OPS802 OPERATIONS MANAGEMENT - COMPREHENSIVE STUDY

GUIDE

WEEK 1: INTRODUCTION TO OPERATIONS MANAGEMENT

CORE DEFINITIONS

Operations Management (OM)

 Administration of business practices to create maximum efficiency within an organization

 Transforms inputs (materials, labour, technology) into outputs (goods/services)
 Includes: design of goods/services, day-to-day process management, continual
improvement

Why OM is Important

 Efficiency: Optimize resource utilization (time, labour, materials)

 Quality: Ensure products/services meet customer expectations
 Cost-Effectiveness: Reduce costs while maximizing value

Key Functions of OM

1. Process Design: Develop efficient processes for producing goods/services

2. Quality Control: Monitor and ensure high standards

3. Supply Chain Management: Coordinate sourcing, production, and delivery

4. Resource Allocation: Manage human, material, and financial resources

5. Continuous Improvement: Implement strategies to enhance performance

GOODS VS. SERVICES

Goods (Tangible)

 Physical products that can be touched, stored, and measured

 Production occurs before consumption
 Can be inventoried
 Quality measured through physical attributes and defect rates
 Examples: Cars, electronics, clothing

Services (Intangible)

 Non-physical offerings consumed at point of delivery

 Produced and consumed simultaneously
 Cannot be inventoried; must be delivered as needed
 Quality is subjective, based on customer experience
 Examples: Healthcare, education, consulting

VALUE CONCEPTS

Value Definition

 Value = Benefits / Cost

 Perceived benefit relative to cost of acquiring it

Enhancing Value in Goods

 Quality Improvement: Better materials, improved processes, rigorous quality control

 Customization: Tailor products to individual preferences
 Innovation: Introduce new features or technologies

Enhancing Value in Services

 Customer Service: Responsive support, personalized assistance

 Service Quality: Training programs, standardized procedures
 Convenience: Flexible hours, online access, streamlined processes
CUSTOMER BENEFIT PACKAGE (CBP)

Definition: Clearly defined set of tangible and intangible features that customers recognize, pay
for, use, or experience

Components:

1. Primary Goods/Services: Core products/services (e.g., airline flight)

2. Peripheral Goods/Services: Additional offerings that enhance experience (e.g., in-flight meals)

3. Variants: Customizable features catering to specific preferences (e.g., business class seating)

VALUE CHAIN VS. SUPPLY CHAIN

Supply Chain

 Network of organizations involved in creation and delivery from raw materials to end
customer
 Focus: Physical movement of goods and supporting information/financial flows
 Encompasses multiple organizations
 Objective: Optimize flow of goods/information to minimize costs and improve delivery

Value Chain

 Set of activities a company performs to create value for customers

 Focus: Internal activities of single organization
 Components:

 Primary Activities: Inbound logistics, operations, outbound logistics, marketing/sales,

service
 Support Activities: Infrastructure, HR management, technology development,
procurement

 Objective: Enhance value through quality, efficiency, and differentiation

THREE VALUE CHAIN FRAMEWORKS

1. Input-Output Framework

 Shows how inputs (materials, labour, capital, technology) transform into outputs
(products/services)
 Highlights flow and conversion of resources
 Helps identify bottlenecks and inefficiencies

2. Pre- and Post-Production Services Framework

 Pre-Production: Market research, design, planning, sourcing

 Production: Manufacturing, assembly, service delivery
 Post-Production: Installation, maintenance, customer support, returns
 Emphasizes coordination across all phases

3. Hierarchical Supply Chain Perspective

 Tier 1 (Direct Suppliers): Provide materials/components directly to manufacturer

 Tier 2 (Indirect Suppliers): Provide to Tier 1 suppliers
 Tier 3 (Raw Material Providers): Provide to Tier 2 suppliers
 Distribution and Retail: Final delivery to customers
 Illustrates layered nature and interdependencies

THREE GENERAL TYPES OF BUSINESS PROCESSES

1. Core Processes: Primary activities that directly create value (manufacturing, service delivery,
sales)

2. Support Processes: Enable core processes (HR, IT support, procurement)

3. Management Processes: Govern operations and strategy (strategic planning, performance

management)

KEY CHALLENGES FACING OPERATIONS MANAGEMENT

1. Customers: Expect diverse high-quality goods, rapid delivery, exceptional service

2. Technology: Rapid evolution (3D printing, nanotechnology) requires continuous adaptation

3. Workforce: Demands new skills, ongoing learning, greater diversity

4. Globalization: Borderless marketplace, increased competition, varying labour costs

5. Sustainability: Environmental and ethical standards now critical performance area

6. Optimizing Supply Chains: Managing global chains across continents, mitigating risks

LITTLE'S LAW

Formula: L = λ × W

Where:

 L (Work in Progress): Average number of items in the system

 λ (Throughput): Average arrival rate into the system
 W (Lead Time): Average time an item spends in the system

Applications:

 Queue Management: Understand queue lengths and wait times

 Process Improvement: Optimize process flow and reduce delays
 Forecasting: Predict system performance and plan resources

Example: Bookstore with 10 visitors/hour, each spending 0.5 hours

L = 10 × 0.5 = 5 customers in store at any given time

WEEK 2: PERFORMANCE MEASUREMENT

PERFORMANCE MEASUREMENT FUNDAMENTALS

Definition: Act of quantifying performance of organizational units, goods/services, processes,

people, and business activities

Purpose:

 Provides scorecard of performance

 Helps identify performance gaps
 Makes accomplishments visible to stakeholders

Importance of Alignment

 Strategic Alignment: Ensures metrics support organizational objectives

 Consistency and Focus: Departments work toward common goals
 Improved Decision-Making: Provides relevant data for impactful decisions
 Performance Tracking: Enables progress monitoring and timely corrective actions

PERFORMANCE MEASUREMENT CATEGORIES

1. FINANCIAL

Organizational Level:

 Revenue Growth: Increase in sales/income over time

 Profit Margins: Profitability as percentage of revenue
 Return on Investment (ROI): Profitability of investments
 Earnings Per Share (EPS): Profitability per outstanding share

Operational Level:

 Cost Efficiency: Minimize production and operational costs

 Cost per Unit: Production cost per item
 Operational Budget Compliance: Working within budgets

2. CUSTOMER AND MARKET

Organizational Level:

 Customer Satisfaction (CSAT): Overall satisfaction with products/services

 Net Promoter Score (NPS): Likelihood to recommend
 Market Share: Percentage of sales in total market
 Brand Equity: Value based on customer perception

Operational Level:

 Customer Response Time: Speed of addressing queries/complaints

 Customer Retention Rate: Percentage continuing to use products/services
 First Contact Resolution (FCR): Issues resolved on first interaction
 Service Quality: Quality assessed through feedback and surveys

3. QUALITY

Organizational Level:

 Product/Service Defect Rate: Percentage failing to meet standards

 Customer Complaints: Number of complaints received
 Warranty Claims: Number and cost of claims
 Compliance with Standards: Adherence to certifications (e.g., ISO)

Operational Level:

 Yield Rate: Percentage produced correctly without rework

 First Pass Yield (FPY): Units meeting standards without corrections
 Process Defects: Errors within operational processes
 Rework Rate: Percentage needing rework due to quality issues
4. TIME

Organizational Level:

 Time to Market: Speed of developing and launching products

 Lead Time: Time from order placement to delivery
 Cycle Time: Time to complete entire business process
 On-Time Delivery Rate: Percentage delivered by promised date

Operational Level:

 Process Cycle Time: Time to complete specific operational task

 Throughput Time: Total time for product through production system
 Order Fulfillment Time: Speed of processing and shipping orders
 Downtime: Time equipment/processes are non-operational

BUSINESS ANALYTICS IN OPERATIONS

1. Descriptive Analytics

 Analyzes historical data to understand what happened

 Applications: Performance reporting, inventory analysis, quality control
 Example: Manufacturer analyzes previous months' data to identify delay causes

2. Predictive Analytics

 Uses historical data and algorithms to forecast future outcomes

 Applications: Demand forecasting, maintenance scheduling, supply chain risk management
 Example: Retail chain forecasts holiday season demand for stock allocation

3. Prescriptive Analytics

 Recommends specific actions to optimize outcomes

 Applications: Production scheduling, inventory optimization, supply chain optimization
 Example: Logistics company optimizes delivery routes to minimize fuel and maximize on-
time delivery

ANALYTICS IMPROVEMENTS

Forecasting

 Demand Forecasting: Analyzes sales data, customer behavior, market trends

 Capacity Planning: Plans production schedules and workforce allocation
 Seasonality Identification: Detects patterns for better preparation

Inventory Management

 Optimizing Stock Levels: Suggests optimal reorder points and quantities

 Inventory Turnover Analysis: Monitors usage and identifies slow-moving inventory
 Safety Stock Optimization: Forecasts demand variability for better safety stock decisions

Operational Efficiency

 Process Optimization: Identifies bottlenecks and suggests improvements

 Predictive Maintenance: Uses sensor data to predict equipment failures
 Workforce Management: Predicts workload fluctuations and optimizes scheduling

REAL-TIME DATA AND IoT

Real-Time Data Benefits:

 Immediate Insights: Track operations in real-time, respond to issues immediately

 Proactive Decision-Making: Faster adjustments to processes and resources
 Continuous Monitoring: 24/7 tracking of performance metrics

IoT Benefits:
 Equipment Monitoring: Sensors track machine condition, enable predictive maintenance
 Process Optimization: Monitor production lines, flag deviations immediately
 Supply Chain Visibility: Real-time tracking of goods location and status

INTERLINKING INTERNAL AND EXTERNAL MEASURES

Internal Measures:

 Focus on efficiency and effectiveness of internal processes

 Examples: Production efficiency, employee productivity, operational costs

External Measures:

 Focus on customer satisfaction and market outcomes

 Examples: Customer satisfaction, market share, supply chain efficiency

The Ripple Effect:

 Operational Efficiency → Customer Satisfaction (faster production → shorter delivery →

happy customers)
 Cost Efficiency → Competitive Pricing (lower costs → competitive prices → greater market
share)
 Employee Productivity → Customer Experience (engaged employees → better service →
higher retention)

TRIPLE BOTTOM LINE (TBL)

The "Three Ps": People, Planet, Profit

1. People (Social Performance)

 Employee health and safety

 Diversity and inclusion
 Employee engagement and satisfaction
 Local community engagement

2. Planet (Environmental Performance)

 Energy consumption and waste reduction

 Carbon footprint management
 Water usage efficiency
 Sustainable practices

3. Profit (Economic Performance)

 Cost efficiency and productivity

 Return on Investment
 Resource utilization
 Financial sustainability

ORGANIZATIONAL PERFORMANCE MODELS

1. BALDRIGE PERFORMANCE EXCELLENCE FRAMEWORK

Seven Key Criteria:

1. Leadership: How leaders guide organization and create performance culture

2. Strategy: Planning and implementing strategies aligned with mission/vision

3. Customers: Engaging customers to understand needs and deliver value

4. Measurement, Analysis, and Knowledge Management: Using data to drive performance

5. Workforce: Engaging, developing, and supporting employees

6. Operations: Managing key processes for efficiency and effectiveness

7. Results: Performance and improvement in key areas

Benefits:

 Comprehensive assessment of all organizational aspects

 Encourages continuous improvement
 Promotes innovation and long-term sustainability

2. BALANCED SCORECARD FRAMEWORK

Four Key Perspectives:

1. Financial Perspective: Revenue growth, profit margins, ROI

- "How do we appear to shareholders?"

2. Customer Perspective: Customer retention, satisfaction scores, NPS

- "How do customers see us?"

3. Internal Business Processes: Cycle time, defect rates, process improvements

- "What must we excel at?"

4. Learning and Growth: Employee satisfaction, training effectiveness

- "How can we continue to improve and create value?"

Benefits:

 Holistic view combining financial and non-financial metrics

 Strategic alignment of operations with long-term goals
 Focus on continuous improvement across all levels

3. SERVICE-PROFIT CHAIN FRAMEWORK

Key Elements (Sequential Flow):

1. Internal Service Quality → 2. Employee Satisfaction and Productivity → 3. Service Quality → 4.

Customer Satisfaction → 5. Customer Loyalty → 6. Revenue Growth and Profitability

Key Concept: Employee satisfaction directly drives customer satisfaction and profitability

Benefits:

 Employee-centric approach
 Links service quality to long-term customer loyalty
 Demonstrates ROI of investing in employees

CALCULATING LOYAL CUSTOMER VALUE

Example: Coffee Shop

Given:

 Customer Retention Rate: 80% (Defection Rate: 20%)

 Purchase Frequency: 2 visits/week = 104 visits/year
 Average Purchase: $5 per visit
 Profit Margin: 45%

Calculations:

1. Annual Contribution = $5 × 0.45 × 104 = $234/year

2. Average Buying Life = 1 ÷ 0.20 = 5 years

3. Average Customer Value = $234 × 5 = $1,170

Impact of Reducing Defection:

 If defection reduces to 10%: Buying life = 10 years

 New customer value = $234 × 10 = $2,340

Key Insight: Small improvements in retention dramatically increase customer lifetime value

WEEK 3: COMPETITIVE ADVANTAGE AND OPERATIONS STRATEGY

STRATEGY FUNDAMENTALS

Strategy Definition: Setting goals and priorities, determining actions to achieve goals, and
mobilizing resources to execute actions

Business Strategy: Strategic initiatives to create value for organization and stakeholders and gain
competitive advantage

GAINING COMPETITIVE ADVANTAGE

Definition: Company's ability to perform better than competitors by offering unique value to
customers

THREE KEY APPROACHES TO COMPETITIVE ADVANTAGE

1. DIFFERENTIATION
 Offering products/services with unique features that set company apart
 Key Focus Areas:
  Innovation: Continuously improving products, introducing new features
 Branding: Creating strong, recognizable brand associated with quality
 Customer Experience: Superior customer service or unique buying experience

Example: Apple

 Product design with unique visual style and distinctive features

 Pricing strategy: Price skimming for sense of high value and exclusivity
 Brand loyalty through specialized customer service and customized products
 Retail outlets: Apple stores for unique experience

2. COST LEADERSHIP
 Becoming lowest-cost producer while maintaining acceptable quality
 Key Focus Areas:

 Process Efficiency: Streamlining production to minimize waste

 Supplier Relationships: Negotiating better deals, reducing procurement costs
 Automation: Using technology to reduce manual labor

Example: Walmart

 Highly efficient supply chain

 Large-scale operations
 Advanced logistics system
 Result: Low prices attracting price-sensitive customers

3. FOCUS STRATEGY
 Targeting specific, narrow market segment
 Tailoring products/services to meet needs of particular group
 Can focus on cost leadership OR differentiation within niche market
 Key Focus Areas:

 Niche Markets: Concentrating on specific customer segments

 Customization: Offering products tailored to niche preferences
UNDERSTANDING CUSTOMER NEEDS

Approaches:

 Market Research: Surveys, focus groups, data analysis

 Customer Feedback: Direct input on goods and services
 Trend Analysis: Monitoring changes in customer behavior

Example: Amazon uses data continuously to understand preferences and tailor offerings

HOW CUSTOMERS EVALUATE GOODS

Key Factors:

1. Features: Unique attributes setting product apart (functionality, innovation, design)

2. Quality: Durability, reliability, craftsmanship

3. Price: Cost consideration, especially for price-sensitive customers

4. Reliability: Consistent performance without defects

HOW CUSTOMERS EVALUATE SERVICES

Key Factors:

1. Customer Experience: How customers feel during and after interaction

2. Responsiveness: Speed and efficiency in addressing needs/resolving problems

3. Consistency: Same level of service every time

4. Service Quality: Overall satisfaction with service delivery

THE FIVE KEY COMPETITIVE PRIORITIES

1. COST

 Minimizing costs through efficient processes, resource utilization, economies of scale

 Example: Walmart's cost leadership through supply chain optimization

2. QUALITY

 Delivering superior products/services meeting or exceeding expectations

 Focus on high-quality materials, reliability, consistency
 Example: Apple's emphasis on quality in design and customer service

3. TIME

 Offering faster delivery, shorter lead times, speed in product development

 Example: Amazon Prime's fast-shipping services and quick order fulfillment

4. FLEXIBILITY
 Quickly responding to market changes or customer preferences
 Product flexibility: Ability to produce variety of products
 Volume flexibility: Adjusting production volumes based on demand
 Example: Zara rapidly adjusting clothing collections in response to fashion trends

5. INNOVATION
 Continuously improving products/processes to meet changing needs
 Introducing new products or features
 Investing in R&D
 Example: Tesla's cutting-edge electric vehicle technology and self-driving features

INTERLINKING COMPETITIVE PRIORITIES

Cost and Quality

 Efficient processes can maintain high quality while controlling costs

 Example: Toyota's Kaizen (continuous improvement) reduces waste without compromising
quality

Time and Flexibility

 Fast delivery often requires high flexibility to adjust to changing demands

 Example: Dell's build-to-order model (time) with customizable specifications (flexibility)

Innovation and Quality

 Continuous innovation often raises product quality standards

 Example: Apple's new product iterations with cutting-edge technology and premium quality

Challenge: Balancing Interlinked Priorities

 Trade-offs exist: Heavy cost reduction may limit innovation

 Relentless focus on speed could compromise quality if not managed carefully

HILL'S FRAMEWORK FOR OPERATIONS STRATEGY

Purpose: Links high-level corporate strategy to operational activities

Three-Level Linkage:

1. CORPORATE OBJECTIVES
 Long-term strategic goals (market leadership, profitability, sustainability)
 Guide all downstream decisions
2. MARKETING STRATEGY
 How company positions itself in market
 Communicates value proposition to customers
 Defines how company competes (cost, quality, service, innovation)

3. OPERATIONS STRATEGY
 Specific way company configures operations to support marketing strategy
 Involves: Process design, technology selection, resource management, performance
standards
 Aligns with competitive priorities set by marketing strategy

ORDER QUALIFIERS AND ORDER WINNERS

Order Qualifiers:

 Minimum standards product/service must meet to be considered

 Basic expectations assumed to be met by all competitors
 Examples: Safety, price range, durability

Order Winners:

 Differentiating factors convincing customers to choose one company over competitors

 What makes company stand out in marketplace
 Influences purchase decision

EXAMPLE: EMIRATES AIRLINES

Corporate Objectives:

 Global leader in premium air travel

 Expand market share in luxury travel segment
 Maintain financial sustainability
Marketing Strategy:

 Position as luxury brand emphasizing customer experience, comfort, in-flight services

 Key Competitive Priorities: Quality (premium service), Time (punctuality), Innovation (state-
of-the-art amenities)
 Differentiation through superior service, comfortable seating, exclusive entertainment,
global connectivity

Operations Strategy:

 Process Efficiency: Streamline ground operations for smooth check-in, boarding, baggage
handling
 Resource Management: Highly trained staff for top-notch customer service
 Technology Investment: Upgrade in-flight entertainment, offer in-flight Wi-Fi, personalized
dining
 Customer Experience: Flight crews and ground personnel provide excellent service

Order Qualifiers (Emirates):

 Safety: Highest safety standards expected

 Punctuality: On-time flights with minimal delays
 Global Connectivity: Wide range of destinations and convenient schedules

Order Winners (Emirates):

 Luxury and Comfort: First-class suites, lie-flat business class, spacious economy
 In-flight Experience: Extensive entertainment, gourmet dining, personalized service
 Exclusive Services: First-class lounges, chauffeur services, on-board showers
 Customer Service Excellence: Highly trained staff, exceptional service throughout journey

SUSTAINABILITY IN OPERATIONS STRATEGY

Key Considerations:

 Environmental impact of operations

 Sustainable sourcing practices
 Compliance with environmental standards
 Reduction of waste and pollution
 Long-term viability vs. short-term profits

CASE STUDY INSIGHTS: SUSTAINABLE LAWN CARE

Problem:

 Company produces high-quality fertilizer/grass seed

 Limited control over application process
 Misapplication causes customer dissatisfaction and environmental damage
 Competitor offers bundled service (product + application)

Strategic Shift Required:

 From product-based company to service-oriented company

 Offer complete lawn-care solution including application services
 New Strategy: "Delivering a perfect lawn, hassle-free"

Revised Customer Benefit Package:

 Physical Goods: High-quality fertilizer and grass seed (core)

 Services: Professional application with warranties
 Additional Benefits: On-site application, customized maintenance plans, environmental
safety

Revised Value Chain:

Raw materials → Manufacturing → Distribution → Application service → Follow-up maintenance

→ Customer support

Operational Capabilities Needed:

 Service Efficiency: Efficient application service team

 Quality Control: Standardized application process
 Customer Relationship Management: Track satisfaction, provide ongoing support
 Sustainability: Compliance with environmental standards
 Technology Integration: Scheduling software, customer feedback tools

WEEK 4: CAPACITY MANAGEMENT AND THEORY OF CONSTRAINTS

CAPACITY FUNDAMENTALS

Capacity Definition: Maximum amount of work an organization can complete within a given
period under ideal conditions

Can refer to:

 Production process capacity

 Human resources allocation
 Technical thresholds
 Various other operational concepts

Capacity Management: Process by which organization plans, monitors, and adjusts capacity to
ensure it meets demand efficiently

Capacity Constraints: Limitations within system preventing production beyond certain output
level (machinery, labour, space, resources)

OPERATIONS PRINCIPLE
Any measure of capacity should reflect the ability of operation or process to supply demand

Example: Automobile Transmission Factory

 Operates 2 shifts/day, 5 days/week
 400 transmissions/shift
 Capacity = 2 × 5 × 400 × 4 weeks = 16,000 transmissions/month

PLANNING AND CONTROLLING CAPACITY

Medium-term Capacity (months to 1 year):

 Hiring more workers

 Acquiring additional machinery
 Subcontracting work during high-demand periods

Short-term Capacity (daily/weekly):

 Adjusting worker shifts

 Using overtime
 Temporarily outsourcing services

AGGREGATE DEMAND AND CAPACITY

Aggregate Demand: Total demand across all products/services over specific period

Aggregate Capacity: Overall capacity of operation to meet this demand

Goal: Balance these factors to avoid:

 Overproduction (excess costs)

 Underproduction (lost revenue)

OBJECTIVES OF CAPACITY MANAGEMENT

a. COSTS

 When capacity exceeds demand: Resources underutilized → higher unit costs

 Fixed costs spread over fewer units → increased per-unit cost
 Example: Factory at 50% capacity has same fixed costs but higher cost per unit

b. REVENUES

 Capacity matching/exceeding demand: Fulfill all orders → maximize revenue

 Capacity lower than demand: Lost sales and reduced revenue
 Example: Airline with 80 seats fully booked loses revenue if could sell 100 tickets

c. WORKING CAPITAL

 Building inventory anticipating demand ties up working capital

 Helps satisfy future demand quickly but incurs holding costs
 Example: Retailer builds stock before holidays (storage and inventory management costs)

d. QUALITY

 Fluctuating capacity (temporary workers) may negatively affect quality

 Temporary workers may lack experience/training → errors and disruptions
 Example: Restaurant hiring extra staff during peak times may have more order errors

e. SPEED OF RESPONSE

 Surplus capacity allows quick response to customer demand

 Can be achieved through inventory buildup or maintaining extra capacity
 Example: Electronics company with surplus ships products immediately

f. DEPENDABILITY OF SUPPLY

 Closer demand is to capacity ceiling, less dependable operation becomes

 High utilization leaves little room for unexpected events
 Example: Factory at full capacity can't handle breakdowns or rush orders
g. FLEXIBILITY

 Surplus capacity provides flexibility for unexpected demand increases

 Perfect balance = no room to accommodate additional orders
 Example: Ice cream producer needs flexibility for summer demand surge

CAPACITY MANAGEMENT GOALS

1. Balancing Capacity with Demand: Sufficient levels without wasting resources

2. Minimizing Costs: Keep capacity utilization high, avoid under/over-utilization

3. Ensuring Flexibility and Responsiveness: Respond to demand fluctuations while maintaining

quality

4. Maximizing Revenue: Align capacity with demand to fulfill all orders

5. Improving Efficiency and Reliability: Smooth operations, minimize delays and bottlenecks

ECONOMIES AND DISECONOMIES OF SCALE

ECONOMIES OF SCALE
 Increasing production volume → decrease in cost per unit
 More you produce, cheaper per unit becomes

Why They Happen:

1. Fixed Cost Spread: Fixed costs spread over larger number of units

2. Operational Efficiency:

- Specialization: Workers specialize in tasks

- Bulk Purchasing: Larger orders = supplier discounts

- Improved Technology: Automation more cost-effective at higher volumes

3. Learning Curve Effect: Workers gain experience, execute tasks more efficiently

Example: Car manufacturer increases from 1,000 to 1,500 cars/day

 Fixed costs spread over more units

 Bulk material purchases reduce costs
 Result: Lower cost per car

DISECONOMIES OF SCALE
 Increasing production → increase in cost per unit
 Business grows too large, inefficiencies offset benefits

Why They Happen:

1. Coordination and Communication Issues: Harder to coordinate across departments

2. Management Challenges: More management layers create bureaucracy, slow decisions

3. Inflexibility and Loss of Agility: Harder to adjust operations quickly

4. Worker Demotivation: Feel like "cogs in machine," reduced productivity

5. Logistics Costs: Complex and expensive logistics for wider distribution

Optimal Scale: Level where costs are minimized

 Before this point: Benefit from economies of scale

 Beyond this point: Diseconomies of scale increase costs

FOCUSED FACTORY STRATEGY

Definition: Achieves economies of scale without large investments by concentrating on narrow

range of goods/services
Focus Areas:

1. Key products

2. Specific technologies

3. Tailored process designs and capabilities

4. Focused competitive priorities (e.g., next-day delivery)

5. Targeted market segments or customers

Benefit: Enhanced operational focus and performance through "divide and conquer" approach

CAPACITY MEASUREMENT FOR WORK ORDERS

Work Order: Specifies work to be performed for customer/client, including quantity, processing
requirements, resources needed

CAPACITY REQUIRED FORMULA

Ci = Si + (Pi × Qi)

Where:

 Ci = Capacity Required (total time to complete work order)

 Si = Setup or changeover time (fixed)
 Pi = Processing time per unit
 Qi = Size of order in units

Example: Factory Work Order

 Order: 200 units

 Setup time: 2 hours
 Processing time: 0.5 hours/unit
 Ci = 2 + (0.5 × 200) = 2 + 100 = 102 hours

SETUP TIME DIFFERENCES: GOODS VS. SERVICES

MANUFACTURING (GOODS)
 Setup time is FIXED per work order
 Independent of order size
 Performed ONCE per work order
 Example: 500 units, 2-hour setup

Ci = 2 + (0.5 × 500) = 252 hours

SERVICES

 Setup time often REPEATED for each unit

 Dependent on order size
 Each service may require own setup
 Example: 10 surgeries, 30-min setup each

Ci = (0.5 × 10) + (2 × 10) = 25 hours

Formula for Services: Ci = (Si × Qi) + (Pi × Qi)

Key Difference:

 Manufacturing: One setup regardless of units

 Services: Each unit may need separate setup (e.g., sterilizing equipment for each surgery)

UTILIZATION

Formula: Utilization = (Resources Used / Resources Available) × 100%

Example: Factory with 10 Machines

 Total capacity: 10 × 100 units = 1,000 units/day

 Actual: 7 machines producing 600 units
 Utilization = (600 / 1,000) × 100% = 60%
 40% capacity is idle

UTILIZATION IN SERVICE OPERATIONS

Formula: Utilization = (Demand Rate / (Service Rate × Number of Servers)) × 100%

Where:

 Demand Rate: Actual customers/tasks handled

 Service Rate: Customers/tasks one server can handle
 Number of Servers: Total service providers available

Example: Restaurant with 5 Servers

 Service rate: 4 tables/hour per server

 Current demand: 16 tables
 Utilization = (16 / (4 × 5)) × 100% = 80%
 20% available capacity not being used

SAFETY CAPACITY (CAPACITY CUSHION)

Definition: Extra capacity reserved for unanticipated events (demand surges, material shortages,
equipment breakdowns)

Formula: Average Safety Capacity = 100% - Average Resource Utilization (%)

Purpose:

 Handle unexpected disruptions

 Maintain performance during contingencies
 Provide flexibility for demand increases

Example: Factory

 Design capacity: 1,000 units/day

 Operates at: 900 units/day
 Safety capacity: 10%
 Allows handling unexpected demand or production delays

HOTEL CAPACITY PLANNING EXAMPLE

Grandview Hotel:

 150 rooms available

 365 nights/year
 Total annual capacity: 150 × 365 = 54,750 room-nights

Expected Demand:

 Forecasted occupancy: 80%

 Expected demand = 54,750 × 0.80 = 43,800 room-nights/year

Staffing:

 20 housekeeping staff
 Each cleans 10 rooms/day
 Staff capacity = 20 × 10 × 365 = 73,000 room cleanings/year

Analysis:
 Required staff = 43,800 / (10 × 365) = 12 staff
 Current: 20 staff (excess capacity)
 Options: Reduce staff OR maintain for peak periods/emergencies

Strategic Decisions:

 Staffing adjustments based on expected demand

 Room utilization management (marketing during off-peak)
 Contingency planning (use excess capacity as buffer)

LONG-TERM CAPACITY STRATEGIES

Focus: Decisions about future capacity needs over several years

Capacity Expansion Options:

1. LEAD STRATEGY
 Expand capacity AHEAD of demand growth
 Proactive approach
 Risk: Under-utilization if demand doesn't materialize
 Benefit: All future demand met

2. LAG STRATEGY
 Expand capacity AFTER demand increases
 Conservative approach
 Risk: Missed opportunities during high demand
 Benefit: Reduced overinvestment risk

3. INCREMENTAL EXPANSION
 Gradually increase capacity over time
 Balances risk and flexibility
 Matches demand growth step-by-step

SHORT-TERM CAPACITY MANAGEMENT

Focus: Immediate adjustments without long-term capital investments

STRATEGIES:

1. Add or Share Equipment

 Leasing additional equipment during peak periods

 Capacity sharing partnerships (e.g., hospitals sharing specialized equipment)
 Example: Consortium of hospitals each focusing on different specialties

2. Sell Unused Capacity

 Monetize excess/idle capacity

 Example: Hotel partners with nearby hotels for overflow guests
 Example: Companies sell unused computing power

3. Change Labor Capacity and Schedules

 Overtime and extra shifts during peak periods

 Hire temporary employees for demand spikes
 Outsource certain tasks/processes temporarily
 Most flexible resource for short-term adjustments

MANAGING CAPACITY BY SHIFTING AND STIMULATING DEMAND

Goal: Balance high-demand periods with excess capacity during slow times
STRATEGIES:

1. Vary Price of Goods/Services

 Lower prices during low-demand periods

 Examples:

 Hotels: Lower weekend rates

 Airlines: Discounted midweek flights
 Restaurants: Happy hour prices during off-peak times

2. Provide Customers with Information

 Communicate best times to use service

 Examples:

 Call centers: Display best times to call on bills

 Amusement parks: Apps showing busiest ride times

3. Advertising and Promotion

 Targeted campaigns to stimulate demand during low periods

 Examples:

 Retailers: After-holiday sales

 Coupons distributed during off-peak times

THEORY OF CONSTRAINTS (TOC)

Definition: Methodology for identifying most important limiting factor (constraint) preventing
goal achievement, then systematically improving it

Key Concept: Constraint (Bottleneck) is factor limiting system performance

THROUGHPUT AND CONSTRAINTS

Throughput: Rate at which system generates money through sales

 Only valuable if product is sold

 Producing unsold goods is wasteful

Constraint: Any factor limiting system performance, restricting full potential

TYPES OF CONSTRAINTS

1. Physical Constraints:

 Machinery, equipment, labor, space limitations

 Example: Machine producing 50 units/hour when demand is 100 units/hour

2. Nonphysical Constraints:

 Policies, procedures, market conditions

 Examples: Bureaucratic decision-making, inefficient work rules, poor management, lack of
demand

BOTTLENECKS VS. NON-BOTTLENECKS

Bottleneck (BN):

 Work activity/resource limiting entire system capacity

 System throughput restricted by bottleneck's capacity

Non-Bottleneck (NBN):
 Activities/resources with idle capacity
 Can handle more work but underutilized due to bottleneck
 Don't waste time on NBN if bottleneck is true limiter

FIVE FOCUSING STEPS OF TOC

1. IDENTIFY THE CONSTRAINT

 Locate bottleneck limiting system performance
 Can be machine, work activity, or external factor

Signs of Constraint:

 Inventory accumulations before constraint

 More WIP than reasonably needed
 Excessive hand-holding and oversight needed
 Excessive waiting and machine downtime

2. EXPLOIT THE CONSTRAINT

 Ensure constraint used to maximum capacity
 Adjust work schedules, eliminate downtime, reduce waste
 Get most output without additional resources

3. SUBORDINATE OTHER ACTIVITIES TO THE CONSTRAINT

 Align all other processes with constraint
 Non-bottleneck activities operate at pace supporting bottleneck
 Prevent overproduction leading to excess inventory

4. ELEVATE THE CONSTRAINT

 If constraint can't handle demand after optimization
 Increase constraint capacity
 May involve: New equipment, additional staff, productivity improvements

5. REPEAT THE PROCESS FOR THE NEXT CONSTRAINT

 After addressing current constraint, new bottleneck emerges
 Repeat process for continuous improvement
 TOC is cyclical process

GOURMET BISTRO RESTAURANT CASE STUDY

Problem:

 50-table restaurant with high demand

 Slow service and long wait times
 Lost sales and dissatisfied customers

Step 1: Identify Constraint

 Kitchen can prepare 40 orders/hour

 Dining room can handle 50 orders/hour
 Bottleneck: Kitchen (40 < 50)

Step 2: Exploit Constraint

 Streamline prep work before peak hours

 Simplify menu during peak hours (focus on popular items)
 Assign specific roles to minimize task switching
 Result: Kitchen capacity increases to 45 orders/hour

Step 3: Subordinate Everything

 Waitstaff pacing matches kitchen output

 Stagger orders to avoid overwhelming kitchen
 Host communicates wait times to manage expectations
 Result: Smoother flow, better service pacing
Step 4: Elevate Constraint

 Hire additional kitchen staff (1 more chef)

 Kitchen capacity increases to 55 orders/hour
 Bottleneck shifts from kitchen to dining room
 Result: Kitchen now exceeds dining room capacity

Step 5: Repeat Process

 New constraint: Dining room (50 tables)

 Options: Add tables, improve table turnover, reservation system
 Continuous improvement cycle continues

Results:

 Increased throughput from 40 to 55 orders/hour (37.5% increase)

 Reduced customer wait times
 Improved customer satisfaction
 Better resource utilization

KEY TAKEAWAYS ACROSS ALL WEEKS

1. Operations Management is about transforming inputs into outputs efficiently and effectively

2. Performance measurement must align with strategic goals across all dimensions

3. Competitive advantage comes from differentiation, cost leadership, or focus strategies

4. Capacity management balances supply and demand while optimizing resources

5. Theory of Constraints provides systematic approach to identifying and eliminating bottlenecks

6. Value creation extends throughout entire value chain, not just production

7. Analytics (descriptive, predictive, prescriptive) drive better decision-making

8. Customer satisfaction drives profitability through the service-profit chain

9. Sustainability (People, Planet, Profit) is now critical performance dimension

10. Strategic alignment from corporate objectives through operations is essential for success

HUDSON JEWELLERS CASE STUDY QUESTIONS

WEEK 1 QUESTION:
Use one of the three value chain frameworks to characterize the diamond value chain. How
does it gain, create, and keep customers?

WEEK 2 QUESTION:
Assess key performance measurement indicators for Hudson's case. Why are they relevant and
important for continuous improvement and context?

WEEK 3 QUESTION:
Define and draw customer benefit package and state Hudson Jewelers' strategy; rank order
competitive priorities, order qualifiers, and order winners; state ways they gain competitive
advantage.

WEEK 5 QUESTION:
What are detailed components of inventory holding costs? What other factors influence holding
costs (security, obsolescence, etc.)? Assess inventory management impact on operations
performance.

END OF STUDY GUIDE