Operations management

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Operations management is an area of management concerned with designing and controlling the process of production and redesigning business operations in the production of goods or services. [1] It involves the responsibility of ensuring that business operations are efficient in terms of using as few resources as needed and effective in terms of meeting customer requirements. Operations management is primarily concerned with planning, organizing and supervising in the contexts of production, manufacturing or the provision of services. [2]

Management Coordinating the efforts of people

Management is the administration of an organization, whether it is a business, a not-for-profit organization, or government body. Management includes the activities of setting the strategy of an organization and coordinating the efforts of its employees to accomplish its objectives through the application of available resources, such as financial, natural, technological, and human resources. The term "management" may also refer to those people who manage an organization.

Production is a process of combining various material inputs and immaterial inputs in order to make something for consumption. It is the act of creating an output, a good or service which has value and contributes to the utility of individuals.

The outcome of business operations is the harvesting of value from assets owned by a business. Assets can be either physical or intangible. An example of value derived from a physical asset, like a building, is rent. An example of value derived from an intangible asset, like an idea, is a royalty. The effort involved in "harvesting" this value is what constitutes business operations cycles.

Contents

It is concerned with managing an entire production system which is the process that converts inputs (in the forms of raw materials, labor, and energy) into outputs (in the form of goods and/or services), or delivers a product or services. [3] Operations produce products, manage quality and creates service. Operation management covers sectors like banking systems, hospitals, companies, working with suppliers, customers, and using technology. Operations is one of the major functions in an organization along with supply chains, marketing, finance and human resources. The operations function requires management of both the strategic and day-to-day production of goods and services. [4]

Manual labour physical work done by people

Manual labour or manual work is physical work done by people, most especially in contrast to that done by machines, and to that done by working animals. It is most literally work done with the hands, and, by figurative extension, it is work done with any of the muscles and bones of the body. For most of human prehistory and history, manual labour and its close cousin, animal labour, have been the primary ways that physical work has been accomplished. Mechanisation and automation, which reduce the need for human and animal labour in production, have existed for centuries, but it was only starting in the 18th and 19th centuries that they began to significantly expand and to change human culture. To be implemented, they require that sufficient technology exist and that its capital costs be justified by the amount of future wages that they will obviate. Semi-automation is an alternative to worker displacement that combines human labour, automation, and computerization to leverage the advantages of both man and machine.

Energy quantitative physical property transferred to objects to perform heating or work on them

In physics, energy is the quantitative property that must be transferred to an object in order to perform work on, or to heat, the object. Energy is a conserved quantity; the law of conservation of energy states that energy can be converted in form, but not created or destroyed. The SI unit of energy is the joule, which is the energy transferred to an object by the work of moving it a distance of 1 metre against a force of 1 newton.

Ford Motor car assembly line: the classical example of a manufacturing production system. LongBeachFord.jpg
Ford Motor car assembly line: the classical example of a manufacturing production system.

In managing manufacturing or service operations several types of decisions are made including operations strategy, product design, process design, quality management, capacity, facilities planning, production planning and inventory control. Each of these requires an ability to analyze the current situation and find better solutions to improve the effectiveness and efficiency of manufacturing or service operations. [5]

Post office queue. Operations management studies both manufacturing and services. HK Central Zhong Huan Zhong Xin The Center mall shop interior service counters queue line barrier visitors.jpg
Post office queue. Operations management studies both manufacturing and services.

History

The history of production and operation systems began around 5000 B.C. when Sumerian priests developed the ancient system of recording inventories, loans, taxes, and business transactions. The next major historical application of operation systems occurred in 4000 B.C. It was during this time that the Egyptians started using planning, organization, and control in large projects such as the construction of the pyramids. By 1100 B.C., labor was being specialized in China; by about 370 B.C., Xenophon described the advantages of dividing the various operations necessary for the production of shoes among different individuals in ancient Greece: [6] [7]

Sumer Ancient civilization and historical region in southern Mesopotamia

Sumer is the earliest known civilization in the historical region of southern Mesopotamia, modern-day southern Iraq, during the Chalcolithic and Early Bronze ages, and one of the first civilizations in the world along with Ancient Egypt and the Indus Valley. Living along the valleys of the Tigris and Euphrates, Sumerian farmers were able to grow an abundance of grain and other crops, the surplus of which enabled them to settle in one place. Prehistoric proto-writing dates back before 3000 BC. The earliest texts, from c. 3300 BC, come from the cities of Uruk and Jemdet Nasr; early cuneiform script emerged around 3000 BC.

Egyptians are an ethnic group native to Egypt and the citizens of that country sharing a common culture and a common dialect known as Egyptian Arabic.

Planning is the process of thinking about the activities required to achieve a desired goal. It is the first and foremost activity to achieve desired results. It involves the creation and maintenance of a plan, such as psychological aspects that require conceptual skills. There are even a couple of tests to measure someone’s capability of planning well. As such, planning is a fundamental property of intelligent behavior. An important further meaning, often just called "planning" is the legal context of permitted building developments.

...In large cities, on the other hand, inasmuch as many people have demands to make upon each branch of industry, one trade alone, and very often even less than a whole trade, is enough to support a man: one man, for instance, makes shoes for men, and another for women; and there are places even where one man earns a living by only stitching shoes, another by cutting them out, another by sewing the uppers together, while there is another who performs none of these operations but only assembles the parts. It follows, therefore, as a matter of course, that he who devotes himself to a very highly specialized line of work is bound to do it in the best possible manner.

Shoemakers, 1568 Shoemaker Book of Trades.png
Shoemakers, 1568

In the Middle Ages, kings and queens ruled over large areas of land. Loyal noblemen maintained large sections of the monarch's territory. This hierarchical organization in which people were divided into classes based on social position and wealth became known as the feudal system. In the feudal system, vassals and serfs produced for themselves and people of higher classes by using the ruler's land and resources. Although a large part of labor was employed in agriculture, artisans contributed to economic output and formed guilds. The guild system, operating mainly between 1100 and 1500, consisted of two types: merchant guilds, who bought and sold goods, and craft guilds, which made goods. Although guilds were regulated as to the quality of work performed, the resulting system was rather rigid, shoemakers, for example, were prohibited from tanning hides. [8]

Middle Ages Period of European history from the 5th to the 15th century

In the history of Europe, the Middle Ages lasted from the 5th to the 15th century. It began with the fall of the Western Roman Empire and merged into the Renaissance and the Age of Discovery. The Middle Ages is the middle period of the three traditional divisions of Western history: classical antiquity, the medieval period, and the modern period. The medieval period is itself subdivided into the Early, High, and Late Middle Ages.

Feudalism combination of legal and military customs in medieval Europe

Feudalism was a combination of legal and military customs in medieval Europe that flourished between the 9th and 15th centuries. Broadly defined, it was a way of structuring society around relationships derived from the holding of land in exchange for service or labour. Although derived from the Latin word feodum or feudum (fief), then in use, the term feudalism and the system it describes were not conceived of as a formal political system by the people living in the Middle Ages. In its classic definition, by François-Louis Ganshof (1944), feudalism describes a set of reciprocal legal and military obligations among the warrior nobility revolving around the three key concepts of lords, vassals and fiefs.

Vassal person who has entered into a mutual obligation to a lord or monarch in the context of the feudal system in medieval Europe

A vassal is a person regarded as having a mutual obligation to a lord or monarch, in the context of the feudal system in medieval Europe. The obligations often included military support by knights in exchange for certain privileges, usually including land held as a tenant or fief. The term is applied to similar arrangements in other feudal societies.

Services were also performed in the Middle Ages by servants. They provided service to the nobility for cooking, cleaning and entertainment. Court jesters were service providers. The medieval army could also be considered a service since they defended the nobility.

The industrial revolution was facilitated by two elements: interchangeability of parts and division of labor. Division of labor has always been a feature from the beginning of civilization, the extent to which the division is carried out varied considerably depending on period and location. Compared to the Middle Ages, the Renaissance and the Age of Discovery were characterized by a greater specialization in labor, one of the characteristics of growing European cities and trade. It was in the late eighteenth century that Eli Whitney popularized the concept of interchangeability of parts when he manufactured 10,000 muskets. Up to this point in the history of manufacturing, each product (e.g. each gun) was considered a special order, meaning that parts of a given gun were fitted only for that particular gun and could not be used in other guns. Interchangeability of parts allowed the mass production of parts independent of the final products in which they would be used.

Civilization Complex state society

A civilization or civilisation is any complex society characterized by urban development, social stratification imposed by a cultural elite, symbolic systems of communication, and a perceived separation from and domination over the natural environment.

Renaissance European cultural period, 14th to 17th century

The Renaissance is a period in European history, covering the span between the 14th and 17th centuries and marking the transition from the Middle Ages to modernity. The traditional view focuses more on the early modern aspects of the Renaissance and argues that it was a break from the past, but many historians today focus more on its medieval aspects and argue that it was an extension of the middle ages.

Age of Discovery Period of European global exploration

The Age of Discovery, or the Age of Exploration, is an informal and loosely defined term for the period in European history in which extensive overseas exploration emerged as a powerful factor in European culture and which was the beginning of globalization. It also marks the rise of the period of widespread adoption in Europe of colonialism and mercantilism as national policies. Many lands previously unknown to Europeans were discovered by them during this period, though most were already inhabited. From the perspective of many non-Europeans, the Age of Discovery marked the arrival of invaders from previously unknown continents.

In 1883, Frederick Winslow Taylor introduced the stopwatch method for accurately measuring the time to perform each single task of a complicated job. He developed the scientific study of productivity and identifying how to coordinate different tasks to eliminate wasting of time and increase the quality of work. The next generation of scientific study occurred with the development of work sampling and predetermined motion time systems (PMTS). Work sampling is used to measure the random variable associated with the time of each task. PMTS allows the use of standard predetermined tables of the smallest body movements (e.g. turning the left wrist by 90°), and integrating them to predict the time needed to perform a simple task. PMTS has gained substantial importance due to the fact that it can predict work measurements without observing the actual work. The foundation of PMTS was laid out by the research and development of Frank B. and Lillian M. Gilbreth around 1912. The Gilbreths took advantage of taking motion pictures at known time intervals while operators were performing the given task.

Service Industries: At the turn of the twentieth century, the services industries were already developed, but largely fragmented. In 1900 the U.S. service industry consisted of banks, professional services, schools, general stores, railroads and telegraph. Services were largely local in nature (except for railroads and telegraph) and owned by entrepreneurs and families. The U.S. in 1900 had 31% employment in services, 31% in manufacturing and 38% in agriculture. [9]

The idea of the production line has been used multiple times in history prior to Henry Ford: the Venetian Arsenal (1104); Smith's pin manufacturing, in the Wealth of Nations (1776) or Brunel's Portsmouth Block Mills (1802). Ransom Olds was the first to manufacture cars using the assembly line system, but Henry Ford developed the first auto assembly system where a car chassis was moved through the assembly line by a conveyor belt while workers added components to it until the car was completed. During World War II, the growth of computing power led to further development of efficient manufacturing methods and the use of advanced mathematical and statistical tools. This was supported by the development of academic programs in industrial and systems engineering disciplines, as well as fields of operations research and management science (as multi-disciplinary fields of problem solving). While systems engineering concentrated on the broad characteristics of the relationships between inputs and outputs of generic systems, operations researchers concentrated on solving specific and focused problems. The synergy of operations research and systems engineering allowed for the realization of solving large scale and complex problems in the modern era. Recently, the development of faster and smaller computers, intelligent systems, and the World Wide Web has opened new opportunities for operations, manufacturing, production, and service systems.

Industrial Revolution

Marshall's flax mill in Holbeck. The textile industry is the prototypical example of the English industrial revolution. Marshall's flax-mill, Holbeck, Leeds - interior - c.1800.jpg
Marshall's flax mill in Holbeck. The textile industry is the prototypical example of the English industrial revolution.

Before the First industrial revolution work was mainly done through two systems: domestic system and craft guilds. In the domestic system merchants took materials to homes where artisans performed the necessary work, craft guilds on the other hand were associations of artisans which passed work from one shop to another, for example: leather was tanned by a tanner, passed to curriers, and finally arrived at shoemakers and saddlers.

The beginning of the industrial revolution is usually associated with 18th century English textile industry, with the invention of flying shuttle by John Kay in 1733, the spinning jenny by James Hargreaves in 1765, the water frame by Richard Arkwright in 1769 and the steam engine by James Watt in 1765. In 1851 at the Crystal Palace Exhibition the term American system of manufacturing was used to describe the new approach that was evolving in the United States of America which was based on two central features: interchangeable parts and extensive use of mechanization to produce them.

Second Industrial Revolution and post-industrial society

Henry Ford was 39 years old when he founded the Ford Motor Company in 1903, with $28,000 capital from twelve investors. The model T car was introduced in 1908, however it was not until Ford implemented the assembly line concept, that his vision of making a popular car affordable by every middle-class American citizen would be realized. The first factory in which Henry Ford used the concept of the assembly line was Highland Park (1913), he characterized the system as follows:

"The thing is to keep everything in motion and take the work to the man and not the man to the work. That is the real principle of our production, and conveyors are only one of many means to an end" [10]

This became one the central ideas that led to mass production, one of the main elements of the Second Industrial Revolution, along with emergence of the electrical industry and petroleum industry.

The post-industrial economy was noted in 1973 by Daniel Bell. [11] He stated that the future economy would provide more GDP and employment from services than from manufacturing and have a great effect on society. Since all sectors are highly interconnected, this did not reflect less importance for manufacturing, agriculture, and mining but just a shift in the type of economic activity.

Operations management

Although productivity benefited considerably from technological inventions and division of labor, the problem of systematic measurement of performances and the calculation of these by the use of formulas remained somewhat unexplored until Frederick Taylor, whose early work focused on developing what he called a "differential piece-rate system" [12] and a series of experiments, measurements and formulas dealing with cutting metals [13] and manual labor. [14] The differential piece-rate system consisted in offering two different pay rates for doing a job: a higher rate for workers with high productivity (efficiency) and who produced high quality goods (effectiveness) and a lower rate for those who fail to achieve the standard. One of the problems Taylor believed could be solved with this system, was the problem of soldiering: faster workers reducing their production rate to that of the slowest worker. In 1911 Taylor published his "The Principles of Scientific Management", [15] in which he characterized scientific management (also known as Taylorism) as:

  1. The development of a true science;
  2. The scientific selection of the worker;
  3. The scientific education and development of the worker;
  4. Intimate friendly cooperation between the management and the workers.

Taylor is also credited for developing stopwatch time study, this combined with Frank and Lillian Gilbreth motion study gave way to time and motion study which is centered on the concepts of standard method and standard time. Frank Gilbreth is also responsible for introducing the flow process chart in 1921. [16] Other contemporaries of Taylor worth remembering are Morris Cooke (rural electrification in the 1920s and implementer of Taylor's principles of scientific management in the Philadelphia's Department of Public Works), Carl Barth (speed-and-feed-calculating slide rules ) and Henry Gantt (Gantt chart). Also in 1910 Hugo Diemer published the first industrial engineering book: Factory Organization and Administration.

In 1913 Ford Whitman Harris published his "How many parts to make at once" in which he presented the idea of the economic order quantity model. He described the problem as follows:

"Interest on capital tied up in wages, material and overhead sets a maximum limit to the quantity of parts which can be profitably manufactured at one time; "setup costs" on the job fix the minimum. Experience has shown one manager a way to determine the economical size of lots" [17]

This paper inspired a large body of mathematical literature focusing on the problem of production planning and inventory control.

In 1924 Walter Shewhart introduced the control chart through a technical memorandum while working at Bell Labs, central to his method was the distinction between common cause and special cause of variation. In 1931 Shewhart published his Economic Control of Quality of Manufactured Product, [18] the first systematic treatment [19] of the subject of Statistical Process Control (SPC).

In the 1940s methods-time measurement (MTM) was developed by H.B. Maynard, JL Schwab and GJ Stegemerten. MTM was the first of a series of predetermined motion time systems, predetermined in the sense that estimates of time are not determined in loco but are derived from an industry standard. This was explained by its originators in a book they published in 1948 called "Method-Time Measurement". [20]

Up to this point in history, optimization techniques were known for a very long time, from the simple methods employed by F.W.Harris to the more elaborate techniques of the calculus of variations developed by Euler in 1733 or the multipliers employed by Lagrange in 1811, and computers were slowly being developed, first as analog computers by Sir William Thomson (1872) and James Thomson (1876) moving to the eletromechanical computers of Konrad Zuse (1939 and 1941). During World War II however, the development of mathematical optimization went through a major boost with the development of the Colossus computer, the first electronic digital computer that was all programmable, and the possibility to computationally solve large linear programming problems, first by Kantorovich [21] in 1939 working for the Soviet government and latter on in 1947 with the simplex method of Dantzig. These methods are known today as belonging to the field of operations research.

From this point on a curious development took place: while in the United States the possibility of applying the computer to business operations led to the development of management software architecture such as MRP and successive modifications, and ever more sophisticated optimization techniques and manufacturing simulation software, in post-war Japan a series of events at Toyota Motor led to the development of the Toyota Production System (TPS) and Lean Manufacturing.

In 1943, in Japan, Taiichi Ohno arrived at Toyota Motor company. Toyota evolved a unique manufacturing system centered on two complementary notions: just in time (produce only what is needed) and autonomation (automation with a human touch). Regarding JIT, Ohno was inspired by American supermarkets: [22] workstations functioned like a supermarket shelf where the customer can get products they need, at the time they need and in the amount needed, the workstation (shelf) is then restocked. Autonomation was developed by Toyoda Sakichi in Toyoda Spinning and Weaving: an automatically activated loom that was also foolproof, that is automatically detected problems. In 1983 J.N Edwards published his "MRP and Kanban-American style" in which he described JIT goals in terms of seven zeros: [23] zero defects, zero (excess) lot size, zero setups, zero breakdowns, zero handling, zero lead time and zero surging. This period also marks the spread of Total Quality Management (TQM) in Japan, ideas initially developed by American authors such as Deming, Juran and Armand V. Feigenbaum. [24] TQM is a strategy for implementing and managing quality improvement on an organizational basis, this includes: participation, work culture, customer focus, supplier quality improvement and integration of the quality system with business goals. [19] Schnonberger [25] identified seven fundamentals principles essential to the Japanese approach:

  1. Process control: SPC and worker responsibility over quality
  2. Easy able -to-see quality: boards, gauges, meters, etc. and poka-yoke
  3. Insistence on compliance: "quality first"
  4. Line stop: stop the line to correct quality problems
  5. Correcting one's own errors: worker fixed a defective part if he produced it
  6. The 100% check: automated inspection techniques and foolproof machines
  7. Continual improvement: ideally zero defects

Meanwhile, in the sixties, a different approach was developed by George W. Plossl and Oliver W. Wight, [26] this approach was continued by Joseph Orlicky as a response to the TOYOTA Manufacturing Program which led to Material Requirements Planning (MRP) at IBM, latter gaining momentum in 1972 when the American Production and Inventory Control Society launched the "MRP Crusade". One of the key insights of this management system was the distinction between dependent demand and independent demand. Independent demand is demand which originates outside of the production system, therefore not directly controllable, and dependent demand is demand for components of final products, therefore subject to being directly controllable by management through the bill of materials, via product design. Orlicky wrote "Materials Requirement Planning" in 1975, [27] the first hard cover book on the subject. [26] MRP II was developed by Gene Thomas at IBM, and expanded the original MRP software to include additional production functions. Enterprise resource planning (ERP) is the modern software architecture, which addresses, besides production operations, distribution, accounting, human resources and procurement.

Dramatic changes were occurring in the service industries, as well. Beginning in 1955 McDonald's provided one of the first innovations in service operations. McDonald's is founded on the idea of the production-line approach to service. [28] This requires a standard and limited menu, an assembly-line type of production process in the back-room, high customer service in the front-room with cleanliness, courtesy and fast service. While modeled after manufacturing in the production of the food in the back-room, the service in the front-room was defined and oriented to the customer. It was the McDonald's operations system of both production and service that made the difference. McDonald's also pioneered the idea of franchising this operation system to rapidly spread the business around the country and later the world. [29]

FedEx in 1971 provided the first overnight delivery of packages in the U.S. This was based on the innovative idea of flying all packages into the single airport in Memphis Tenn by midnight each day, resorting the packages for delivery to destinations and then flying them back out the next morning for delivery to numerous locations. This concept of a fast package delivery system created a whole new industry, and eventually allowed fast delivery of online orders by Amazon and other retailers. [30]

Walmart provided the first example of very low cost retailing through design of their stores and efficient management of their entire supply chain. Starting with a single store in Roger's Arkansas in 1962, Walmart has now become the world's largest company. This was accomplished by adhering to their system of delivering the goods and the service to the customers at the lowest possible cost. The operations system included careful selection of merchandise, low cost sourcing, ownership of transportation, cross-docking, efficient location of stores and friendly home-town service to the customer. [31]

In 1987 the International Organization for Standardization (ISO), recognizing the growing importance of quality, issued the ISO 9000, a family of standards related to quality management systems. There standards apply to both manufacturing and service organizations. There has been some controversy regarding the proper procedures to follow and the amount of paperwork involved, but much of that has improved in current ISO 9000 revisions.

With the coming of the Internet, in 1994 Amazon devised a service system of on-line retailing and distribution. With this innovative system customers were able to search for products they might like to buy, enter the order for the product, pay online, and track delivery of the product to their location, all in two days. This required not only very large computer operations, but dispersed warehouses, and an efficient transportation system. Service to customers including a high merchandise assortment, return services of purchases, and fast delivery is at the forefront of this business. [32] It is the customer being in the system during the production and delivery of the service that distinguishes all services from manufacturing.

Recent trends in the field revolve around concepts such as:

Topics

Production systems

In a job shop machines are grouped by technological similarities regarding transformation processes, therefore a single shop can work very different products (in this picture four colors). Also notice that in this drawing each shop contains a single machine. Job Shop Ordonnancement.JPEG
In a job shop machines are grouped by technological similarities regarding transformation processes, therefore a single shop can work very different products (in this picture four colors). Also notice that in this drawing each shop contains a single machine.
Flexible Manufacturing System: in the middle there are two rails for the shuttle to move pallets between machining centers (there are also FMS which use AGVs), in front of each machining center there is a buffer and in left we have a shelf for storing pallets. Usually in the back there is a similar system for managing the set of tools required for different machining operations. FlexiblesFertigungssystem.jpg
Flexible Manufacturing System: in the middle there are two rails for the shuttle to move pallets between machining centers (there are also FMS which use AGVs), in front of each machining center there is a buffer and in left we have a shelf for storing pallets. Usually in the back there is a similar system for managing the set of tools required for different machining operations.

A production system comprises both the technological elements (machines and tools) and organizational behavior (division of labor and information flow). An individual production system is usually analyzed in the literature referring to a single business, therefore it's usually improper to include in a given production system the operations necessary to process goods that are obtained by purchasing or the operations carried by the customer on the sold products, the reason being simply that since businesses need to design their own production systems this then becomes the focus of analysis, modeling and decision making (also called "configuring" a production system).

A first possible distinction in production systems (technological classification) is between continuous process production and discrete part production (manufacturing).

Delivery lead time is the blue bar, manufacturing time is the whole bar, the green bar is the difference between the two. Class wort.jpg
Delivery lead time is the blue bar, manufacturing time is the whole bar, the green bar is the difference between the two.

Another possible classification [37] is one based on Lead Time (manufacturing lead time vs delivery lead time): engineer to order (ETO), purchase to order (PTO), make to order (MTO), assemble to order (ATO) and make to stock (MTS). According to this classification different kinds of systems will have different customer order decoupling points (CODP), meaning that work in progress (WIP) cycle stock levels are practically nonexistent regarding operations located after the CODP (except for WIP due to queues). (See Order fulfillment)

The concept of production systems can be expanded to the service sector world keeping in mind that services have some fundamental differences in respect to material goods: intangibility, client always present during transformation processes, no stocks for "finished goods". Services can be classified according to a service process matrix: [38] degree of labor intensity (volume) vs degree of customization (variety). With a high degree of labor intensity there are Mass Services (e.g., commercial banking bill payments and state schools) and Professional Services (e.g., personal physicians and lawyers), while with a low degree of labor intensity there are Service Factories (e.g., airlines and hotels) and Service Shops (e.g., hospitals and auto mechanics).

The systems described above are ideal types: real systems may present themselves as hybrids of those categories. Consider, for example, that the production of jeans involves initially carding, spinning, dyeing and weaving, then cutting the fabric in different shapes and assembling the parts in pants or jackets by combining the fabric with thread, zippers and buttons, finally finishing and distressing the pants/jackets before being shipped to stores. [39] The beginning can be seen as process production, the middle as part production and the end again as process production: it's unlikely that a single company will keep all the stages of production under a single roof, therefore the problem of vertical integration and outsourcing arises. Most products require, from a supply chain perspective, both process production and part production.

Metrics: efficiency and effectiveness

Operations strategy concerns policies and plans of use of the firm productive resources with the aim of supporting long term competitive strategy. Metrics in operations management can be broadly classified into efficiency metrics and effectiveness metrics. Effectiveness metrics involve:

  1. Price (actually fixed by marketing, but lower bounded by production cost): purchase price, use costs, maintenance costs, upgrade costs, disposal costs
  2. Quality: specification and compliance
  3. Time: productive lead time, information lead time, punctuality
  4. Flexibility: mix, volume, gamma
  5. Stock availability
  6. Ecological Soundness: biological and environmental impacts of the system under study.

A more recent approach, introduced by Terry Hill, [40] involves distinguishing competitive variables in order winner and order qualifiers when defining operations strategy. Order winners are variables which permit differentiating the company from competitors, while order qualifiers are prerequisites for engaging in a transaction. This view can be seen as a unifying approach between operations management and marketing (see segmentation and positioning).

Productivity is a standard efficiency metric for evaluation of production systems, broadly speaking a ratio between outputs and inputs, and can assume many specific forms, [41] for example: machine productivity, workforce productivity, raw material productivity, warehouse productivity (=inventory turnover). It is also useful to break up productivity in use U (productive percentage of total time) and yield η (ratio between produced volume and productive time) to better evaluate production systems performances. Cycle times can be modeled through manufacturing engineering if the individual operations are heavily automated, if the manual component is the prevalent one, methods used include: time and motion study, predetermined motion time systems and work sampling.

An ABC cumulated curve. Typically one curve is constructed for revenue (consumption) and another for inventory (stock). ABC class.jpg
An ABC cumulated curve. Typically one curve is constructed for revenue (consumption) and another for inventory (stock).

ABC analysis is a method for analyzing inventory based on Pareto distribution, it posits that since revenue from items on inventory will be power law distributed then it makes sense to manage items differently based on their position on a revenue-inventory level matrix, 3 classes are constructed (A, B and C) from cumulative item revenues, so in a matrix each item will have a letter (A, B or C) assigned for revenue and inventory. This method posits that items away from the diagonal should be managed differently: items in the upper part are subject to risk of obsolescence, items in the lower part are subject to risk of stockout.

Throughput is a variable which quantifies the number of parts produced in the unit of time. Although estimating throughput for a single process maybe fairly simple, doing so for an entire production system involves an additional difficulty due to the presence of queues which can come from: machine breakdowns, processing time variability, scraps, setups, maintenance time, lack of orders, lack of materials, strikes, bad coordination between resources, mix variability, plus all these inefficiencies tend to compound depending on the nature of the production system. One important example of how system throughput is tied to system design are bottlenecks: in job shops bottlenecks are typically dynamic and dependent on scheduling while on transfer lines it makes sense to speak of "the bottleneck" since it can be univocally associated with a specific station on the line. This leads to the problem of how to define capacity measures, that is an estimation of the maximum output of a given production system, and capacity utilization.

Overall equipment effectiveness (OEE) is defined as the product between system availability, cycle time efficiency and quality rate. OEE is typically used as key performance indicator (KPI) in conjunction with the lean manufacturing approach.

Configuration and management

Designing the configuration of production systems involves both technological and organizational variables. Choices in production technology involve: dimensioning capacity, fractioning capacity, capacity location, outsourcing processes, process technology, automation of operations, trade-off between volume and variety (see Hayes-Wheelwright matrix). Choices in the organizational area involve: defining worker skills and responsibilities, team coordination, worker incentives and information flow.

Regarding production planning , there is a basic distinction between the push approach and the pull approach, with the later including the singular approach of just in time. Pull means that the production system authorizes production based on inventory level; push means that production occurs based on demand (forecasted or present, that is purchase orders). An individual production system can be both push and pull; for example activities before the CODP may work under a pull system, while activities after the CODP may work under a push system.

Classic EOQ model: trade-off between ordering cost (blue) and holding cost (red). Total cost (green) admits a global optimum. Eoq inventory 0001.png
Classic EOQ model: trade-off between ordering cost (blue) and holding cost (red). Total cost (green) admits a global optimum.

Regarding the traditional pull approach to inventory control, a number of techniques have been developed based on the work of Ford W. Harris [17] (1913), which came to be known as the economic order quantity (EOQ) model. This model marks the beginning of inventory theory, which includes the Wagner-Within procedure, the newsvendor model, base stock model and the Fixed Time Period model. These models usually involve the calculation of cycle stocks and buffer stocks, the latter usually modeled as a function of demand variability. The economic production quantity [42] (EPQ) differs from the EOQ model only in that it assumes a constant fill rate for the part being produced, instead of the instantaneous refilling of the EOQ model.

A typical MRPII construct: general planning (top) concerned with forecasts, capacity planning and inventory levels, programming (middle) concerned with calculation of workloads, rough-cut capacity planning, MPS, capacity requirements planning, traditional MRP planning, control (bottom) concerned with scheduling. MRP2.jpg
A typical MRPII construct: general planning (top) concerned with forecasts, capacity planning and inventory levels, programming (middle) concerned with calculation of workloads, rough-cut capacity planning, MPS, capacity requirements planning, traditional MRP planning, control (bottom) concerned with scheduling.

Joseph Orlickly and others at IBM developed a push approach to inventory control and production planning, now known as material requirements planning (MRP), which takes as input both the master production schedule (MPS) and the bill of materials (BOM) and gives as output a schedule for the materials (components) needed in the production process. MRP therefore is a planning tool to manage purchase orders and production orders (also called jobs).

The MPS can be seen as a kind of aggregate planning for production coming in two fundamentally opposing varieties: plans which try to chase demand and level plans which try to keep uniform capacity utilization. Many models have been proposed to solve MPS problems:

MRP can be briefly described as a 3s procedure: sum (different orders), split (in lots), shift (in time according to item lead time). To avoid an "explosion" of data processing in MRP (number of BOMs required in input) planning bills (such as family bills or super bills) can be useful since they allow a rationalization of input data into common codes. MRP had some notorious problems such as infinite capacity and fixed lead times, which influenced successive modifications of the original software architecture in the form of MRP II, enterprise resource planning (ERP) and advanced planning and scheduling (APS).

In this context problems of scheduling (sequencing of production), loading (tools to use), part type selection (parts to work on) and applications of operations research have a significant role to play.

Lean manufacturing is an approach to production which arose in Toyota between the end of World War II and the seventies. It comes mainly from the ideas of Taiichi Ohno and Toyoda Sakichi which are centered on the complementary notions of just in time and autonomation (jidoka), all aimed at reducing waste (usually applied in PDCA style). Some additional elements are also fundamental: [43] production smoothing (Heijunka), capacity buffers, setup reduction, cross-training and plant layout.

When introducing kanbans in real production systems, attaining unitary lot from the start maybe unfeasible, therefore the kanban will represent a given lot size defined by management. Kanban esp.png
When introducing kanbans in real production systems, attaining unitary lot from the start maybe unfeasible, therefore the kanban will represent a given lot size defined by management.

A series of tools have been developed mainly with the objective of replicating Toyota success: a very common implementation involves small cards known as kanbans; these also come in some varieties: reorder kanbans, alarm kanbans, triangular kanbans, etc. In the classic kanban procedure with one card:

The two-card kanban procedure differs a bit:

Since the number of kanbans in the production system is set by managers as a constant number, the kanban procedure works as WIP controlling device, which for a given arrival rate, per Little's law, works as a lead time controlling device.

Value stream mapping, a representation of materials and information flows inside a company, mainly used in the lean manufacturing approach. The calculation of the time-line (bottom) usually involves using Little's law to derive lead time from stock levels and takt time. Vsm-epa.gif
Value stream mapping, a representation of materials and information flows inside a company, mainly used in the lean manufacturing approach. The calculation of the time-line (bottom) usually involves using Little's law to derive lead time from stock levels and takt time.

In Toyota the TPS represented more of a philosophy of production than a set of specific lean tools, the latter would include:

Seen more broadly, JIT can include methods such as: product standardization and modularity, group technology, total productive maintenance, job enlargement, job enrichment, flat organization and vendor rating (JIT production is very sensitive to replenishment conditions).

In heavily automated production systems production planning and information gathering may be executed via the control system, attention should be paid however to avoid problems such as deadlocks, as these can lead to productivity losses.

Project Production Management (PPM) applies the concepts of operations management to the execution of delivery of capital projects by viewing the sequence of activities in a project as a production system. [44] [45] Operations managements principles of variability reduction and management are applied by buffering through a combination of capacity, time and inventory.

Service operations

Service industries are a major part of economic activity and employment in all industrialized countries comprising 80 percent of employment and GDP in the U.S. Operations management of these services, as distinct from manufacturing, has been developing since the 1970s through publication of unique practices and academic research. [46] Please note that this section does not particularly include "Professional Services Firms" and the professional services practiced from this expertise (specialized training and education within).

According to Fitzsimmons, Fitzsimmons and Bordoloi (2014) differences between manufactured goods and services are as follows: [47]

These four comparisons indicate how management of service operations are quite different from manufacturing regarding such issues as capacity requirements (highly variable), quality assurance (hard to quantify), location of facilities (dispersed), and interaction with the customer during delivery of the service (product and process design).

While there are differences there are also many similarities. For example, quality management approaches used in manufacturing such as the Baldrige Award, and Six Sigma have been widely applied to services. Likewise, lean service principles and practices have also been applied in service operations. The important difference being the customer is in the system while the service is being provided and needs to be considered when applying these practices. [48]

One important difference is service recovery. When an error occurs in service delivery, the recovery must be delivered on the spot by the service provider. If a waiter in a restaurant spills soup on the customer's lap, then the recovery could include a free meal and a promise of free dry cleaning. Another difference is in planning capacity. Since the product cannot be stored, the service facility must be managed to peak demand which requires more flexibility than manufacturing. Location of facilities must be near the customers and scale economics can be lacking. Scheduling must consider the customer can be waiting in line. Queuing theory has been devised to assist in design of service facilities waiting lines. Revenue management is important for service operations, since empty seats on an airplane are lost revenue when the plane departs and cannot be stored for future use. [49]

Mathematical modeling

Queue networks are systems in which single queues are connected by a routing network. In this image servers are represented by circles, queues by a series of retangles and the routing network by arrows. In the study of queue networks one typically tries to obtain the equilibrium distribution of the network. ServidorParalelo.jpg
Queue networks are systems in which single queues are connected by a routing network. In this image servers are represented by circles, queues by a series of retangles and the routing network by arrows. In the study of queue networks one typically tries to obtain the equilibrium distribution of the network.
Illustration of the Simplex method, a classical approach to solving LP optimization problems and also integer programming (ex: branch and cut). This technique is mainly used in push approach but also in production system configuration. The interior and surface of the green polytope geometrically represent the feasible region, while the red line indicates the optimally chosen sequence of pivot operations used to reach the optimal solution. Simplex-method-3-dimensions.png
Illustration of the Simplex method, a classical approach to solving LP optimization problems and also integer programming (ex: branch and cut). This technique is mainly used in push approach but also in production system configuration. The interior and surface of the green polytope geometrically represent the feasible region, while the red line indicates the optimally chosen sequence of pivot operations used to reach the optimal solution.

There are also fields of mathematical theory which have found applications in the field of operations management such as operations research: mainly mathematical optimization problems and queue theory. Queue theory is employed in modelling queue and processing times in production systems while mathematical optimization draws heavily from multivariate calculus and linear algebra. Queue theory is based on Markov chains and stochastic processes. [50] Computations of safety stocks are usually based on modeling demand as a normal distribution and MRP and some inventory problems can be formulated using optimal control. [51]

When analytical models are not enough, managers may resort to using simulation. Simulation has been traditionally done through the discrete event simulation paradigm, where the simulation model possesses a state which can only change when a discrete event happens, which consists of a clock and list of events. The more recent transaction-level modeling paradigm consists of a set of resources and a set of transactions: transactions move through a network of resources (nodes) according to a code, called a process.

A control chart: process output variable is modeled by a probability density function and for each statistic of the sample an upper control line and lower control line are fixed. When the statistic moves out of bounds, an alarm is given and possible causes are investigated. In this drawing the statistic of choice is the mean and red points represent alarm points. Xbar chart for a paired xbar and R chart.svg
A control chart: process output variable is modeled by a probability density function and for each statistic of the sample an upper control line and lower control line are fixed. When the statistic moves out of bounds, an alarm is given and possible causes are investigated. In this drawing the statistic of choice is the mean and red points represent alarm points.

Since real production processes are always affected by disturbances in both inputs and outputs, many companies implement some form of quality management or quality control. The Seven Basic Tools of Quality designation provides a summary of commonly used tools:

These are used in approaches like total quality management and Six Sigma. Keeping quality under control is relevant to both increasing customer satisfaction and reducing processing waste.

Operations management textbooks usually cover demand forecasting, even though it is not strictly speaking an operations problem, because demand is related to some production systems variables. For example, a classic approach in dimensioning safety stocks requires calculating the standard deviation of forecast errors. Demand forecasting is also a critical part of push systems, since order releases have to be planned ahead of actual clients’ orders. Also, any serious discussion of capacity planning involves adjusting company outputs with market demands.

Safety, Risk and Maintenance

Other important management problems involve maintenance policies [52] (see also reliability engineering and maintenance philosophy), safety management systems (see also safety engineering and Risk management), facility management and supply chain integration.

Organizations

The following organizations support and promote operations management:

Journals

The following high-ranked [53] academic journals are concerned with operations management issues:

See also

Related Research Articles

A quality management system (QMS) is a collection of business processes focused on consistently meeting customer requirements and enhancing their satisfaction. It is aligned with an organization's purpose and strategic direction (ISO9001:2015). It is expressed as the organizational goals and aspirations, policies, processes, documented information and resources needed to implement and maintain it. Early quality management systems emphasized predictable outcomes of an industrial product production line, using simple statistics and random sampling. By the 20th century, labor inputs were typically the most costly inputs in most industrialized societies, so focus shifted to team cooperation and dynamics, especially the early signaling of problems via a continual improvement cycle. In the 21st century, QMS has tended to converge with sustainability and transparency initiatives, as both investor and customer satisfaction and perceived quality is increasingly tied to these factors. Of QMS regimes, the ISO 9000 family of standards is probably the most widely implemented worldwide – the ISO 19011 audit regime applies to both, and deals with quality and sustainability and their integration.

Supply-chain management management of the flow of goods and services, involves the movement and storage of raw materials, of work-in-process inventory, and of finished goods from point of origin to point of consumption

In commerce, supply-chain management (SCM), the management of the flow of goods and services, involves the movement and storage of raw materials, of work-in-process inventory, and of finished goods from point of origin to point of consumption. Interconnected or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain. Supply-chain management has been defined as the "design, planning, execution, control, and monitoring of supply-chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally." SCM practice draws heavily from the areas of industrial engineering, systems engineering, operations management, logistics, procurement, information technology, and marketing and strives for an integrated approach. Marketing channels play an important role in supply-chain management. Current research in supply-chain management is concerned with topics related to sustainability and risk management, among others. Some suggest that the “people dimension” of SCM, ethical issues, internal integration, transparency/visibility, and human capital/talent management are topics that have, so far, been underrepresented on the research agenda.

Material requirements planning (MRP) is a production planning, scheduling, and inventory control system used to manage manufacturing processes. Most MRP systems are software-based, but it is possible to conduct MRP by hand as well.

Inventory goods held for resale

Inventory or stock is the goods and materials that a business holds for the ultimate goal of resale.

The theory of constraints (TOC) is a management paradigm that views any manageable system as being limited in achieving more of its goals by a very small number of constraints. There is always at least one constraint, and TOC uses a focusing process to identify the constraint and restructure the rest of the organization around it. TOC adopts the common idiom "a chain is no stronger than its weakest link". This means that processes, organizations, etc., are vulnerable because the weakest person or part can always damage or break them or at least adversely affect the outcome.

Just-in-time manufacturing logistics

Just-in-time (JIT) manufacturing, also known as just-in-time production or the Toyota Production System (TPS), is an inventory control methodology aimed primarily at reducing times within production system as well as response times from suppliers and to customers. Its origin and development was in Japan, largely in the 1960s and 1970s and particularly at Toyota.,

<i>Kanban</i> scheduling system / stock replenishment

Kanban (看板) is a scheduling system for lean manufacturing and just-in-time manufacturing (JIT). Taiichi Ohno, an industrial engineer at Toyota, developed kanban to improve manufacturing efficiency. Kanban is one method to achieve JIT. The system takes its name from the cards that track production within a factory. For many in the automotive sector, kanban is known as the "Toyota nameplate system" and as such the term is not used by some other automakers.

Manufacturing resource planning

Manufacturingresource planning is defined as a method for the effective planning of all resources of a manufacturing company. Ideally, it addresses operational planning in units, financial planning, and has a simulation capability to answer "what-if" questions and extension of closed-loop MRP.

Business Planning and Control System (BPCS) is an Enterprise Resource Planning (ERP) software designed for an OS/400 system. BPCS is a series of software programs that are the largest software supplier for AS/400.

Push–pull strategy

The business terms push and pull originated in logistics and supply chain management, but are also widely used in marketing, and is also a term widely used in the hotel distribution business. Walmart is an example of a company that uses the push vs. pull strategy.

Production leveling, also known as production smoothing or – by its Japanese original term – heijunka (平準化), is a technique for reducing the Mura (Unevenness) which in turn reduces muda (waste). It was vital to the development of production efficiency in the Toyota Production System and lean manufacturing. The goal is to produce intermediate goods at a constant rate so that further processing may also be carried out at a constant and predictable rate.

Backflush accounting is a certain type of "postproduction issuing", it is a product costing approach, used in a Just-In-Time (JIT) operating environment, in which costing is delayed until goods are finished. Backflush accounting delays the recording of costs until after the events have taken place, then standard costs are used to work backwards to 'flush' out the manufacturing costs. The result is that detailed tracking of costs is eliminated. Journal entries to inventory accounts may be delayed until the time of product completion or even the time of sale, and standard costs are used to assign costs to units when journal entries are made. Backflushing transaction has two steps: one step of the transaction reports the produced part which serves to increase the quantity on-hand of the produced part and a second step which relieves the inventory of all the component parts. Component part numbers and quantities-per are taken from the standard bill of material (BOM). This represents a huge saving over the traditional method of a) issuing component parts one at a time, usually to a discrete work order, b) receiving the finished parts into inventory, and c) returning any unused components, one at a time, back into inventory.

A master production schedule (MPS) is a plan for individual commodities to be produced in each time period such as production, staffing, inventory, etc. It is usually linked to manufacturing where the plan indicates when and how much of each product will be demanded. This plan quantifies significant processes, parts, and other resources in order to optimize production, to identify bottlenecks, and to anticipate needs and completed goods. Since an MPS drives much factory activity, its accuracy and viability dramatically affect profitability. Typical MPSs are created by software with user tweaking.

Quick response manufacturing (QRM) is an approach to manufacturing which emphasizes the beneficial effect of reducing internal and external lead times.

Demand Flow Technology (DFT) is a strategy for defining and deploying business processes in a flow, driven in response to customer demand. DFT is based on a set of applied mathematical tools that are used to connect processes in a flow and link it to daily changes in demand. DFT represents a scientific approach to flow manufacturing for discrete production. It is built on principles of demand pull where customer demand is the central signal to guide factory and office activity in the daily operation. DFT is intended to provide an alternative to schedule-push manufacturing which primarily uses a sales plan and forecast to determine a production schedule.

Petrolsoft Corporation (1989–2000) was a supply chain management software company with a focus on the petroleum industry. Petrolsoft Corporation was founded at Stanford University in 1989 by Bill Miller and David Gamboa as Petrolsoft Software Group. It was later incorporated in 1992. Petrolsoft introduced demand-driven inventory management to the petroleum industry.

Production planning border area between business management, engineering, industrial engineering, and computer science in particular, the economic

Production planning is the planning of production and manufacturing modules in a company or industry. It utilizes the resource allocation of activities of employees, materials and production capacity, in order to serve different customers.

Operations management for services has the functional responsibility for producing the services of an organization and providing them directly to its customers. It specifically deals with decisions required by operations managers for simultaneous production and consumption of an intangible product. These decisions concern the process, people, information and the system that produces and delivers the service. It differs from operations management in general, since the processes of service organizations differ from those of manufacturing organizations.

Project production management (PPM) is the application of operations management to the delivery of capital projects. The PPM framework is based on a project as a production system view, in which a project transforms inputs into outputs.

InoERP

ino ERP is an open-source php based Enterprise Resource Planning (ERP) application that can be used with MySQL, MariaDB or Oracle 12c database. The objective of inoERP is to provide a dynamic pull based system where the demand /supply changes frequently and traditional planning systems are incompetent to provide a good inventory turn.

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Further reading