The use of operations management techniques
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Published: Mon, 5 Dec 2016
Operations management is concerned with the design, planning, control and improvement of an organisation’s resources and processes to provide goods or services for customers. Whether it is the provision of airport services, medical services, holiday packages, or the manufacturing of automobiles, consumers electronics and so on; the operations manager would have been involved in the design, creation and delivery of those products and services. (Johnson, R. etal 2003). Operations Managers are found everywhere including banks, supermarkets, construction site, production plant, government offices, and so on. Their role includes designing systems within an organisation, ensuring quality, manufacturing products, and delivery of services. They also deal with clients, suppliers, partners, and latest technology.
Operation management is more than just planning and managing processes; it is transformation processes which can also be define as a series of activities along a value chain extending from supplier to customer.
Material, Equipments, Labour, Management, and Capital
Figure 1: Operations as a Transformation Process (adaptation from Russell & Taylor, 2005)
For instance, in a car manufacturing factory, sheet steel is formed into different shapes, painted and finished, and then assembled with thousands of component parts to produce a working automobile. In a hospital, customers (patients) are helped to become healthier individuals through special care, medication, meals, physiotherapy, and surgical procedures. Core activities in operations management include organizing work, arranging layouts, locating facilities, designing jobs, measuring performance, selecting processes, controlling quality, scheduling work, managing inventory, and planning production.
Operations Management Techniques
There are several operations management techniques used by companies. These include but not limited to;
Material Requirement Planning (MRP)
Supply Chain Management
Waiting Line Analysis
This report will focus on three of the ten Operations Management techniques listed above. They are Supply Chain Management, Just-in-Time, and Benchmarking.
2.1 Supply Chain Management
According to Russell and Taylor (2006), Supply Chain Management can be described as an operations management technique that focuses on integrating an managing the flow of goods and services and information through the supply chain in order to make it responsive to customer needs while lowering total costs. It is also an integrated group of business processes and activities with the same goal of providing customer satisfaction. These processes include the procurement of services, materials, and components from suppliers; production of the products and services; and distribution of the products to the customers.
2.2 Just-in-Time (JIT)
This is an operation management philosophy directed at eliminating manufacturing wastes by producing only the right amount and combination of parts at the right place at the right time. Developed by the Japanese during the post World War II era, it is based on the principle of producing only what is needed and nothing more than needed. The Japanese believed that anything produced over the quantity required is waste. Wastes results from any activity that adds cost without adding value to the product, such as transferring of inventories from one place to another or even storing them. (Sirisha, D. 2003).
The goal of JIT is to minimize the presence of non-value-adding operations and non-moving inventories in the production line. This will result in shorter throughput times, better on-time delivery performance, higher equipment utilization, lesser space requirement, lower costs, and greater profits. JIT is most applicable to operations or production flows that do not change, i.e., those that are simply repeated over and over again. An example of this would be an automobile assembly line, wherein every car undergoes the same production process as the one before it.
This is one of the operations management technique aimed at improving organisational process by constantly identifying, understanding and adapting successful practices and processes by others and facilitating its incorporation into an organisation. Simply put, benchmarking means comparing one’s organization or a part of it with that of the other companies. As further explained by Camp (1995), “benchmarking is a continuous activity; key internal processes are adjusted, performance is monitored, new comparisons are made with the current best performers and further changes are explored. When information about these key processes is obtained through a co-operative partnership with specific organisations (rather than third party such as independently-maintained database), there is an expectation of mutual benefit over a period of time”. The type of benchmarking that companies can adopt are:
Benchmarking exercise is a four-stage process involving;
Planning stage – involves identifying, establishing and documenting specific study focus areas, key events and definitions.
Data collection stage – involves accumulating qualitative data and learning from the best practices of different organizations.
Data analysis and reporting stage – involves critical evaluation of practices followed at high performing organizations, and the identification of practices that help and deter superior performance.
Adaptation stage – involves developing an initial action plan to adapt and implement the practices followed by these high performance organizations.
3.0 CASE STUDY 1: Dell’s Supply Chain Management Practices (Consumer Electronics)
This case study is based on a different type of supply chain management practices pioneered by Dell Inc, one of the leading PC manufacturers in the world. It is known as the Direct Model, a unique model of selling PCs directly to the consumers, bypassing the resellers. With this model, Dell was able to provide its customers with tailor-made products, built only after procuring the order from them. This case study describes this model in detail and explains how it enabled Dell to manage its supply chain effectively.
3.1 Summary – Background Note
Dell Inc. (headquartered in Texas, USA) is a global technology corporation that develops, manufactures, sells, and support personal computers and other computer-related products. Founded in 1984 by Michael Dell (Michael), it grew during the 1980s and 1990s to become the largest seller of PCs and servers. Dell became a pioneer in the “configure to order” approach to manufacturing – delivering individual PCs configured to customer specification. In order to minimise delay between purchase and delivery, Dell has a general policy of manufacturing its products close to its customers; which allows for implementing a just-in-time (JIT) manufacturing approach, which minimises inventory costs.
3.2 The Direct Model
Dell’s ‘Direct selling Model’ traces its origins to Michael’s idea of selling computers directly to the consumers eliminating the need for distributors. He believed that by selling system (PCs) directly to the consumers, the company would be able to better understand the needs of its consumers. Each system was assembled according to customer’s preference.
Dell also realised that maintaining a high level of quality was necessary in order to compete with the to PC manufacturers like IBM and Compaq. To achieve this, the company decided to increase their funds in hand by reducing inventory. Dell decided to produce PCs as per orders it received and not to hold excess inventory or finished products. Dell then later decided to replace inventory with information and pass on the information to the suppliers, who were provided access to company’s internal data about the demand for specific components. With the reduction in components inventory having a positive effect on each cash flow, the company decided to bring other task related production in line with the reduced inventory. The overall savings Dell derived from managing the inventory encouraged it to try matching supply and demand on monthly, weekly and daily basis. This reduced the variation in supply and demand and gradually it was no longer necessary for Dell to maintain any component inventory.
Dell established its website in 1994, introduced online pricing in 1995, and began online sales in 1996. Within six months Dell’s revenue on the Internet stood at US $1 million a day. By 1997, sales through the Web were around US $1 billion, and by 1998, Dell’s sales through the Internet accounted for more than half of its total sales. The internet proved to be a booster for Dell’s direct model as it was able to facilitate transactions. Reduce costs, and improve relationships with customers. Dell’s direct model was directly supported by the way the company’s activities were organized globally.
3.2.1 The Direct Model – Role of Dell’s Suppliers
As bringing components from the suppliers’ factories to Dell took anything between 7 and 30 days depending on the mode of transportation, Dell required all its suppliers to maintain a warehouse close to its factories. They could either manufacture the product at the warehouse or produce at another place and ship the finished product to the warehouse. The warehouses known as Suppliers Logistics Centres (SLC) were located few miles away from Dell’s assembly plants. Each SLC could be shared by more than one supplier. Typically, Dell required suppliers to maintain inventory for 8 to 10 days in SLCs. Dell took the inventory from SLCs as required, usually replenishing its stocks every two hours. Most suppliers replenished the stocks at SLCs thrice a week.
Dell demanded that its suppliers should be extremely flexible to accommodate short-term demand fluctuations. The suppliers are provided with data on real-time customer demand, and every week, suppliers were given an order commitment from Dell for the following week. The suppliers needed to send their consent to meet the company’s demands immediately.
3.2.2 The Direct Model – Balancing Demand and Supply
Dell maintained a database to track the purchasing patterns of corporate customers and their budget cycles, in order to forecast demand. It also maintained a similar database for individual customers in order to cater for their future requirements. The changing demand patterns were communicated to the major suppliers three times a day.
If it was found that the lead time for a product was increasing, the procurement of the product was accelerated or additional suppliers were brought and the customers were encouraged to buy substitute product. If any component was found to be accumulating, customers were provided incentive to buy those products. On the other hand, if demand exceeded supply at any given point in time, Dell had more than one supplier to accelerate supply. If the component was generic, Dell checked with alternative suppliers. Once the supplier options were exhausted, Dell used its marketing team to shift demand.
3.3 Benefits of Direct Model
Dell gained tremendous benefit from their Direct Model approach to Supply Chain Management. As Dell did not hold large inventory of finished products, it did not have to sell technologically obsolete products at a discount. Dell was able to bring in new products according to the needs of the customers into the market faster than its competitors. In addition to this, Dell was able to incorporate new technologies quickly into its products and take them to customers almost two months ahead of its competitors. Through the Direct Model, Dell’s production system functioned on negative working capital as suppliers were paid 36 days after Dell received payments from its customers. This is in contrast with other computer manufacturers who usually paid the suppliers 30 days before the PC was skipped to the market
3.4 What Dell could do to get more positive results
In order for Dell to regain its number one position in the PC market, it has to make significant business changes to way its been doing business for two decades. Firstly, Dell could provide a facility where consumers have the opportunity to see the product before buying it. Dell can achieve this by partnering with PC retail stores. This will also help to address some of the customer service issues and improve its support system. Another thing Dell could do is to create products with a longer shelf-life, like digital televisions and printer cartridges, in addition to a few desktops and notebooks and sell them through the Dell retail stores. Finally, Dell could enter the commercial retail segment and compete with likes of HP and Acer, although this is an area in which Dell is not experienced enough.
4.0 CASE STUY 2: Toyota’s Just-in-Time Revolution (Automotive)
This case study is based on the Just-in-Time manufacturing system pioneered by Toyota. It is one of the most significant production approaches of the post world war II era. The case discusses in detail the concept of Toyota’s JIT system and the ‘Kanban’ concept; which was one of the principles on which Toyota’s JIT was based. I will compare the Kanban concept with the western manufacturing philosophy. I will also make objective criticism and suggestion, where appropriate, to show what else Toyota could do to get more positive results.
4.1 Summary – Background Note
Toyota’s history goes back to 1897, when Sakichi Toyoda (Sakichi) diversified into machinery business from his family traditional business of carpentry. He founded Toyoda Automatic Loom Works in 1926 for manufacturing automatic looms. Sakichi established an automobile department within TALW. Toyota Motor Corporation was established in 1937 after Sakichi’s son Kiichiro Toyoda (Kiichiro) convinced him to enter the automobile business.
Kiichiro visited the Ford Motor company in Detroit to study the US automotive industry. He saw that an average US worker’s production was nine times that of a Japanese worker. He realized that the productivity of the Japanese automobile industry had to be increased if it were to compete globally. Back in Japan, he customized the Ford production system to suit Japanese market. He also devised a system wherein each process in the assembly line of production would produce only the number of parts needed at the next step on the production line, which made logistics management easier as material was procured according to consumption. This system was referred to as Just-in-time (JIT) with the Toyota Group.
4.2 Just-in-Time Production System in Toyota
Taiichi Ohno (Ohno), who is now referred to as ‘the father of JIT’ implemented JIT in Toyota’s manufacturing plants in the early 1970s. The system was aimed at avoiding waste, reducing inventories and increasing production efficiency in order to maintain Toyota’s competitive edge. Initially, it was used as a method for reducing inventories in Toyota’s shipyards, but later it evolved into a management philosophy including a set of techniques.
Kanban was an important component of Toyota’s JIT concept. It is a simple parts-movement system that depended on cards and containers to take parts from one workstation to another on production line. Ohno developed the in 1956 from the supermarkets in the US, which had devised an effective system for replenishment of store shelves based on the quantities picked by customers. The essence of the Kanban concept was that a supplier delivered components to the production line only when required, thus eliminating storage in the production area. Supplier delivered desired components when they received a card and an empty container, indicating that more parts were needed for the production. In case of line interruption, each supplier produced only enough components to fill the container and then stopped.
At Toyota, two types of Kanban cards were used. To move parts from one place to another, known as the Conveyance Kanban card and to authorize the production of parts, known as the Production Kanban card. Three types of information were exchanged using Kanban;
Pick up information guided the earlier stages regarding parts to be produced for the succeeding stages.
Transfer information indicated when the parts had to be produced for the succeeding stages.
Production information was transmitted from the earlier stages to the later stages to inform the workers about the product mix and other operational matters.
To make the Kanban system effective and reap maximum benefits from it, Ohno framed six rules:
Do not dens defective products to the subsequent process
The subsequent process comes to withdraw only what is needed
Produce only the exact quantity withdrawn by the subsequent process
Level the production
Kanban is a means to fine tuning
Stabilize and rationalize the process
Another important component of JIT was called Heijunka (production smoothing). JIT’s principle of building only the required number of items helped keep the production costs low. Heijunka helped in the accomplishment of this principle by creating a consistent production volume. Heijunka averaged highest and lowest variations of the orders. The variations were then removed from the production schedule. This ensured that the right quantity of parts was produced with minimum workforce. Heijunka took care not only of the total volume of items but also the type of items produced and the other options.
Benefits to Toyota
The JIT system implemented by Toyota offered several advantages over other manufacturing processes. Because of the early adoption of JIT, Toyota benefited more from the system than other automobile companies. The main benefit of the JIT system to Toyota is its ability to help drive down costs and waste by improving the flow of production. Another big advantage of JIT system to Toyota is that it improves the responsiveness to changes in demand. The Kanban concept implemented is like a smart traffic light with ability to sense when the traffic, or in this case the demand, is building up. In addition to these, Toyota was able to:
Reduce stock holdings by reduction in storage space which saves storage and insurance costs.
Have less working capital tied up in stock as stock is only obtained when it is needed.
Reduce time spent on checking and re-working the product of others as the emphasis is on getting the work right first time
4.4 What Toyota could do to get more positive results
Toyota has not been able to replicate the JIT production system in an efficient way in any of its operations outside Japan. Toyota should try to imbibe the Japanese culture (which is a main driving force of their JIT) in their other operations outside Japan inorder to get more result. Also, Toyota should use more than two suppliers for most parts as having less than two suppliers makes Toyota susceptible to flow interruption.
5.0 CASE STUY 3: Xerox – The Benchmarking Story (Consumer Electronics)
This case study is based on the benchmarking initiatives taken by Xerox, one of the world’s leading copier companies. This is a part of their ‘Leadership through Quality’ program implemented by the company during the early 1980s. I will discuss in detail the benchmarking concept and its implementation in various processes at Xerox. I will explore the positive impact of benchmarking practices on Xerox also make objective criticism and suggestion, where appropriate, to show what else Xerox could do to get more positive results
5.1 Summary – Background Note
The history of Xerox dated back to 1938, when Chester Carlson, a patent attorney and part-time inventor, made the first xerographic image in the US. He struggled for over five years to sell the invention, until 1944 when Battelle Memorial Instutite approached him to refine his new process. Xerox was registered as a trademark in 1948 when The Haliod Company obtained all rights to Carlson’s invention from Battelle. Xerox Corporation was formed and listed on the New York stock Exchange in 1961.
The company grew throughout the 1960s by acquiring many companies, and later diversified into the information technology business through to the early 1970s. in the 1970s, Xerox focused on introducing new and more efficient models to retain its share of the reprographic market and cope with competition from the US and Japanese companies. The company’s revenue increased from $698 million in 1966 to $4.4 million in 1976, and profits also increased five-fold from $83 million in 1966 to $407 million in 1977. The rapid growth at Xerox led to the introduction of a variety of controls and procedures and the number of management layers was increased during the 1970s. This, however, slowed down decision-making and resulted in major delays in product development.
By early 1980s, has found itself increasingly vulnerable to intense competition from both the US and Japanese competitors. According to analysts, Xerox ignored new entrants who were consolidating their positions in the lower-end market and in niche segments. The management also failed to give the company strategic direction. The company’s operating cost was high and its products were of inferior quality in comparison to its competitors. Xerox also suffered from its highly centralized decision-making processes. As a result of this, return on assets fell to less than 8% and market share in copiers came down sharply from 86% in 1974 to just 17% in 1984.xerox’s profits decreased from $1.15billion in 1980 to $290 million in 1984.
When David T. Kearns (Kearns) took over in 1982, he discovered that Japanese companies were able to undercut Xerox’s prices effortlessly because their average costs of copiers was 50-60% cheaper than that of Xerox. Kearns quickly began emphasizing reduction of manufacturing costs and gave new thrust to quality control by launching a program that was popularly referred to as ‘Leadership through Quality’. As part of this quality program (to find ways to reduce their manufacturing costs), Xerox implemented the benchmarking program. These initiatives played a major role in pulling Xerox out of trouble in the years to come. The company even went on to become one of the best examples of the successful implementation of benchmarking.
5.2 Benchmarking against Japanese Competitors
Xerox discovered that it took twice as long as its Japanese competitors to bring a product to market, five times the number of engineers, four times the number of design changes, and three times the design costs. The company also found that the Japanese could produce, ship, and sell units for about the same amount that it cost Xerox just to manufacture them. In addition, Xerox’s products had over 30,000 defective parts per million – about 30 times more than its competitors. Benchmarking also revealed that Xerox would need an 18% annual productivity growth rate for five consecutive years to catch up with the Japanese. After an initial period of denial, Xerox managers accepted the reality.
Following this, Xerox defined benchmarking as ‘the process of measuring its products, services, and practices against its toughest competitors, identifying the gaps and establishing goals. Goal is always to achieve superiority in quality, product reliability and cost.’ Gradually, Xerox developed its own benchmarking model. This model involved tens steps categorized under five stages – planning, analysis, integration, action and maturity.
Figure 2: Xerox Benchmarking Model (according to Karsnia 1991, Camp 1989)
Xerox collected data on key processes of best practice companies. These critical processes were then analyzed to identify and define improvement opportunities. For the purpose of acquiring data from the related benchmarking companies, Xerox subscribed to the management and technical databases, referred to magazines and trade journals, and also consulted professional associations and consulting firms. Having worked out the model it wanted to use, Xerox began by implementing competitive benchmarking. However, the company found this type of benchmarking to be inadequate as the very best practices, in some processes or operations were not being practiced by copier companies. The company then adopted functional benchmarking, which involved a study of the best practices followed by a variety of companies regardless of the industry they belonged to. Xerox initiated functional benchmarking with the study of the warehousing and inventory management system of L.L. Bean (Bean), a mail-order supplier of sporting goods and outdoor clothing.
Similarly, Xerox zeroed in on various other best practice companies to benchmark its other processes. These included American Express (for billing and collection), Cummins Engines and Ford (for factory floor layout), Florida Power and Light (for quality improvement), Honda (for supplier development), Toyota (for quality management), Hewlett-Packard (for research and product development), Saturn (a division of General Motors) and Fuji Xerox (for manufacturing operations) and DuPont (for manufacturing safety).
Results of Benchmarking
Some of the benefits Xerox derived as a result of their benchmarking are;
Customer satisfaction for its copier/duplicator and printing systems increased by 38% and 39% respectively.
Customer satisfaction with its sales processes improved by 40%, service processes by 18% and administrative processes by 21%.
Customer complaints reduced by more than 60%.
Financial performance of the company also improved considerably through the mid and late 1980s.
Some of the other benefits Xerox derived were:
Number of effects reduced by 78 per 100 machines.
Inspection of incoming components reduced to below 5%.
Inventory costs reduced by two-thirds.
Notable decrease in labour costs.
Became the leader in the high-volume copier-duplicator market segment
Country units improved from 152% to 328%.
5.4 What Xerox could do to get more positive results
Xerox could get more positive results by continuously benchmarking against other companies outside the United States, especially in India and China. As we are in a more competitive business environment where customers preference are changing and they want more value for their money, Xerox should try to diversify more into the technology market in order to retain its competitiveness in the market.
Hence we can see that operations management is an important aspect of any business organisation. It is very important as it is concerned with creating products and services; the core of an organization’s existence. It is also challenging because the techniques implemented by organizations need to work globally and responsibly within the society and the environment; as we can see in all the three case studies used in this report.
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