Professional Documents
Culture Documents
Operations Management
meeting
Z,Inc.
Z, Inc. is a multinational conglomerate wrhich is primarily a produc -
transmissians. Although transmission production is somewhat outside of their core com petency, the p lant has been successful for Z ,
Inc. in the past. This production facility divaspart of their diversifica-
attemp
ted
to make sure they had supporting industries outside af t h eir c ore co m p etency that ca ul d p r o t ect
their cash-flaav.
in the Jackson, Alichigan area were some of the highest in the nation, primarily because of the large union inAuence in the area. The
plant was about 30 years old and a )ot of the equipmentwas out of
d ate. This caused the labor intensity to be even higher than nor m al .
An updated plant w o ul d i n c rease automation and t h erefore, it divas
believed, would i n c rease quality and r e duce lead ti me. An u p d a ted
plant could b e d o n e i n se veral wais, either by i m p r o v i ng t he a u tomation in t h e existing facility, r b y c o m p l etely replacing the fa -
cility. Either way, Z, Inc. anticipated resistancefrom the union because there xvould be a reduction in t he cur rent v;ork force due ta
the automation. At a bo ard me eting of the Z co m p a n y, the falloiving conversation took place:
Baard M e m b er ZA (c o m m e n ts are being d irected at t he C E O ) :
Sales
Labor Expense
5 9,500,000
I 2,000,000
M a t erials Expense
I 4e000,000
Eq uipment Expense
Overhead Expense
$1,000,000
S 3,000,000.
The C E O
w a s l e f t w i t h t h e t a s k o f o r g anizing a re c om-
management industry.
Strategic management focuseson planning and developing the business as a svhole. Typical Iob t i t l es include the B o ard of D i r e c t o rs
will take further visits into the CEO's conversations and his analysis process.
At thc same time, you (thc reader) arc invited to formulate your oNn opinions and recommendations on how Z, Inc.'s transmission production should
be handled. Th>s case and many others in this book arc based on actual expcricnccs that th c a u t ho r v e n t t h r o u g h i n h i s 20 + y e ars of o p erations m an age-
ment Ide has, hnivcver, changed th names of the company and the p~~plc.
and has simplified the numbers, in order to protect the misguided. Tbc actions that are taken in these cases arc not to bc c o n s idered the " r i g ht a ns Ncr"
or "correct solution." I h csc actions arc onc of many options and thcsc options v ill be considered as altcrnativcs throughout thc book.
an organization and focuses on the month-to-month company performance. Typical job t i t l es i n c l u de V i ce P r e sident a nd D i r e c t o r .
Fi nancial
Ai arketing
Op e r a tional.
The financial function analyzes the financial nability of the business. The m ar keting fu n c t ion a t t em pt s t o
erformance
tion
Once again sve see that this book fo cuses on the operations management function and takes a look at how this function is effected
when globalization occurs svithin the business. Globalization can refer to:
International sourcing of products
International production of the goods and.'or services
In t e r n a tional transportation of the products
International markets for the products produced.
de the major shippersand resellers throughout the vvorld like Hyundai of Korea.
Lo g i s tics This process involves routing m a nagement and l o c a -
or example,%'al
equipment. F
iliart
considers the l o gistics fun ction to b e t h e ir co m p e titive edge in
by always having what the customer wants available
when the customer wants it. Th e airlines industry, as in the case
performanc
e
comple
xexample
management
gement expertise. Examples include the major international, consulting terms like AiliS (American Aianagement Systems).
manufac
turing is ivhere units
F o r d o r D a i m l e r C h r y sler or h e a r i ng a i d m a n u -
Dept.
Dept D
Dept. 8
Dept. C
Dept. E
Dept. I-
this repetitive process. The assembly line or the Japanese JIT gust-in-Time) production process are examples of this tiptoe of ma-
Process A
Process ('
Plocess 8
Proc e ss E
Process D
A Littd History
u s that the necessary data f' tools are available to create the output .
Last of all, ive look at th e p r o cess tool wh ich can take a variety of
forms (see Chart 1.3 and Chapter 5). This basic flow systemsrnodel will be followed throughout this book ~vhen planning options
are discussed. The key to selecting and developing a successful operations management system is i n m a k in g sure the r esults (outpu t )
satisg th e go a ls. That is w hy w e v i ll s p e n d t h e n e xt f eav chapters
Process
Illpllts
Change
Oulpllts
Conllot
Feedback
A Little History
As mentioned earlier, operations management goes back to the beginning of m an. H o w ever, looking into the m ore recent past, say 50
years, we find that the m ost dr amatic changes have taken place during these feiv years of history. There are several reasons for these
%'orld%''ar II the computer became available, which created computationally over-burdened systems like 6 iRP and PERT,'CP ili (Project Evaluation and Review Technique /' Critical Path AIethodology)
feasible. Also, after this war, the Japanese >vere going through a reconstruction of their i n d u s try in a co u n t ry t h at h ad no n a t u r al re -
10
sources, min i mal c ash fl ow, and lo ts of p e o p l e. In o r d e r to g r o w
their industry, they had to b r in g m aterials into the country, convert
them to end p r o d u c ts as quickly as possible, and ship t h e m. Th e y
didn't care how many people it took because there was a plentiful
a vork force. Thi s m a t erials efficiency f o cused strategy became t h e
roots of ivhat is nosv knows' throughout t he xvorld a s Just-in-Ti m e
{JIT).
ll.eanwhile, during the same time as Japan's reconstruction and
t he introduction o f c o m p u t ers, Israel was becomin g a ne w n a t i o n
and a lso needed to d e v e lop n ew i n d u s t r ies. Rather t h an c o p y i n g
Europe or the L'SA t hey took advantage of their plentiful supply of
operational methodologies. XVe end up with pre%'orld IVar II operations scheduling systems that had the following focus:
EOQ Economic Order Quantity (EOQ) is a planning system
focused on ma n a ging i n v e ntory l e vels. EOQ i s t h e m o s t c o m -
monly used production planning philosophy because of it's simplicity and minimal data
LP Linear Programming is an optimi
zation process that facilitates optimal
routings and loadings and minimizes costs. This can
requireme
nts.
afterworld'War II, sve had several events that would initiate the reinvention of PO M
m e t h.odologies. Theseivere:
(( I'x1 t
R. . i u r
. I' I a n i tt t f - I <',I' t
I t rp tt.
The advent of
machinery became
TOC.
il i R P is t o h a v e a
A Littd History
of the OP I'.' TOC systems.I t was found that the inefficient use of
the bottleneck was costing companies a small fortune.
However, the m aterials efficiency of JIT s e emed to be v ery l i t t l e
deal with the capacity scheduling inadequacies of h,iRP by integrating some of the opti mi zation of TO C . A d v a nced integrated systems
of this ts~e are often r eferred to as A d v anced Planning and S ch e-
s tem, and the sales and marketing systems. The first attempt at th i s
sourcesAlanagement (ERP).
In Chart 1.5 we see the production and o p e rations management
functions of an e n t e rp rise detailed ou t a l on g th e r i gh t s id e of t h e
chart. Activities begin with a business plan, then they focus on planning functions like forecasting and R o ugh C u t C a p a city Pl anning.
These activities integrate into schedules like the Aggregate Production Schedule and the ili a ster Production S chedule. The execution
of the AiRP function next creates purchasing and shop floor. production requirements.
Down the left side of C h ar t l l. 5 we see all the financial activities
of an e n t erp rise in cl u d in g t h e g e neral l edger an d p r o f i t a n d l o s s
fLinctions. In th e top center of the chart we see the sales functions.
From this chart we can see how the enterprise information i nt e gration would f u n c tion u n der an ili R P I I or ER P e n v i r o n m e nt ( n o t e :
the numbers are connectors, for ex am ple the " 1" co n n e cts to t h e
other "I " i n t h e ch art these connectors are used in order to avoid
having lines crossing on the chart, but t hey have the same meaning
process focused on any resource preference. It also offers optimization in any resource, rather than l i m i t in g us ta o nl y on e cr i t i cal resource, as the c urrent p l a n n i ng s ystems tend to d a . T h e f u t u r e o f
operations m an agement v i l l a l s o fo c us m o re a nd m o r e a n i n t e gration, particularly on internationa] integration and on supply chain integration. In t his baak, the discussion of alternative production
methodologies, and ho~v they can vary for one international setting
to another, ivill accur in m any chapters, like Chapters 5 and 10.
Quahty
Quality has always been a confusing term a nd is difTicult to de fine.
It is difficult to get tao p e ople to agree on a definition of qua lity, let
alone an entire industry. As a result, there are numerous d e f i n i t ions
throughout th e w o rl d f o r q u a l i ty, bu t l e t's look at a c o u p le of t h e
common d e f i n i t i ons. In t h e U n i t e d S t a t e s, q ua lity i s m o s t o f t e n
ned, it is considered to be a quality product. Unfortunately, this definition does little to focus on the customer.%'e have formalized this
definition of quality thr ough systems like ISO (t he European Devel-
16
o ped Quality standard that has found i n t e r n ational application) o r
e x a m pl e i n Ge r m a ny, the U S A d e f i n i t i on a l s o
mer". The Japanese definition does not focus on durability or flexibility. Rather, it f o c u ses on m a r k eting appeal give the customer
whatever they get excited about. One example would be the "b o o m
box" the carry around sternum.The %'estern definition of q u a l i ty
would have the box v'ork, even if it v'as dropped from 20 feet. The
Japanese definition wo uld ha ve th bax. filled svith levers and knobs
for the user ta move around and eect the sound. For same reason,
an increased number oflevers makes the boom box seem more valuable to the customer, even if the customer never usesthem. Therefore, the perceived quality to t h e c u s tonier wo u ld m ake th e cu s tor ner feel thr illed by th e Japanese product an d th e c u stomer w o u l d
prefer to buv i t o ver the " d u r a ble" p r o d uct o p t i on. Th is could a lso
flect back on Z, Inc. Is lack of quality a reason for their lack of profitability. %'hat should their definition of qu ality be?
Produc
tivity
Productivity is another measure that permits an unlimited number
of variations and is therefore difficult to define. Specifically, productivity is output d i v ided by in p ut . O u t pu t i s generally accepted to be
Net Sales. Output can b e th e v alue of p r o d u c t ion o r t r a n sfer cost
rate if we are interested in f a c t a ry pr o ductivity wxhere product is
transferred bet fveen factories of the same o rgaization. Input c an b e
iu(
arity.
lripttr
In the W'estern countries, productivity almost al ways means labor
Internationally, we find a mul t i t u de of measures of productivity perforrnance. For examples in Japan we find s everal productivity m e a -
sures, one of which is value-added productivity. Value-addd productivity focuses on getting as much increased value out of t he production process as possible. For example, as a Japanese producer
we are building a TV , a nd th e TV h a s a t u n e r a nd p o w er s u p p l y,
each of ivhich costs 85 to produce.% 7e can sell the tuner for $10 on
18
get more value-added content out of p r o d u c i ng the tuner, and have
the USA subcontractor produ ce the power supplies. Both count r ie s
wou]d input 55 of p r o d u c tive effort, but for t h at effort t h e Japanese
Prod)(c'.Ii <irl ?
A'et Sales
Set Sales
+ A f a c htn!.'1'1'+t.'h.'.
Aiore recently, a measure of productivity known as Cr i tical Resource Productivity has become popular because it is easy to me as ure and focuses an organization on i t ' s most e ff ect ive area of i rn p rovement. For example, in th e a u t o m o b ile i n d u stry, 7 t o 1 0 p e r cent of the va]ue added cost content of the vehicle is labor while 5t)
to 60 percent of the va]ue added cost content is in m a t e rials. Hen-
I-'roclitct! v! tl'
5'eI Sale>
-
19
Eff iciency
Efficiency is a minor measure of performance which is primarily
used to evaluate internal effectiveness. For example, in the Un i t e d
States, labor efficiency is used to c o m p a re labor p erforma nce to a
standard. This comparison to standard ivould then be used to m easure if and hov mu c h of a performa nce bonus svould be paid out to
a particular employee. Anything over 100 '.4 svould constitute good
Ef ficieitc.v -
Stet))clat'cPTitr)e
Actual Ti iree
x 1 {!0
Financial ~Measures
Financial measures of performance include protit and loss numbers
from the P8'L statement as favell as performance and liquidity ratios
from th e B a l ance Sheet. Appendix A (a t th e e nd o f t h e b o o k) i n cludes several of the most common p
r atios that a r e
erformance
ebts j
20
However, Inventory reduction is also considered to be good.
That rnea/ns, as inventory g oes do wn , th e i n v entory asset ratio
would imp rove but the current ratio ~vould get worse. W'hich ratio is
the better measure of over-all corporate goal achievement?
There are n u m erous stories of co m p a nies v here the president r educed inventories only ta get repr im anded by the B o ard of D i r e c t-
ventory, even th ough i t w a s o p erationally i n efficient t o d o s o . R e viesv the discussion of conflicting goals in Chapter 3.
Are conflicting financial and operational goals a factor in Z, I n c.'s
performance>
Internal and
where you use several measures of yourself and r e t ake those same
measures over time to see if you are improving. Internal Benchmarking can also me asure different f acilities svithin t he s ame c o m p a ny
2. (inc of thc most popular tables of industrial ratios is thc Industry Norms and
Key B u siness Ratios put
ou t b y D u n a n d B r a d s t r e et I n f o r m a t i on S e rr ic c s .
This report will give all the average ratios, thc average profit and loss statement, and the average balance sheet for one year f or each Standard I n d u s t r i a l
t o o l s an d t e c h n i q ues w he n c o m p a red t o y o u r
competitors. Appendix A includes a collection of measures of performance and discusses their applicability.
Inventory Level
erformance
be expanded on in Chapter 4.
Inventory Turns
Inventory tu rns measures ho~v often inventory is used up and repla-
ced in one year. A high level of inventory turns is good since it suggests t hat you d o n 't h a ve a l ot o f i n v e ntory s it ting a ro un d. S it t i n g
inventory is a resource svaste.
Throughput
Throughput is a measure of quality units shipped ta the customer.
It incorporates a focus on q u a l i ty a nd on d e l i v ered sales.It leaves
aut a m easure o f p r o d u c t i on s i n ce p r o d u c ed g o o ds t h at a r e n o t
Operating Expense
Operating Expense measures the cost of runn ing the factory floor in
d o e sn't, t h en i t ' s c o s t i ng u s m o r e t o d o th e sa m e
22
amount of business as before. A ratio of the two, called Thr oughput
(Total ls)velttopl')
Integration
Integration is. a measure of internal perform ance. It is a measure of
hoav effective the comm u n i cation channels svork within an organizat ion. There are nu m erous ways of m easuring in tegration w h ich i n -
clude:
Number of Cress-Functional Teams
Le vel of Integration %within Teams
Cycle Time
Cycle Time is a me asure of t he a mo u nt of t i m e i t t a k es to pr o cess
an order, fron> start to f i n i s h. Reduced cycle time m e ans increased
requireme
nts
responsiveness to customer
and reduced in-process
inventory levels. This ivould increase inventory turns. The Japanese
use Cycle Time as a measure of p
because responsive-
erformance
ness and reduced inventory are both goals of the JIT pr o c ess and a
cycle tim e iTteasurement i m p r o vement is e a sily c o m m u n i c able t o
employees. Cycle Time readily demonstrates an accomplishment of
all goals. Fo r e x a m p le, Toyota has a Cy c le T i m e f o r a u t o m o b i l e
in three hours. The Cycle Time for American and European auto
manufacturers is me a sured in we e ks a nd i n s o m e p l a n ts e ven i n
months. Inventory t u r n s every f ou r h o u r s a t T o y ot a so th a t, over
t wo shifts, th e i n v entory t u r n s n u m b er s ar e o ver 1 M O t u r n s p e r
year. A good inventory turns number for American or European auto manufacturers svould be 10 turns per year.
Another form of c yc le time t hat is "P r o d u ct D e v elopment Cy c le
Time". Here we focus on the time it takes from the conceptualization of a ne w p r o d u ct i d e a, to i t 's being available to the customer.
Responsiveness in this area is critical for th e p r o d u cts that re quire
fast responsiveness, for example, the fad fashions in the apparel industry.
A thir d f o r m o f c y c l e t i m e ha s gained extensive popularity b e cause of the eCo m m e rce push. This is the cash-to-cash cycle time .
This forin of cycle time tracks the time from u hen an order is received, until the pr o d uct is paid for.%'hen considering internet speed
and responsiveness, we also need to take a close look at the financial
responsiveness of the internet transaction. For example, in the cornputer industry, the average cash-to-cash cycle time is 106 days and
the best of class cycle time is 21 da>s. That means that on the average, the cash for salesis tied up for about 3 'A m o n t h s. The carrying
cost of f i n ancing t hi s i n ventory can be d e v astating to a c o m p u t e r
e quipment supplier. That is why the D el l C o m p u ter m o del for p u r chasing equipment on - line h as become so a ttractive. De ll c o m p u ters has managed to re duce the cash-to-cash cycle time to a ne gative S days. They have turned the ti de to iv here they are operating
on the customers' money. It then comes as no surprise that Dell can
Back to Z, Inc.
Do t hey n e ed o p e rational m e asures of p e r f o r m a nce? %'hich m e a sures do they need.' Should Z 's C EO a n a l yze these measures prior