Operations management concepts and practices

Operations Management

Production and operations management is not an elusive term used to describe some vague concepts; instead it simply refers to management of all the processes and systems that help in the production of goods. As we all know that production requires efficient and organized use of human capital, materials, resources and machines. However all these components of production need to be supervised and they must work in an efficient manner in order to produce goods and services on time without delay or faults. Production and operation functions thus include collection of resources, efficient distribution of these resources among concerned departments, planning the different phases of production, inventory management, making proper schedules for completion of tasks, controlling and improving product quality which is known as quality management. These main functions of production and operations remain the same in all firms regardless the nature of their business. With current advancement in IT and with more firms adopting latest technologies, IT management has also become a core function in many firms.

Now let us focus on strategic importance of POM functions compared to other functions in an organization. The reason POM functions are given importance is based on the fact that these functions affect other functions in an organization. Smooth management of production and operations concerns can cast a positive influence of other simpler tasks. Other functions in an organization include delegation of responsibility, actual implementation of planning stages, meeting targets and deadlines etc. however all these functions are dependent on POM functions. If the latter are not carried out smoothly, the former suffer miserably. Let us see the strategic importance of one of the POM function and this will help us understand why these functions vary such weight. Supply chain management is one of the key POM function. Supply chain management refers to placement of orders and acquisition of resources of time. While the buyers or distributors are worried about timely deliveries of products and efficiency of products, manufacturers are more concerned about how their customers judge demand and place orders. This is because unpredictable changes in demand can force the customers to place orders for products whose production level has not yet been increased. For this reason, supply chain management has become a major issue.

Supply chain management sounds like a complex series of integrated activities but it all boils down to one simple end i.e. customers must always have the items as and when required. Roger Blackwell, a professor of business studies at Ohio State University and acclaimed author of quite a few best-selling books on the subject of supply chain says, "Supply-chain management is all about having the right product in the right place, at the right price, at the right time, and in the right condition." (Tom Stein and Jeff Sweat, 1998) anything that goes wrong in this one function can negatively affect other important functions in an organization.

Just-in-time management is a new and powerful approach that many businesses are adopting today. This method of operation focuses on the timely production of goods and services so the risk of wastage can be significantly reduced or eliminated and JIT is quite different from traditional means of operation management. For example in the traditional OM strategy, firms would order inventory in advance, which often created problems, this has been eliminated by JIT concept. When the orders for supplies are made way in advance of the actual production time, it often creates problems as inventory is either damaged due to delays in production or it often proves to be in surplus. This leads to wastage of resources, which would have been used more efficiently, for this reason JIT-management approach is adopted by some companies.

Chen H. Chung (1999) writes, "Since time is of human essence, a better understanding of the nature of time helps enhance managerial effectiveness. The JIT concept is not just in time. While it is important to produce products at the right time, issues such as quality management, waste elimination, work improvement, maintenance, procurement, etc. are fundamental to the successful implementation of JIT and therefore have occupied most of the JIT literature."

Just in time therefore minimizes waste that occurs from advanced booking or placement of orders and also reduces the need for maintaining inventory. Barbara B. Flynn (1995) believes JIT leads to: "improved quality performance in several respects. First, as components, parts, and finished goods spend less time in inventory, the potential for damage during handling and for spoilage during extended storage periods is reduced. These effects improve quality performance in terms of scrap and rework."

Therefore to maintain quality, we have fully adopted all aspects of JIT management and production practices. The type of business determines which management concepts would be successful and which would not prove to be so appropriate.

Quality improvement has been the major buzzword in American corporate sector since last one decade. This is because of the fact that United States competitors were continuously outperforming local firms in the area of quality and productivity. It was noticed that because of lack of concepts such as continuous improvement and Total quality management, our companies were suffering in terms of revenues and declining customer satisfaction. That is when quality management and improvement caught the attention of concerned authorities in the United States as it was noticed that quality was the one thing that were helping foreign firms outperform and outshine U.S. firms. However companies around the world are vying for more customers and better sales through improved quality methods, very few of them take into account the costs associated with quality improvement and control. In Japan, most large corporations are working on the principle of kaizen, which means continuous improvement, which may be gradual, but should focus on achievement of zero defect level. However while this approach has turned Japan into a market leader in various fields, it is believed that continuous improvement may not exactly be a sound approach because of the costs involved. Joseph Juran first popularized this concept in 1950s but it was challenged by another quality theorist Crosby who maintained that quality was free. However Juran has repeatedly advocated in-depth analysis of quality related costs, as he believes that rising quality costs could result in lower overall revenues. "Because the main language of [corporate management] was money, there emerged the concept of studying quality-related costs as a means of communication between the quality staff departments and the company managers" (Gryna, 4)

Realizing that quality costs could sometimes be a burden on the company and were thus important to pay attentions to, he separated these costs into four distinct categories. These categories focus on each area of quality control and also make it clear for companies to determine where which areas can impact their sales profits the most.

Prevention costs: Prevention costs refer to the costs incurred by a firm on quality measures meant to prevent any risk of failure and defect.

Appraisal costs: Most companies concerned with quality of their products have special appraisal method to review product design and check other quality related aspects of a product. Various tests are conducted to make sure that products can tolerate wear and tear under different conditions. It is believed that when prevention costs are increased, appraisal costs should decrease.

Internal Failure costs: Failure costs are sub-divided into two categories, internal failure costs and external failure costs. These are the most probably the worst kind of quality costs that a company might have to incur in case a serious defect is found in its final product. External failure costs: External failure costs are more dangerous of the two failure costs. These are to be incurred after the product has reached the end user and is found to be defective.

Manufacturing techniques are not always static and to keep up with rapidly evolving highly complex business world, organizations need to adopt new manufacturing technologies and give up traditional ones. The most well-known traditional manufacturing methods are job shop and process flow methods. The third a relatively new and better manufacturing method is known as cellular manufacturing. Compared to the traditional methods, cellular manufacturing is a more efficient system of production but can cost more in terms of equipment and expertise. "Cellular manufacturing is a time-tested strategy for factory layout design and material flow organization to reduce work-in-process inventory, shorten order throughput times, and improve quality levels in any suitable manufacturing facility." (IIE Solutions, 2002)

Process flow method is based on conventional production layout where assembly line is designed in a linear fashion. All resources are arranged in a linear fashion. While process flow is efficient system, it is not suitable for today's changing time since we need to adapt to changes quickly which process flow doesn't allow. Secondly it is only good for repetitive production of homogenous products with no unique features or design. Job shop on the other hand is a more flexible technique where equipment is arranged in a hybrid so all work is done by respective sections. This is good for production of specialized goods but there is a down side to it too. It can work well when every section is performing at its peak. Cellular manufacturing for that matter avoids the limitations of both process flow assembly line and job shop. Everything is carried out in cells and these special cells contain all equipment to produce a product from scratch. However the cost may often be high because of installment of similar machinery in every cell and extensive expertise is required.

There are two commonly known inventory systems i.e. dependent demand and independent demand inventories. Dependent demand refers to the demand of components that make up the actual product, in other words, when the demand for a product increases, it leads to dependent demand of its various parts. Independent demand on the other hand is independent of demand for other goods or parts. The inventory systems for both therefore are based on similar lines. A dependent demand inventory system is flexible in nature and changes with a change in the demand for the actual final product. Independent demand inventory system is based on mathematical calculations and usually there are certain important things to keep in mind while managing this type of inventory. The most important questions with regard to inventory management are when to order and what quantity to order. These questions can be answered with the help of small calculation and mathematical computations. A continuous review system should exist and in an independent demand inventory we take into account Inventory position (IP), Backorders (BO), ON-hand inventory (OH) and Reorder point (R). Operation managers are required to update inventory regularly and place new orders as soon as OH reaches R. IP=OH+SR-BO where SR stands for order placed but not yet received. Inventory position is checked after each withdrawal. A simple calculation below can help us understand this:

In this case Reorder point is 70, On hand inventory is 40 and SR=45 and BO =0

Calculating IP;