Operations Control Chapter 8 CHAPTER OUTLINE I. INTRODUCTION A. There are two aspects to an effective operating system: 1. Design 2. Control. B. Effective operations control is attained by applying the basic control concepts to the operations function. C. Operations controls generally relate to one of three areas: costs, quality, or inventories. II. CONTROLLING OPERATION COSTS A. Ensuring that operations costs do not get out of hand is one of the primary jobs of the operations manager; begins with understanding accounting and budgeting systems. B. Concerned with costs related to labor, materials, and overhead. 1. Variable overhead expenses expenses that change in proportion to the level of production or service. 2. Fixed overhead expenses expenses that do not change appreciably with fluctuations in the level of production or service. C. Budgets help to control costs by comparing actual costs to budgeted costs. D. Cost control systems indicate when a particular cost is out of control; doesn t address why. III. QUALITY MANAGEMENT A. Quality although quality is a relative term, for the operations manager, quality is determined in relation to the specifications or standards set in the design stages the degree or grade of excellence specified. 1
B. Six common dimensions of design quality C. The quality of an organization s goods and services can affect the organization: 1. Loss of business 2. Liability 3. Costs 4. Productivity D. A total quality response program helps to transfer the quality programs that are internal to the organization to the customer. To implement the program, firms must: 1. Develop a new attitude toward customers 2. Reduce management layers to enable managers to contact customers 3. Link quality and information systems to customer needs and problems 4. Train employees in customer responsiveness 5. Integrate customer responsiveness throughout the distribution channel 6. Use customer responsiveness as a marketing tool E. Quality assurance the idea of building in quality as opposed to inspecting it in. 1. Quality is the responsibility of all employees. 2. Suppliers are treated as partners. 3. Associated with W. Edwards Deming; developed 14 points needed to achieve quality. F. Total quality management (TQM) 1. A management philosophy that emphasizes managing the entire organization so that it excels in all dimensions of products and services that are important to the customer. a. An organization-wide emphasis b. A way of thinking 2. TQM actions: a. Find out what customers want. b. Design a product or service that will meet (or exceed) what customers want. c. Design a production process that facilitates doing the job right the first time. d. Keep track of results, and use them to guide improvements in the system. e. Extend these concepts to suppliers and to distribution. 3. Implementing TQM: a. Demonstrate top-down commitment and involvement-push. b. Set tough improvement goals, not just stretch goals. c. Provide appropriate training, resources, and human resource backup. d. Determine critical measurement factors; benchmark and track progress. 2
e. Spread success stores; always share financial progress reports. f. Identify the costs of quality and routes to improvement. g. Rely on teamwork, involvement, and all-level leadership. h. Respect the gurus, but tailor every initiative for a good local fit. i. Allow time to see progress, analyze the system s operations, reward contributions, and make needed adjustments. j. Recognize that the key internal task is a culture change and the key external task is a new set of relationships with customers and suppliers. 4. Barriers to adopting TQM: a. Lack of consistency of purpose on the part of management. b. Emphasis on short-term profit. c. Inability to modify personnel review systems. d. Mobility of management (job hopping). e. Lack of commitment to training and failure to instill leadership that is change-oriented. f. Excessive costs. G. Specific approaches for improving quality 1. Continuous improvement generally refers to an ongoing effort to make improvements in every part of the organization relative to all of its products and services. 2. Kaizen a philosophy of improvement that originated in Japan; good change ; a process of continuous and relentless improvement. 3. Quality at the source makes each employee responsible for the quality of his/her work. 4. Lean manufacturing is a systematic approach to identifying and eliminating waste and non-value-added activities. 5. Six sigma A precise set of statistical tools and a rallying cry for continuous improvement. Was pioneered by Motorola in the 1980s. Addresses the question of what does the customer want in the way of quality? 6. Lean six sigma A combination of lean methods and six sigma; draws on the philosophies, principles, and tools of both approaches. Goal is growth and not just cost-cutting. H. Reengineering searching for and implementing radical change in business processes to achieve breakthroughs in costs, speed, productivity and service. I. Other Quality Standards 1. ISO 9000 a set of quality standards for international business; five parts guide internal quality management programs and facilitate external quality assurance endeavors. 2. ISO 14000 a series developed in addition to the ISO 9000 to control the impact of an organization s activities and outputs on the environment. 3
3. Zero-defects program increases quality by increasing everyone s impact on quality a. Attempts to create a positive attitude towards the prevention of low quality b. Successful programs have four characteristics. i. Extensive communication regarding the importance of quality ii. Organization-wide recognition iii. Problem identification by employees iv. Employee goal setting J. Types of Quality Control 1. Product quality control relates to inputs or outputs of the system; used when quality is evaluated with respect to a batch of existing products or services. 2. Process control relates to equipment and processes used during the production process; used to monitor quality while the product or service is being produced. 3. Acceptance sampling statistical method of predicting the quality of a batch or a large group of products by inspecting a sample or group of samples. 4. Process control chart time-based graphic display that shows whether a machine or a process is producing items that meet pre-established specifications. a. Mean charts monitor the mean or average value of some characteristic of the items produced. b. Range charts monitor the range of variability of some characteristic of the items produced. IV. INVENTORY CONTROL A. Inventory quantity of raw materials, in-process goods, or finished goods on hand; serves as a buffer between different rates of flow associated with the operating system (between purchasing and production). B. Inventories offer many advantages to the operating system and the organization. 1. Purchase, produce and ship in economic lot sizes rather than in small jobs. 2. Produce on a smooth, continuous basis even when demand for the finished goods or raw materials fluctuates. 3. Prevents major problems when forecasts for demands are wrong or when unexpected external forces slows down or stops supply or production. C. Just-in-time inventory control system that schedules materials to arrive and leave as they are needed. D. Independent versus Dependent Demand Goods 4
1. Independent demand items finished goods or other end items to be shipped out or sold. 2. Dependent demand items subassembly or component parts used to make a finished product; their demand is based on the number of finished products being produced. E. ABC classification system method of managing inventories based on the total value of their usage per unit of time; grouping items establishes appropriate control over each item. F. Safety stocks inventory maintained to accommodate unexpected changes in demand and supply and allow for variations in delivery time. G. The Order Quantity 1. When determining the optimal number of units to order, the ordering costs must be balanced against the costs of carrying the inventory. 2. Economic order quantity (EOQ) determined by the point where ordering costs equal carrying costs or where total cost (ordering costs plus carrying costs) is at a minimum. H. Material requirements planning (MRP) dependent inventory planning and control system that schedules the right amount of materials to produce the final product on schedule. 5