue) Management: The concept used in service operations with high-fixed
costs and low-variable costs that attempts to match supply and demand (a chase strategy) to maximize
capacity utilization. Yield Management Requires: The ability to segment the market; High-fixed and low-
variable costs where additional sales create more profits; Product perishability (cannot be inventoried); Lower-
priced capacity that can be presold.
Price/ Service Duration Matrix: Positioning of Selected Service Industries. Price [Fixed and Variable] and
Duration [Predictable and Unpredictable]. Quadrants I (Movies, stadia, arenas), II (Hotels, airlines, Rental cars,
Cruise liners), III (Restaurants, Golf courses, Internet service providers), IV (Continuing Care Hospitals).
----------------------------------------------------------------------------------------------------------------------------------------------------------
----------------------------
3) Demand Forecasting (Hindsight is no substitute for Foresight)
Basis for planning: Finance & Accounting (Budgetary planning and control); Marketing (Planning new
products; Compensate sales personnel), Operations (Process selection, Capacity planning, Layout; Production
planning, Scheduling, Inventory)
What affects forecasts? Change in general economy; Changes in industrial/ CB; Availability of essential
complementary products.
Demand Management: Independent Demand (Finished Goods), Dependent Demand (Raw Mtrls, Component
parts, Sub-assemblies, etc.)
What a firm can do to manage Independent Demand? Can take an active role to influence demand
(Campaigns, Price) or can take a passive role and simply respond to demand.
Types of Forecasts: Qualitative (Judgmental) and Quantitative (Time Series Analysis, Causal Relationships,
Simulation)
Components of Demand: Avg. dem for a period of time; Trend; Seasonal element; Cyclical elements;
Random variation; Autocorrelation
Qualitative Forecasting Methods: Executive Judgment, Grass Roots, Mkt Research, Panel Consensus,
Historical Analogy, Delphi Method.
Quantitative Forecasting Methods: [Time-Series Analysis] Simple Moving/Weighted Moving Avg.,
Exponential Smoothing, Regression, Box Jenkins technique, Shiskin time-series, Trend Projections. [Causal]
Regression Analysis, Econometric Models, I/O Models, Leading Indicators [Simulation Models]. Time Series
Analysis: Time series forecasting models try to predict the future based on past data. You can pick models
based on: Time horizon to forecast, Data availability, Accuracy required, Size of forecasting budget,
Availability of qualified personnel. Guide to selecting quantitative forecasting techniques is given below: SMA
– 6-12 mnths, weekly data often used; stationary data (no trend or seasonality); short-medium forecast
horizon. WMA/Simple ES – 5-10 observations needed to start; stationary data; short forecast horizon. ES
with trend - 5-10 observations needed to start; stationary and trend data pattern; short forecast horizon.
Linear Regression – 10-20 obs., for seasonality atleast 5 obs./season; stationary, trend, seasonality; short-
medium forecast horizon. Formula: Exponential Smoothing Model: Ft = Ft-1 + a(At-1 - Ft-1)
Major Reasons for Acceptance of Exp Smoothing Technique: Surprisingly accurate, Formulation easy,
Easily understood, Computationally easy, Computer storage requirements limited, Tests for accuracy easy to
compute.
The Mean Absolute Deviation (MAD) Statistic to Determine Forecasting Error (Formula):
1 MAD = 0.8 SD and 1 SD = 1.25 MAD. The ideal MAD is zero which would mean there is no forecasting error.
The larger the MAD, the less the accurate the resulting model.
Tracking Signal: Measurement that indicates whether the Forecast Average keeps pace with any genuine
upward or downward changes in demand. Depending on the number of MAD’s selected, the TS can be used
like a quality control chart indicating when the model is generating too much error in its forecasts. TS =
RSFE/MAD where, RSFE = Running Sum of Forecast Errors. [Mnth – Forecast – Actual – Deviation – RSFE –
Absolute Deviation – Sum of Abs. Dev – MAD (SoAD/n) – TS]. NOTE: If TS<0, Actual<Forecast; if TS>0,
Actual>Forecast
Simple Linear Regression Model: The simple linear regression model seeks to fit a line through various
data over time. Yt = a + bX
Yt is the regressed forecast value or dependent variable in the model, a is the intercept value of the the
regression line, and b is similar to the slope of the regression line. However, since it is calculated with the
variability of the data in mind, its formulation is not as straight forward as our usual notion of slope. Formulae
for ‘a’ and ‘b’ –
Multiple Regression Analysis: Number of variables is considered as affecting the demand of the item of
interest. Eg., Gross Sales of Home Furnishings = f(# of marriages, # of housing starts, disposable income,
time trend …). Causal Relationship Model: Treating the change in the item of interest as caused by the
change in factors(s) identified as causes. Eg., Sales of Sq Yards of Carpet = f(# of housing starts). Focus
Forecasting: Uses simple, logical rules to project past data into the future. Primarily in finished goods
inventory management. Eg of rules., Whatever the company sold in the past 3 months is what we would sell in
the next 3 months, What we sold in the same three-month period last year we will probably sell in this year,
We will probably sell 10% more in the next 3 months than we sold in the past three months. Web-Based
Forecasting: [CPFR] Collaborative Planning, Forecasting, and Replenishment a Web-based tool used to
coordinate demand forecasting, production and purchase planning, and inventory replenishment between
supply chain trading partners. Used to integrate the multi-tier or n-Tier supply chain, including manufacturers,
distributors and retailers. CPFR’s objective is to exchange selected internal information to provide for a
reliable, longer term future views of demand in the supply chain. CPFR uses a cyclic and iterative approach to
derive consensus forecasts. Steps in CPFR: Creation of a front-end partnership agreement ((Objectives,
Resource requirements, Confidentiality); Joint business planning (when, how, frequency, exceptions);
Development of demand forecasts; Sharing forecasts; Inventory replenishment.