Operation management notes PDF

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OPERATIONS MANAGEMENT Prof. Marco Taisch, A. 2015/2016 Sommario Course structure............................................................................................................................................................. Introduction.....................................................

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OPERATIONS MANAGEMENT Prof. Marco Taisch, A.Y. 2015/2016 Sommario Course structure.............................................................................................................................................................. 2 Introduction.................................................................................................................................................................... 2 OPERATIONS STRATEGY................................................................................................................................................... 4 Strategic levels............................................................................................................................................................. 4 Different approaches................................................................................................................................................... 5 Not just one plan......................................................................................................................................................... 6 Operations- Market alignment.................................................................................................................................... 6 STRATEGIC CAPACITY MANAGEMENT.............................................................................................................................9 Characteristic of capacity strategies......................................................................................................................10 MODELS FOR OPERATIONS STRATEGY...........................................................................................................................14 Order winners, order losers and qualifiers................................................................................................................14 Mapping operations strategies..................................................................................................................................15 Project selection matrix.............................................................................................................................................16 Lifecycle s curve.........................................................................................................................................................16 Four V analysis........................................................................................................................................................... 16 Trade off.................................................................................................................................................................... 18 QUEUE THEORY (Service operation management)........................................................................................................20 2.................................................................................................................................................................................... 20 Queuing system modelling........................................................................................................................................ 20 SERVICES AND SERVICE PROCESSES..............................................................................................................................22 Operations system characteristics.............................................................................................................................22 Interaction with customer (front office vs back office)..........................................................................................22 Volume to handle vs variety offered......................................................................................................................24 Variability (of demand, of capacity) and uncertainty.............................................................................................26 MANAGING CAPACITY AND DEMAND...........................................................................................................................27 YIELD MANAGEMENT.................................................................................................................................................... 30 The beginning of Y.M.................................................................................................................................................30 Applications............................................................................................................................................................... 30 Possible processes.....................................................................................................................................................31 Yield management tools............................................................................................................................................31

Course structure

Introduction The ‘operations’ is the part of the organization that creates and/or delivers its products and services. Operations management explores the way organizations produce and distribute goods and services. It is the systematic development and control of the process that transform inputs into outputs.

Operations management has expanded from treating only the core production processes in manufacturing organizations to include service organizations, non-core operations processes and processes in other functions such as marketing, finance and HRM. Operation mangers are concerned with each step in providing a service or a product. Consider that some activities, even if are essential for the company, don’t create any value (ex. Accounting, sales, etc); operations are strictly related with the creation of value. Operations and process management requires anaylisis at 3 levels:  the process: a process is an arrangement of resources (people and facilities), so it’s the analysis of the flow between resources  the operation: an operation is an arrangement of processes;  the supply network: a s.n. is an arrangement of operations;

Why this course: 1. Operations are central to the company's business and mankind’s sustainability. Operations’ relevance in a Company 1. Spending on material purchase can be 50-80 % of turnover/total cost 2. Spending on personnel can be 30-50 % of turnover/total cost (50-80 % in services) 3. The annual cost of the facilities (plants, information systems, etc.) can be 30-40 % of turnover/total cost 4. Investments are high and are binding for a long time, so making the right choices is crucial:  a site can cost tens of millions of € and take 2 years to be realized  Develop distinctive competences even more 2. The skills in the Operations area are critical and strongly impact the competitive advantage. Both in industrial companies and in the service ones. 3. Operations contribute to Companies strategy 4. Services are a special world, and a rapidly growing ones. Operations in services are at dawn: companies are struggling to find service-specific skills. 5. There is a strong innovation taking place in the management of companies and organizations: LEAN

OPERATIONS STRATEGY All companies, to survive in time, have to build and keep a specific advantage that differentiate them from competitors. Managing this differentiating advantage is the essence of strategy. So the question is: how do you compete in the global arena? You have to be different from the others. You can differentiate the design, the service level, the price, and so on. This is often the reason why startups fail: it may be a good idea, but it’s already done, or it’s close to another one already in the market. When we speak about strategy, we mustn’t think just of the corporate level of the company: even Operations have a strategy, that of course has to be aligned with the strategy of the company. One of the biggest mistakes a business can make is to confuse ‘operations’ with ‘operational’. The meaning operational is the opposite of strategic; it means detailed, localized, short-term and day-to-day. And operations management is very much like this. Yet ‘managing resources and processes that produce and deliver goods and services’ should also be seen as a long term and strategic issue. Operations strategy is concerned less with individual processes and more with the total transformation process that is the whole business. Tesco, IKEA, Ryanair, etc. are example of firms where operations strategy not just provide support, but is the main reason for their competitive superiority.

Strategic levels  

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CORPORATE decisions related to resources allocation between different markets and products, at the highest level. Here we define in which business we want to be. BUSINESS UNIT what are the market’s need and how to satisfy them. Here we answer the question how do we compete? (A job profile could be the CEO or the country manager). Sometimes business units are seen as “companies within the company”. FUNCITIONAL the “operations layer”, that supports the company in satisfying market needs. We define how to deliver the product/service. Operations strategy is defined by two main streams: corporate objectives impact on business objectives which, in turn, influence operation strategy (top-down); day-to-day experience of providing products and services to the market reveals problems and potential solutions which become formalized into operations strategy (bottom-up).

Two concepts that have emerged over the last few years are relevant to operations strategy:  Business model - is the plan that is implemented by a company to generate revenue and make a profit (i.e. what a company does and how they make money from doing it).  Operating model - is a high level design of the organization that defines the structure and style which enables it to meet its business objectives. It should provide a clear ‘big picture’ description of what the organization does, across both business and technology domains.

Different approaches We can identify four main perspectives on operations strategy: 

Operations strategy is a top-down reflection of what the whole group or business wants to do

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Operations strategy is a bottom-up activity where operations improvements cumulatively build strategy  Operations strategy involves translating market requirements into operations decisions.  Operations strategy involves exploiting the capabilities of operations resources in chosen markets. The traditional approach is the ‘top-down’, where business units take decisions according to marketing’s forecasts and operations have to follow and implement the corporate strategy. This doesn’t work anymore, especially for huge companies. In fact, this structure pushes them away from customers and hides their real needs. But the main drawback of the traditional approach is that the different departments work separately and don’t speak to each other. This obviously leads to a failure in a dynamic environment, like the one that we have today. Here are some factors causing the moving away from the traditional approach: Factors outside the company:  Offer > Demand  over-dimensioned capacity  Customization  Globalization  Speed of technological development technology-push vs market pull innovation Factors influencing company’s resources:  Economical (wealth increase)  Cultural (education level): the way people behave within the company influences the way decisions (and so strategies) are taken;  Social (authority acknowledgment- for example, Japanese people trying to train American people to just in time policy)  Technological innovation  ICT Functional strategies can’t be independent one from another, nor they can be the sequential outcome of the Business strategy; rather VP of main Functions have to communicate and interact to define the strategy at Business Unit and Corporate level. So another approach is preferred, which takes into account all four perspectives that we have said before.

Not just one plan To create a sustainable advantage, a significant amount of time it’s needed. This advantage is rarely the outcome of just one excellent critical choice. It’s the outcome of many little good choices. To take many little good choices a clear line is needed (Deliberate Strategy). But still we have to take into account two main phenomena: first, especially in highly turbulent environments, it’s not possible to plan everything in advance (Emerging Strategy) and second, not everything we have planned will be feasible/reached in the mid-long term (Not realized Strategy).

That is why the strategy has to be flexible (in the sense that we should have sensors to keep the business under control and quickly decide a plan b) and resilient (this means that we should design our strategy taking into account all possible variables, so that eventually the plan is not affected by them).

Operations- Market alignment Operations exist to serve the markets. So, whatever the operations strategy of an organization, it must in some way reflect the requirements of the organization’s markets. In order to align operations and market, performance objectives are needed, that operations are expected to pursue. Following, there are some commonly use categories that are true for any type of operations. However, before we can pursue the idea of performance objectives further we must take a step back in order to consider: 1. Customer needs 2. Market positioning 3. Analysis of competitors’ actions PERFORMANCE OBJECTIVES  Time: o Time to formulate the offer/confirm the order (especially relevant in MTO, ETO)

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o Time to deliver (Delivery speed, relevant in MTS) o delivery reliability (timeliness, sharp on time) Price (i.e. TCO)o Purchase o Usage o Maintenance o Update/Upgrade/Expansion o Disposal Quality o of Design (i.e. specifications- it defines also the market segment, ex. Ferrari) o Conformance (designed performance – real performance; NB only in field!) Flexibility- the ability of adapting to changing environment

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o Product/service f.- the ability to introduce and produce novel products/services or modifying existing ones o Customization o Variety (mix f.) o Plan (delivery f.)- the ability to change planned or assumed delivery dates Service o Delivery (Goods availability at the warehouse in MTS) o Training o Technological improvement o After sale support o Etc.

These objective as generic, so that they can be related to some aspects of external market positioning or internal decisions that are made concerning the operations resources. Because of this, it is worthwhile examining each of the performance objectives in terms of how they affect market position outside operations. A table like the following is a useful tool to simplify this alignment. On the left side identifies market needs and desired performances in Operations, while the right columns are made of achievable performances in OPS and the levers that we can use. Of course the objective is to align the desired performances with the achievable ones. Generally, the levers are the following 3:  Structural design o Overall production capacity, its division and localization: being protected with high entry barriers guarantee the possibility of changing production capacity with ease; face demand variability, economies of scale, volume flexibility, minimum unit of increase/decrease, work cost, competences availability, services, response time, closeness to market...) o Strategic Make or Buy: for example, if there is a rapidly changing demand, we can decide to externalize some processes (buy policy). o Technologic process and equipment o Mechanization/automation grade o Type of plant design of the system o Supply chain configuration (e.g. choosing the distribution channel)  Infrastructural design o Competences needed and their management

o Responsibility allocation o Team vs individuals o Managing by objectives or procedures

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o Functions integration (Design and Manufacturing, Marketing and Planning, ...) o Incentive system o Information flows between:  Different functions  Different hierarchical levels Delivery management o Operations planning and control system o o o o

Choice of how to meet demand (eg. MTS, ATO, MTO) Choice of how to realize the product Supply chain coordination systems Maintenance managing and realization system

STRATEGIC CAPACITY MANAGEMENT

(17/03/2016)

One big issue that stems from Operations strategy is strategic capacity management. Basically, operation’s capacity is the maximum level of value added activity over a period of time that the operation can achieve under normal condition”. The first capacity-related decision faced by any operations is “how much capacity should we have?”. Actually, the answer is influenced by several factors. Some are shown in the following figure:

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Forecast level of demand: only rarely will a business decide to invest in a level of capacity that is exactly equal to its expectation of future demand. However, it’s a starting point in trying to understand why operations finish up the size they are. Uncertainty of future demand: even when the demand for an operation’s products or services can be reasonably well forecast, the uncertainty inherent in all estimates of future demand may inhibit the operation from investing to meet the most likely level of demand. Changes in demand: in addition to any uncertainty surrounding future demand, there is also the question of the time-scale over which demand is being forecast. For example, short term expected demand may be higher than expected long-term sustainable demand. Availability of capital: One obvious constraint on whether operations choose to meet demand fully is their ability to afford the capacity with which to do it. Cost structure of capacity management (break-even points): We make the assumption of revenues as linear curve. To increment capacity (fixed cost breaks) means to create more break even points.

Economies of scale:

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Flexibility of capacity provision: Committing an investment in a partiular level of capacity may be managed in such a way as to facilitate later expansion. Effective capacity requires all the required resources and processes to be in place in order to produce goods and services. This may not imply that all resources and processes are put in place at the same time  risk in committing even part of the capex necessary before demand is certain.

Characteristic of capacity strategies 1. Timing of capacity change

a. Leading strategy: timing the introduction of capacity in such a way that there is always sufficient capacity to meet forecast demand. PROS CONS  Higher production unit cost  Always spare capacity for (plant is not saturated  low opportunities efficiency)  Faster response time  Outbound cash flow  Better delivery reliability  Higher impact from  Lower impact of uncertainty overestimating demand and unforeseen events  Lower impact from underestimating demand b. Lagging strategy: timing the introduction of capacity so that demand is always equal to or greater than capacity. PROS CONS  High plant utilization  Longer response time  Low production cost  Lower delivery reliability  lower impact from  higher impact from

overestimating demand

underestimating demand

Between these two “extreme” capacity policies there are 3 other ways: I. Smoothing with inventory (left graph), means using the excess capacity of one period to produce inventory which can be used to supply the under capacity period. II. Filling with products (right graph) that are not our core business, but are somehow similar (or have similar processes) to our main products. In this case it’s easy (cheap) to start the production and gain some return on the investments. It’s like modifying the dema...