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19/04/2017 LESSON 1
STRATEGIC OPERATIONS MANAGEMENT
WHAT DO OPERATIONS MANAGERS DO?
- Definition of production system : It is a system that transforms inputs into outputs of greater value to the customer
- Definition transformation process: It is a series of activities along a value chain, from supplier to customer, which deliver a product (or a service) to the customer
- What is Operations Management about? It is about design ( How does the production system have to be designed? management and improvement ( if we observe some inefficiencies, how can we improve?) of the production system THE PRODUCTION SYSTEM: Operations management was born with Fordism and manufacturing. During the 70’, some principles of the production system started to be applied to service companies THE OUTPUT OF A PRODUCTION SYSTEM: PRODUCTS SERVICE Tangible Intangible
example: ice-cream has a huge seasonality: companies can accumulate ice cream to cope with the pick of demand during summer THE RANGE FROM SERVICES TO PRODUCTS: Technological innovation is enabling the process of SERVITIZATION , which consists of enriching the product offering with value added services (maintenance of capital equipment, financial services, rental, etc.) For example: financial services can offer leasing services when customers decide to buy a car These systems are also called Product-Service Systems Minimal contact with customers ( normally there is no contact with consumers) Extensive contact with consumers Minimal participation by customer in the delivery Extensive participation by customer in the delivery (ex: medical services) Delayed consumption (companies can produce today, and customers can consume their products in the next months : ex: ice- cream) Immediate consumption Equipment intense production system Labor- intense production Quality easily measured Quality difficult to measure
The process owner (supply chain manager) manages the inbound logistic (management and transportation of finished goods), the operations (plans and production) and the outbound logistic. Between the inbound logistic and outbound logistic there must be collaboration Between operations and marketing series of conflicts can rise, due the presence of LEAD TIME: average time for producing. Marketing gives to operations the sales forecast (how much the factory should produce to meet the demand), customer’s feedback, promotions, and marketing complains. There must be collaboration between the two departments. Problems arise when lead time is wrongly estimated and as a consequence the delivery of the product could be delayed causing complaints of customers with the marketing department. OPERATIONS DEPARTMENT AND ITS INTERACTIONS PRODUCTION TYPOLOGIES:
THREE DIMENSIONS
1. PRODUCTION PLANNING APPROACH:
- Sales catalogue item (sometimes with customer choice options). Situation in which factory produces on the basis of forecast sales. “ make to stock ” production.
- Customer specific design to repeat orders: for example: furniture: the delivery is not immediate, because products are not available immediately, but are made specifically for the customer. The design is made before the customer asks for the product
- Unique customer specific design (or specification): we have no catalogue and design. 2. NATURE OF THE PRODUCTION FLOW
- One-piece flow: producing one piece that is unique
- Lot/batch flow: use the same machine to produce different kind of items. The production system produces a batch of products for a certain period, then it interrupts the production, and starts producing another batch of prodcuts.
- Continuous flow: production system that produces always the same item without interruptions (example: Nutella) 3. NATURE THE TRANSFORMATION ACTIVITY
- Process products: cannot be disassembled (for example food)
- Discrete products: can be disassembled (for example cars) ➔ (^) assembly or
ADVANTAGES: avoidance flow of material that cross each other. High degree of organization (possibility to make mistakes decreases)
3. FLOW SHOP: (car manufacturing)
- Used for high volume productions with low degree of product variety (e.g. car manufacturing)
- The finished product can be divided into its input materials
- Production processes are highly automated, with very specialized equipment
- The typical organization is the assembly line, with the use of conveyor belts to move products from one step of the process to the other at a paced rate Look for efficiency 4. CONTINOUS TRANSFORMATION:
- Used for commodities, as chemicals, cements, milk…
- The finished product cannot be divided into its input materials
- These operations are run 24/
- Production processes are highly automated, with very specialized equipment
- There is generally one primary type of input material
20/04/2017 LESSON 2
PRODUCT PROCESS MATRIX :
to identify most suitable layout of the factory Two variables:
- Batch size: do you want to produce a huge amount or a small amount? It is in correspondence of the demand: if we have high demand for a specific product we will have to produce a high batch size, on the contrary if we have a low demand we are going to produce a low batch size (we can make an example in the car manufacturing: Fiat 500 has a high demand so the batch size will be high, on the contrary Ferrari has a low demand so the batch size will be low).
- Output variety : are we going to produce one single product or high number of options? If we produce one single product! the output variety will be low, high number of products (for example, furniture’s and artisans)! the output variety will be high You need to have a consistency between output variety and batch size Example: Nutella: none product variety (one single product) and high batch size (because the demand is high)
Right part: service shop, professional service: high degree of interactions
- (^) Work with low volumes
- (^) High customization
- (^) High prices, because of high interaction Left part: service factory, mass service: low degree of interactions
- (^) Work with high volumes
- (^) Low customization
- (^) Are commodities --> can charge low prices PRODUCTION SYSTEM DESIGN: THE LEVERS Factories are characterized by numbers of features: the set of these features is the outcome of the process Decisions in order to establish the factory are: 1. HADRWARE CHOICES Decisions which will influence, shape, the physical aspect of the factory.Generally, are costly and long term decisions
- (^) LOCATION (where do i want to locate my factory?) where resources are available, and where we can find easily manpower.
- (^) VERTICALIZATION. How many steps of the production process do you want to carry on internally, or to outsource? (ex: fashion industry outsource production, ex: washing treatments)
- (^) AUTOMATION/TECHNOLOGY: there are lot of product that can be produced with capital intensive or labor intensive process. Assembly activities can be brought by both solutions. If we are going to use machines and robot instead of manpower, it is convenient for the company to produce a huge amount of that product and for a long period in order to have a payback from that investment.
- (^) PRODUCTION CAPACITY, how much can we produce in a specific period? It depends on many situations: demand is high--> high production capacity, if demand is fluctuating/ volatile not easy to predict
1. SOFTWARE DECISIONS: (MANAGERIAL PROCESS)
• PRODUCTION PLANNING & CONTROL:
Companies have to decide if to employ:
- make to stock approach. You develop on the basis of forecast (risk: mistakes in forecasts) why to use make to stock approach? Quick delivery. - Make to order approach --> produce for an actual order coming from the client. Or we can use both approaches. It a managerial decision
- (^) STOCK MANAGEMENT: the amount of stock, raw material you want to hold in your ware house. We can find some advantages and disadvantages: huge amount of raw material you will have immediate availability. Companies can decide to have no stock and use " just in time approach " buy in a specific moment and a specific quantity. ( ex: Ferrari! receives material from supplier every day and has no stock)
- (^) QUALITY MANAGEMENT: how do you want to carry out quality control? On all pieces or just on a sample? How should we take decisions about these levers? PRODUCTION SYSTEM DESIGN: THE RESOURCE-BASED VIEW 1. what are we good at? Identify specific capabilities
What are we good at? how can we transform our core capabilities in a competitive advantage? (P&G or Unilever: have different products and all of them are consumer’s goods, you can find them to the supermarket. Are good at understanding preferences and purchasing behavior of consumers) IDENTIFY CORE CAPABILITIES DEVELOP A COMPETITIVE STRATEGY :
PRODUCTION SYSTEM DESIGN: THE FOCUSED APPROACH
- (^) COMPETITIVE STRATEGY (compete in speed, quality, cost?), set strategic objectives FUNCTIONAL STRATEGY: strategy for the single department. You can have as many number of strategies as departments PRODUCTION SYSTEM DESIGN. Use software and hardware levers All these elements must be consistent --> STRATEGIC ALLIGNMENT If there is not consistency you will not be and effective company ZARA CASE STUDY
- Competitive strategy of Zara
- Ability to identify short-term trends
- Quick and frequent deliveries
- BASED ON SPEED: identify trends and styles, and bringing them to the stores
- Functional strategy for the Operations Department A) DESIGN DEPARTMENT : based on demands, feedbacks from customers and continuous information - based on interaction
- Several inputs to understand demand
- Feedback: connection between customers and designers - shop assistant record
feedbacks from customers and report them to headquarter (meetings everyday to share these information)
- Vertical integration (downstream in the retail store)
- Real-time information on sell-out: numerical evidence of the styles and trends and
for quantities to produce and send to shops B) OPERATION DEPARTMENT : decrease lead time, increase delivery and be flexible
- Speed of production and delivery: needed for quick and frequent deliveries
- Flexibility: ability of changing because of a specific need - volume flexibility
(changing volumes based on demand needs) and product flexibility
- Production capacity set on peaks to be flexible
- Hardware and Software levers used by Zara
- Technology and automation: related to production activities (investments in technology
automation in factories) and transportation
- Flexible manufacturing systems: production equipment’s that can produce ≠ products
with a short set up time - invest in new technology
- Excess production capacity
- Vertical integration (upstream in production): ability to produce internally also fabrics
inside - insourcing results in time reduction
- Location: most of the production is done in Spain (50%), and Europe (80%) - they
produce where they sell (minimize time for transportation)
- Modes of transportation: shipping is done by truck in Europe, and airplane in long
destinations (costly but fast) High degree of consistency in all these aspects: Zara has clear in mind which is its competitive strategy COMPETITIVE ADVANTAGE:
- Unique fashion items combined with short production runs! offer more styles and choices and create a sense of urgency
- Use of flexible business models
- Short term focused order! forecast more accurate
- Its success is based on the close connection between customers and designers. Thought internal interfaces Zara is gathering its information, e.g. sales, staff, leftovers analysis, complaints. HARDWARE:
- Location Stores: town centers and places with high concentration fo women Factory: production 50% in Spain, 26% rest of Europe, 24& Asia and Africa. Manufacturing is centered in northwestern of Spain where cube and headquarters are located
- Verticalization: highly vertical integrated to minimize time necessary ( 50% produced in Spain, 26 rest of Europe, 24 in Asia, and Africa.)
- Automation: both capital intensive and labor intensive. They employ 3000 workers, but it is also highly automated with underground link to 11 factories.
- Production capacity: can increase and decrease production quickly thus there is less inventory in the supply chain. Stores place order twice a week. short term focused order cycles make forecasts very accurate
- Raw materials and components
The more efficient the use of the production inputs, the lower the cost. The main indicator of cost measurement is productivity. PRODUCTIVITY = OUTPUT / INPUT - how much you have produced divided by the inputs that you have used - the higher the productivity ratio, the higher the ability to reduce the costs
- Capital productivity = Output / Capital
- Manpower productivity = Output / Manpower
- Materials productivity = Output / Materials
It's easier to interpret productivity with a percentage; need to transform inputs and outputs into hours of work. Ex: Computer producer
- Time horizon: 2016
- Volume (output): 1600 pieces
- Capital: 1 molding machine
- P = 1600 pieces / 1 machine = 1600 - productivity in numbers
- Unit production time: 1 h/p
- Hours (output): 1600 pieces x 1 h/p = 1600 hours
- 250 days of work, with one 8 hour shift - available hours = 250 days x 8 hours = 2000
hours
- P = 1600 hours to produce / 2000 hours available = 80% - productivity in percentage
Time (3) From the operations system's point of view, the time performance can be thought in terms of:
- SPEED: ability to work fast
- Measured through the mean delivery time
- Average of each delivery time
- DEPENDABILITY: ability to work on time, to deliver on time (due date)
- Measured through the^ mean delay in delivery
- Average of each delay in delivery
Average delivery time: 10 days
- Actual delivery time: ADD - OD =
19 days
- Budgeted delivery time: DD - OD =
15 days
- NOT FAST IN ANY CASE
- Actual delay: ADD - DD = 4 days
- There is a responsibility of the factory in time delay: delay due to ≠ problems, slow
speed... Operations department can be often responsible for both poor performances. It happens because it is not easy to accurately forecast how long it will take to get a unit of production done (manufacturing lead time) Manufacturing lead time The factors determining the length of MLT are:
- WIP : all the inputs and semi-finished units which have to be processed before the last
input - it depends on the line, on the process that is actually happening, how much it needs to wait to be processed
- Cycle time : the time lag between two subsequent units coming out of the production line
- time of waiting between two units (speed of the process in releasing finished products)
- Processing capacity : pace at which the production line works - the reverse of the cycle
time
- MLT^ = WIP x Cycle Time = WIP / Processing Capacity
Ex: Manufacturing lead time
- WIP: 100 pieces
- Cycle time: 2 sec/piece
- MLT = 100 pieces’ x 2 sec/piece = 200 sec - the time the last units have to wait to exit
the system If the MLT is too long it means that probably there is too much WIP (the line is too long) or that the cycle time is too long (too much time to process one single product)
- To reduce the MLT, WIP and cycle time need to be reduced
- Manufacturing lead time : the time that passes since the system
is fed with the necessary inputs till the finished product comes out of the production line
- Follow the path of the water coming into the sink (INPUT) and
going out of the sink (OUTPUT)
- The water accumulated in the sink is waiting for being released by
the sink (WORK IN PROGRESS - WIP)
- Processing capacity: 20 pc/h
- Cycle time: 3 min/p
• Operation D
- Processing capacity: 30 pc/h
- Cycle time: 2 min/p
(appunti quaderno) PERFORMANCE MANAGEMENT: Flexibility and quality How does the Operations function achieve an “operations-based advantage”? Through achieving 4 basic perfomance objectives… FLEXIBILITY: Can be defined as the ability of a system to change itself, but under two conditions (can adapt to a different environment).
- Speed of change
- Cost of change Ex: Flexibility (schema quaderno)
- Seasonal industries: fashion industry (selling relative to a specific season) or Easter eggs
(selling in the Easter period)
- Organize the production activity according to seasonality
ZARA can change very quickly, but is not cost efficient. Flexibility can be assessed from different perspectives:
- PRODUCT FLEXIBILITY : operations ability to introduce new products adapting its resources so that new models can be manufactured. (example: electronic companies very frequently have to introduce a new product. If you have capital intensive system, you invested a lot on machines it is difficult to be product flexible. Nowadays we are in a period of strong innovation. - Industry with high rate of innovation, ex: consumer electronics - Frequent introduction of new products (they need to be manufactured) - Automated and capital intensive factories were less flexible (now companies are making investments in automation to become more flexible) - Ex: AGV (Automated Guided Vehicles) - factory organized in 4 departments with different treatments; possible to plan the internal path of the material in order to transform it into finished product - problem of flexibility: if a new product doesn't need all the treatments, it will need a different path - Need to carefully design the production system in order to boost product flexibility
- VOLUME FLEXIBILITY : operation’s ability of a system to change the level of output
- MIX FLEXIBILITY : ability to provide a wide mix of products. This involves producing different products with a given equipment in a given amount of time 2 companies: producing boats A: cm 20, cm 22 B: cm 20, cm 22 No difference in the two models, but can have a different level fo mix A: needs 4 hours for each single set up of the machine B: needs 15 min for set up the machine
