Operations Management Midterm Flashcards

Why is operations management important to business survival?
(Chapter 1)
-Operations translates materials and services into output
-Operations, finance, and marketing make up the 3 mainline functions of a business
-No part can be dismissed
What are key inputs into any process that produces a product or a service?
What is a product? A service?
-Product is a tangible good
-A service is perishable or intangible
-There is a difference in output
Can there be services without products?
-There cannot be services with out products
-Products are part of the service bundle and are used in the
How are manufacturing and service processes different?
*Manufacturing*- produces a product, takes materials and makes a change to its (shape, physical, size, surface finish, or joining parts)
-Manufacturing also has low customer contact
*Service*- intangible, perishable output, high customer contact, labor intensive (instead of capital intensive),
What 4 core processes do operations managers “obsess over”?
1. Supplier relationship process
2. New service/product development process
3. Order fulfillment process
4. Customer relationship process
What “decisions” do operations managers typically make?
-Process, capacity, Inventory, Quality, Workforce, logistics
What is an operations strategy? What is a strategy?
*Strategy*- is the overall, corporate strategy of the business (WHAT THEY WILL DO)
What are core competencies and what do they include?
*Core Competencies*- are unique resources and strengths that an organization considers when formulating their strategy
All of the following are core competencies except?
What are the four competitive priorities and competitive capabilities?
*Priorities*- cost, time, quality, and flexibility
*Capabilities*- what you actually can do
What is an order winner? Order qualifier?
*Order Winner*- what wins you the customers over
*Order qualifier*- the minimal level required from a set of criteria for a firm to do business in a market segment (competitors also have it)
The Right 6
1. the right level of quality
2. to the right customer
3. at the right time
4. to the right place
5. in the right quantity
6. for the right cost
Independent demand vs. Dependent demand
*Independent demand*- sold to end customers (retail items)
*Dependent demand*- sold to businesses to be used in making other products or as part of service package
Chapter 3
Process Strategy
What are the 4 basic process strategy decisions?
(Process Structure and Customer Involvement)
*Process Structure*- determines the process type relative to the kinds of resources needed, how they are used, and their key characteristics
*Customer Involvement*- reflects the way in which customers become part of the process
What are the 4 basic process strategy decisions?
(Resource Flexibility and Capital Intensity)
*Resource Flexibility*- is the ease with which employees and equipment can handle a wide variety of products, output levels, duties, and functions
*Capital Intensity*- is the mix of equipment and human skills in a process. The greater the relative cost of equipment, the greater is the capital intensity
-The physical arrangement of operations created from the various processes, *puts these decisions into tangible form*
How are these 4 basic process strategy decisions inter-related?
-All of the process decisions directly affect the process itself and indirectly the services and products that it provides
-All work together to promote an effective process design
What are the key attributes of the Product-Process Matrix?
-Brings together 3 elements (*volume, product customization, and process characteristics*)
-It synchronizes the product to be manufactured with the manufacturing process itself
-Customization and Volume are vital
How do process structures in manufacturing differ along these attributes?
-*Customer Contact*- is a primary feature of customer-contact matrix for services, but is NOT in consideration for manufacturing processes
-For manufacturing processes, high product customization means lower volumes for most steps
How do process structures in manufacturing differ in terms of the ability to use inventory to satisfy customer orders?
-Manufacturing processes differ because of the ability to use inventories.
-*Make-to-order, Assemble-to-order, and Make-to-stock* are the different approaches to inventory that should be coordinated in a manufacturing process
Manufacturing Processes
(Inventory Strategies)
*Make to order*- make products to customer specifications in low volumes
*Assemble to order*- produce a wide variety of products from relatively few subassemlies and components after the customer orders are received
*Make to stock*- involves holding items in stock for immediate delivery, (minimizing customer delivery time
Manufacturing Process Structures
*Job Process*- single product (high divergence)
*Batch Process*- medium to small (divergence still too great to dedicate a separate process for each product)
*Continuous flow*- low divergence (assembly line)
How do process structures in manufacturing relate to competitive priorities?
-They relate because we need to decide what types of customers we want to cater to (how specialized?/ what quantity?)
What are the key attributes of the Customer-Contact Matrix?
-The matrix brings together 3 elements (*the degree of customer contact, customization, and process characteristics*)
-The matrix is the starting point for evaluating and improving a process
How does high customer contact differ from low customer contact in service processes?
*High Contact*- the customer is more likely to be present and active, the process is more likely to be visible to the customer, (more personal attention)
*Low Contact*- passive involvement, less personalized attention, and a process out of customer’s sight
How does the degree of customer contact relate to sales opportunity and efficiency in designing services?
-Too much customer contact can sometimes lower efficiency of the process
How do process structures in services relate to the moment of truth?
-Face-to-Face interaction is often referred to as the moment of truth
-Depending on the customer contact involved in the process structure will affect if there is a “moment of truth”
What are the advantages and disadvantages of involving customers?
*Advantages*- may increase value to customer, better quality, faster delivery, greater flexibility, and lower cost. (Ex: self-service)
*Disavantages*- can be disruptive, making the process less efficient, challenging to manage the timing and volume of customer demands, makes interpersonal skills a prerequisite for employees
Decisions about process structures should be aligned with respect to what?
– *customer preferences and competition*
Process Structures in Manufacturing differ in terms of…
-Volume, product customization (or variety), and process divergence and flow (uniformity of work flow)
-These differences determine competitive priorities, competitive capabilities, order quailfiers/winners
-These differences determine whether a firm uses Make to order or make to stock
Process structures in services differ in terms of…
-Customer contact and customization and process divergence and flow
-Differ in terms of sales opportunity, degree of customer-server contact, and efficiency (Service Design Matrix)
-These differences lead to low versus high moments of truth
-These differences lead to physical separation of front office versus back office
Break-even analysis
-Important tool for decision making
-About pricing, quantity, fixed/variable cost
-About what to choose from among >1 options when pricing etc. varies among options
Chapter 2
Project Management
Project and Program Definition
*Project*-an interrelated set of activities with a definite starting and ending point, which results in a unique outcome for a specific allocation of resources
*Program*- an interdependent set of projects with a common strategic purpose.
What roles does a project manager play and why are these important?
*Facilitator*- must resolve conflicts between individuals or departments to ensure that the project has the appropriate resources for the job to be completed.
*Communicator*- Project progress and requests for additional resources must be clearly communicated to senior management. Must also communicate to team for best performance
*Decision Maker*- PM will be sensitive to the way the team performs best and be ready for tough decisions. The PM must organize the team meetings, specify how team will make decisions, and determine the nature and timing of reports to senior management
How should project team members be selected?
*Technical Competence*- should have the competence required for the tasks to which they will be assigned
*Sensitivity*- should be sensitive to interpersonal conflicts that may arise. Senior members should be politically sensitive to help mitigate problems
*Dedication*- should feel comfortable solving problems that may spill over into areas outside their expertise. They should also be dedicated to getting the project done, as opposed to maintaining a comfortable work schedule
What impact does organizational structure (functional)
*Functional*- project is housed in a specific functional area, (the one with the most interest in project). Assistance from personnel in other functional areas must be negotiated. The PM has less control over project timing (if in multiple areas) than if the entire scope of the project fell in one department or area.
What impact does organizational structure (Pure Project)
*Pure Project*- team members work exclusively for the PM on a particular project. This structure simplifies the lines of authority and is particularly effective for large projects. For small projects, it could result in significant duplication of resources across functional areas
What impact does organizational structure (Matrix)
*Matrix*- a compromise of the functional and pure project structures. The PM of the firm’s projects all report to a “Program Manager” who coordinates resource and tech needs across functional boundaries. Matrix structure allows each area to maintain control over who works on a project and the tech that is used. But, team members, have *two bosses* (the project manager and the department manager). Resolving these “line of authority” conflicts requires a strong PM
What do project scope and objectives serve?
Whats the difference??????????????
-The scope provides a succinct statement of project objectives and captures the essence of the desired project outcomes (concrete outcomes of project).
-Time frame of project should be specific in scope
-Also specifies an allocation of resources to a project (makes it possible to make adjustments to scope as project proceeds)
How is the work breakdown structure related to project scope?
*WBS*- is a statement of all work to be completed.
-Relates to scope because it is the plan for how much work will be needed during the project
-This is an important part of the scope of the project
How do PERT and CPM differ?
-The differences are minor
-Understand CPM inside and out
How does the AON convention show precedence relationships?
AON- is a diagraming approach in which nodes represent activities and arcs (arrows) represent the precedence relationships between them
How does the AOA convention show precedence relationships?
AOA- activity on arrows
How does a Gantt Chart show precedence relationships?
-PM often creates the project schedule by superimposing project activities, with their precedence relationships and estimated duration times (on a *time line*)
-The critical path is shown in red
-The chart clearly shows which activities can be undertaken simultaneously and when they should be started
What three pieces of data are minimally required, regardless of whether one uses PERT or CPM, AON or AOA?
-Activities, customer relationships, and time
What is a critical path?
-Critical path is the sequence of activities along between a project’s start and finish that takes the longest time to complete
-THERE IS 0 slack on critical path
How is slack related to ES, EF, LS, and LF times?
-Slack is the maximum length of time that an activity can be delayed without delaying the entire project
-Calculated as S= LS-ES or LF-EF
If only Activity B succeeds Activity A, how is the ES time of Activity B related to the EF time of Activity A?
If only Activity B succeeds Activity A, how is the LF time of Activity A related to the LS time of Activity B?
How is slack related to capacity cushion?
-Slack is positive capacity cushion (you have time)
What is the cost-time trade-off in managing projects?
-There are always cost-time trade-offs on management
-Total project costs increase when you spend more on direct costs (labor/materials) or indirect costs
-There are also penalty costs if a project extends past a certain date
-It is advantageous to completing the project early but it will cost more resources to do so
-May need to crash activities
What does Normal time and Normal cost tell us about a project?
-Normal time is the time necessary to complete an activity under normal conditions (how long it should take)
-Normal cost is the activity cost associated with the normal time
What does Crash Time and Crash Cost tell us about a project?
-Crash time is the shortest possible time to complete an activity
-Crash cost is the activity cost associated with the crash time
Why Crash?
-Crashing to finish a project faster under cost constraints
What is capacity?
(Chapter 6)
-capacity is the maximum rate of output of a process or a system.
-Managers are responsible for ensuring that the firm has the capacity to meet current and future demand
How is capacity typically measured?
-No single capacity measure is best for all situations
-A retailer measures in capacity in annual sales dollars per square foot
-A theater measures capacity as number of seats filled
Input measures vs. Output measures of capacity
*Output measures*- best utilized when applied to individual processes within a firm. Small number of services and products (High-volume processes). (Capacity measured in number of cars per day) As the amount of customization and variety of the product mix increases, output based capacity measures become less useful. Then Input measures become the usual choice
Input measures vs. Output measures of capacity
-*Input measures*- generally used for low-volume, flexible processes. Measures capacity in terms of number of workstations or number of workers used (*AMOUNT INPUTED*)
-How much used each day
What does the utilization rate tell a manager?
*Utilization*- is the degree to which a resource such as equipment, space, or the workforce is currently being used, and is measured as the ratio of average output rate to maximum capacity (expressed as a percent).
-The average output rate and the capacity must be measured in the same terms- that is time, customers.
(how much you’re using your assets)
Utilization Rate Equation
Average output rate
Maximum capicity Times 100
Is a 100% utilization good or bad?
-It is bad to have to be at 100% utilization because you cannot react to changed in demand or problems
Economies of Scale
*Economies of Scale*- concept that states that the average unit cost of a service or good can be reduced by increasing its output rate. (can drive costs down when output increases) (Four reasons for this)
-Increase capacity to economies of scale but if its too high then it becomes a diseconomy of scale
Four reasons that explain Economies of Scale
*Spreading fixed costs*- certain costs do not vary with changes in the output rate.
*Reducing construction costs*- certain expenses are required to build small and large facilities alike (fixed)
*Cutting costs of purchased materials*- higher volumes can reduce the costs of purchased materials
*Finding Process Advantages*- High volume production provides many opportunities for cost reduction
What is capacity management?
Capacity Management- managers are responsible for ensuring that the firm has the capacity to meet current (longterm and short term demand).
How are key decisions in capacity management related to operations strategy or process strategy?
-Capacity decisions are related to a process because changing the capacity of a process will have an impact on other processes in the chain. Capacity decisions must be made in light of several long-term issues such as economies/diseconomies of scale, capacity cushions, timing and sizing strategies, and trade-offs between customer service and capacity utilization
What are the three key decisions in capacity management?
-How much?
How are these decisions informed
(Where question? offshoring/outsourcing/resourcing)
*Offshoring*- moving capacity overseas
*Outsourcing*- Shift capacity to another business
*Resourcing*- moving capacity back
Where Question?
(Capacity management)
*Strategic Level= facility location problem*
-Tangible factors to consider (access to markets and resources, quantifiable costs (land, tax))
-Intangible factors (business climate, environmental concerns, community attitude)
How are these decisions informed
(Economies and Diseconomies of scale)
-They inform managers of “When?” and How much?
-must increase or decrease capacity to the right amount at the right time
How are these decisions informed
(Capacity Cushion)
*Capacity Cushion*- the amount of reserve capacity a process uses to handle sudden increases in demand or temporary losses of production capacity
(equals 100%- average utilization rate %)
-Informs about the “When and How much” decisions
What is an expansionist strategy?
-Involves large, infrequent jumps in capacity
-Capacity cushion= POSITIVE
-Competitive priority= FAST DELIVERY
-Can result in economies of scale and a faster rate of learning
-But, the preemptive firm must have credibility to convince the competition to act to be successful.
What is a wait-and-see strategy?
-Involves smaller, more frequent jumps
-Capacity cushion= NEGATIVE
-Competitive priority= LOW COSTS
-Because it follows demand, it reduces the risks of overexpansion based on overly optimistic demand forecasts.
-However, does not promote long-term growth because they are slow to react to unexpectedly hight increases in demand.
What is a follow-the-leader strategy?
-Expand capacity when others do
-If others are right, so are you, and nobody gains a competitive advantage
-Everyone shares the agony of overcapacity
Which key capacity management decisions are informed by these strategies?
-All three
What if supply (capacity) doesn’t equal demand, what can be done?
Supply factors- employees, overtime, inventory, and sub contracting (can change these factors to adjust capacity)
Demand factors- pricing, promotion, backlogging, reservation (can change these factors to adjust demand)
How is constraint management related to capacity planning and capacity management?
(Chapter 7)
Constraint management is the short term decisions centered on making the most of existing capacity by managing constraints.
-(Theory of constraints, Identification and management of bottlenecks, product mix decisions using bottlenecks, and managing constraints in a line process)
What is a constraint or a bottleneck in a system (either manufacturing or service delivery)?
*Bottleneck*- a special type of a constraint that relates to the capacity shortage of a process, and is defined as any resource whose available capacity limits the organization’s ability to meet the service or product volume, product mix, or fluctuating requirements demanded by the marketplace.
-*Resource whose demand exceeds its capacity*
-Controls output of the entire system
What is the relationship between the capacity of a system and the constraint (or the bottleneck) in the system?
-Relates to the capacity shortage of a process
-Limits the capacity of an organization
-Inventory or queue in front of it
For any system, how many bottlenecks will there be at time=T?
How can a bottleneck in a lineflow or service process be identified?
-The longest step in the process
-Where you have the most inventory
-Service (where the most people are waiting)
How can a bottleneck in a batch process be identified?
-The process that has the highest utilization is usually the bottleneck
What is the Theory of Constraints?
*TOC*- is a systematic management approach that focuses on actively managing those constraints that impede a firm’s progress toward its goal of maximizing profits and effectively using its resources
How does the Theory of Constraints define and view the operational measures of inventory, throughput, operating expense, and utilization?
*Inventory*- all the money invested in a system in purchasing things that it intends to sell
*Throughput*- Rate at which a system generates money through sales
*Operating Expense*- All the money a system spends to turn inventory into throughput
*Utilization*- The degree to which equipment, space, or workforce is currently being used, and is measured as the ratio average output rate to maximum capacity, expressed as a percentage
What the key principles of TOC?
1. The focus should be on balancing flow, not on balancing capacity
2. Maximizing the output and efficiency of every resource may not maximize the throughput of the entire system
3. An hour lost at a bottleneck is an hour lost for the whole system. In contrast, an hour saved at a nonbottleneck resource is a mirage because it does not make the whole system more productive
What the key principles of TOC?
4. Inventory is needed only in front of the bottlenecks in order to prevent them from sitting idle, and in front of assembly and shipping points in order to protect customer schedules. Building inventories elsewhere should be avoided
5. Work, which can be materials, information to be processed, documents, or customers, should be released into the system only as frequently as the bottlenecks need it. Bottleneck flows should be equal to the market demand. Pacing everything to the slowest resource minimizes inventory and operating expenses
What the key principles of TOC?
6. Activating a nonbottleneck resource is not the same as utilizing a bottleneck resource. Activation of nonbottleneck resources cannot increase throughput, nor promote better performance on financial measures.
7. Every capital investment must be viewed from the perspective of its global impact on overall throughput (T), Inventory (I), and operating expense (OE)
What is the “goal” of TOC?
-The goal is to increase throughput, operating costs, and decrease inventory
How is the product mix based on TOC different from the traditional approach?
-In the traditional method you select the best product mix according to the highest overall contribution margin of each product
-In the bottleneck method, this method would take advantage of the principles outlined in the theory of constraints and get the most dollar benefit from the bottleneck (best CM at the bottleneck)
To speed up system…
-Reduce processing time of bottleneck
-Cycle time= f (processing time of bottleneck)
-Reduce cycle time to increase throughput rate and decrease throughput time
-Throughput time= 1/throughput rate
Throughput time of a unit=…
-Sum of processing times for Unit 1 through a line process/ units that are sequentially released into a line process
-*Otherwise, Throughput time= sum processing times+ sum of waiting times
“The Goal” movie
(what is the goal?)
-goal is not efficiency
-goal is to increase sales/throughput, reduce operating costs, and decrease inventories
“The Goal” movie
(What is a bottleneck?)
-bottleneck resources have capacity less than deman
“The Goal” movie
(What happens when system capacity is reduced to match market demand)
-Reduce costs and lowers inventories
-Too much capacity leads to increased inventories and thus holding costs
“The Goal”
Capacity decisions in the short or medium time frame…
-Focus on managing the BOTTLENECK
-The theory of contraint
Product mix Decistions
-Allocate capacity to products based on Contribution Margin per bottleneck time
-Higher overall profitability
Time at Bottleneck?
Time at Non-bottleneck?
-At the bottleneck… *very expensive and priceless*
-At non-bottleneck… *sunk cost (contradicts acct view*)
Cutting batch size…
-Speeds up process and reduces throughput time
When Capacity=Demand in an imperfect world…
-Waiting time in system increases exponentially
What is inventory?
(Chapter 9)
*Inventory*- is a stock of materials used to satisfy customer demand or to support the production of services or goods
What are the accounting versus operational forms of inventory?
*Accounting forms*- Raw materials, work in process, and finished goods inventories
*Operational forms*- Cycle inventory, safety stock inventory, anticipation inventory, and pipeline inventory
Cycle inventory
*cycle inventory*- is the portion of total inventory that varies directly with lot size.
*Lot size*- how frequently to order, and at what quantitity
Average cycle inventory= Q/2
Lot size Principles
1. The lot size, Q, varies directly with the elapsed time between orders. If a lot is ordered every 5 weeks, the average lot size must equal 5 weeks’ demand.
2. The longer the time between orders for a given item, the greater the cycle inventory must be
Safety Stock Inventory
-Surplus inventory that protects against uncertainties in demand, lead time, and supply changes.
-To create safety stock an order for delivery i placed earlier than when the item is typically needed (gives you a cushion)
Anticipation inventory
-Inventory used to absorb uneven rate of demand or supply, which businesses often face
-Uneven demand can motivate a manufacturer to stockpile anticipation inventory (seasonal)
Pipeline Inventory
-Inventory that is created when an order for an item is issued but not yet received
-It exists because the firm must commit to enough inventory to cover lead time for the order
-Longer lead times or higher demands per week create more pipeline inventory
Pipeline inventory= Avg. DL
How much inventory is being carried? In units? In Monetary terms?
Why should organizations carry inventory? Not carry inventory?
-Organizations use inventory for a variety
What are the costs associated with inventory?
*Inventory holding cost*- (carrying cost) is the sum of the cost of capital plus the variable costs of keeping items on hand (shrinkage cost, insurance, taxes)
*Cost of capital*- the opportunity cost of investing in an asset relative to the expected return on assets of similar risks
*Ordering Costs*- the cost of preparing a purchase order for a supplier or a production order for manufacturing
*Setup Cost*- The cost involved in changing over a machine or workspace to produce a different item
*Transportation cost*
*Payments to suppliers*
Is having inventory good or bad?
*Small Inventory*- the cost of capital, holding and storage costs, taxes, insurance, and shrinkage cost are much lower when you have a smaller inventory
*Large Inventory*- can speed up delivery and improve firms customer service, more inventory can also increase work force productivity and facility utilization, can also receive a “quantity discount” from suppliers for making a large order
What does it mean to manage inventory?
*Inventory Management*- the planning and controlling of inventories in order to meet the competitive priorities of the organization.
-Essential for realizing the potential of any supply chain
-Must pick the “right amount” of inventory to achieve the most efficiency.
What are the key inventory management decisions?
-What items to keep in inventory?
-How much to order each time and order is placed?
-When to place an order and how frequently should an order be placed?
-How to monitor levels of the item kept in inventory?
-How well are we managing inventory in our system?
What are lot-sizing decisions?
Lot sizing- is the determination of how frequently and in what quantity they should order
-This is a critical decision for inventory managers
How does an ABC analysis inform inventory management decisions?
*ABC Analysis*- is the process of dividing SKUs (individual items or products in supply chain) into 3 classes according to their dollar usage so *that managers can focus on items that have the highest dollar value.*
*Class A*- reviewed to reduce avg. lot size and ensure timely deliveries from suppliers
*Class B*- require an intermediate level of control.
*Class C*- much looser control is appropriate. the inventory holding cost of C tends to be low.
How does a Q system differ from a P system for monitoring inventory?
*Q System*- fixed order Quantity system, Continuous review system, Constant Q (lot size) (always same sized order)
*P System*- fixed Time Period, Periodic review system, Constant P (time) interval, target inventory level (target because demand is variable)
The lot size that minimizes total annual inventory holding and ordering costs
What are the key assumptions to using the EOQ formula for lot-sizing decisions?
1. The demand rate (units per day) for the item is constant and known with certainty
2. No constraints are placed on the size of each lot
3. The only two relevant costs are the inventory holding cost and the fixed cost per lot for ordering or setup
4. Decisions for one item can be made independently of decisions for other items. In other words, no advantage is gained in combining several orders going to the same supplier
5. The lead time is constant and known with certainty
How does the EOQ change when the demand, ordering cost/setup cost, or holding costs change?
EOQ increases when demand increases
EOQ increases when when setup costs increase
EOQ decreases when holding cost costs increase
At EOQ, what is the relationship between Annual Ordering Cost and Annual Holding Cost?
-At EOQ, *annual holding cost=annual ordering cos*