MBA Class: Operations Management

Quality refers to the ability of a product or service to constantly meet or exceed customer expectations. It is a predictable degree of uniformity and dependability at low cost and suited to the market.

Quality Control is a systematic and scientific system involving the application of all known industrial and statistical techniques to control the quality of the manufactured goods. It is the systematic control of those variables encountered in a manufacturing process which affect the excellence of the product.

MEANING OF TOTAL QUALITY MANAGEMENT (TQM)

Total Quality Management has been coined to describe a philosophy that makes quality values the driving force behind leadership, design, planning and improvement initiatives. The belief is that for long term financial success, quality is essential. In short, Total Quality Management is a philosophy that stresses three principles:

a. Customer satisfaction

b. Employee involvement

c. Continuous improvement in quality

a. Customer Satisfaction: The product should meet or exceed the expectations of customers.

b. Employee involvement: A complete program in employee involvement includes changing organizational culture, encouraging teamwork, fostering individual development through training and establishing awards and incentives.

c. Continuous improvement in quality: The philosophy of continual improvement of machinery , materials, labour utilization and production methods through application of suggestions and ideas of team members- based on a Japanese concept called keizen.

THE DIMENSIONS OF QUALITY

From a customer perspective, quality does not pertain to a single aspect of a product or service, but to a number of different dimensions of the product or services:

b. Performance: Main characteristics of the product or service.

c. Aesthetes: appearance, feel, smell, taste.

d. Special features: Extra characteristics.

e. Conformance: How well a product or service corresponds to the customers expectations.

f. Safety: Risk of injury or harm.

g. Reliability: Consistency of performance.

h. Durability: The useful life of the product or service.

i. Service after sale: Handling of complaints or requests for information.

THE CONSEQUENCES OF POOR QUALITY

It is important for management to recognize the different ways that the quality of firm’s products or services can affect the organization and to take these into account in developing and maintaining a quality assurance program. Some of the major ways that quality affects an organization are:

a. Loss of business:

Poor design or defected product or services can result in loss of business. Failure to devote adequate attention to quality can damage a profit oriented organization’s image and lead to a decreased market share.

b. Liability:

Organizations must pay special attention to the potential liability due to damage or injuries resulting from either faulty design or poor workmanship.

c. Productivity:

Productivity and quality are often closely related. Poor quality can adversely affect productivity during the manufacturing process if parts are defective and have to be reworked. Conversely, improving and maintaining good quality can have a positive affect on productivity.

d. Cost:

Poor quality increases certain cost incurred by the organization. Any serious attempt to deal with quality issues must take into account because the cost is associated with quality.

THE COSTS OF QUALITY (COQ)

Cost of quality (COQ) analysis is a common in industry and constitutes one of the primary functions of quality control departments. Four major categories of costs are associated with quality management. They are:

a. Prevention cost

b. Appraisal cost

c. Internal failure cost

d. External failure cost

a. Prevention cost:

Prevention costs are associated with preventing defects before they happen.

Example:

Quality improvement programs, training, monitoring, data collection and analysis and design cost.

b. Appraisal cost:

Appraisal costs incurred in assessing the level of quality attained by the operating system.

Example:

Inspection equipment, testing, labs, inspectors and the interruption of production to take samples.

c.Internal failure cost:

Internal failure costs resulting from defects that are discovered during the production of a product or service.

Example:

Rework cost, problem solving, material and product losses, scrap and downtime.

c. External failure cost:

Costs that arise when a defect is discovered after the customer have received the product or services.

Example:

Returned goods, reworking cost, warranty cost, loss of goodwill, penalties.

FUNCTIONS/OBJECTIVES/NECESSITY OF QUALITY CONTROL

1. Establishing standards or quality of products.

2. Confirmation of providing quality products for maximum customer satisfaction.

3. Maintaining the standards or quality.

4. Highly standard product design corresponds to the customer’s expectations.

5. Finding out defects in product and trying to eliminate the defects.

6. Minimizing production cost and wastage.

7. Minimizing customers’ complaints.

8. Finding out reasons of deviation from standard and try to solve that.

9. Evaluation and development of inspection system.

10.Making necessary adjustment in production process and maintaining dynamism in production activities.

Model Questions:

1. What do you understand by Quality & Quality Control?

2. Define Total Quality Management (TQM).

3. What are the Dimensions of Quality?

4. Discuss the Consequences of Poor Quality.

5. What are the costs associated with Quality? Discuss.

6. Describe the Functions/Necessity/Objectives of Quality Control.

===

Lecture –8

Quality Control

Topics Covered:

· Methods of Quality Control

· Quality Certification

· Model Questions

METHODS OF QUALITY CONTROL

The purpose of quality control is to assure that processes are performing in an acceptable manner. Quality control can be done in the following ways:

A. INSPECTION

B. STATISTICAL PROCESS CONTROL

1.Acceptance sampling

i.Single sampling plan

ii.Double sampling plan

iii.Multiple sampling plan

2.Control charts

i.Control chart for variables

a. Mean chart

b. Range chart

ii.Control chart for attributes

a. “P” chart

b. “C” chart

A. INSPECTION:

Monitoring in the production process can occur at three points: before production, during production and after production.

The logic of checking conformance before production is to make sure that inputs are acceptable.

The logic of checking conformance during production is to make sure that the conversion of inputs into outputs is proceeding in an acceptable manner.

The logic of checking conformance of output is to make a final verification of conformance before passing goods on to customers.

The purpose of inspection is to provide information on the degree to which items conform to standard. The basic issues are:

· How much to inspect and how often.

· At what points in the process inspection should occur.

· Whether to inspect in a centralized or on-site location.

· Whether to inspect attributes or variables.

B. STATISTICAL PROCESS CONTROL:

Statistical process control is to evaluate the output of a process to determine its acceptability. Managers take periodic samples from the process and compare them with a predetermined standard. If the sample results are not acceptable, they stop the process and take corrective actions. If the sample results are acceptable, they allow the process to continue. Statistical process control van be two types:

1.Acceptance Sampling

2.Control Charts

1. Acceptance Sampling:

Acceptance sampling is a form of inspection that is applied to lots or batches of items either before or after a process instead of during the process.

The purpose of acceptance sampling is to decide whether a lot satisfies pre-determined standards. Lots that satisfy these standards are passed or accepted, those that do not are rejected. The followings are some of the different kinds of sampling plan:

i.Single Sampling Plan:

In this plan one random sample is drawn from each lot and every item in the sample is examined and classified as either ‘good’ or ‘defective’.

ii.Double Sampling Plan:

A double sampling plan allows for the opportunity to take a second sample if the results of the initial sample are inconclusive.

iii.Multiple Sampling Plan:

A multiple sampling plan is similar to a double sampling plan except that more than two samples may be required.

2. Control Charts:

A control chart is a time-ordered plot of sample statistics. It is used to distinguish between random variability and non-random variability. Two types of control charts are used:

i. Control Charts for Variables

ii. Control Charts for Attributes

i. Control Charts for Variables:

Variables mean product or service characteristics such as weight, length, volume or time that can be measured. Mean and range charts are used to monitor variables.

a. Mean Chart:

A mean chart sometimes referred to as an ‘X bar’ chart is used to measure the mean.

b. Range Chart: A range chart or ‘R’- chart is used to monitor the mean and the variability of the process distribution.

ii.Control Charts for Attributes:

Attributes mean product or service characteristics that can be quickly counted for acceptable quality. Two charts commonly used for quality measures based on product or service attributes are the ‘P’ chart and ‘C’ chart.

a. ‘P’ Chart: ‘P’ chart is used for controlling the proportion of defective products or service generated by the process. The quality characteristic is counted rather than measured and the entire item or service can be declared ‘good’ or ‘defective’.

b. ‘C’ Chart: When the goal is to control the number of defects per unit, a ‘C’ chart is used.

QUALITY CERTIFICATION

Quality Certification:

Many firms that do business internationally recognize the importance of quality certification. The purpose of international organization for standardization (ISO) is to promote worldwide standards that will improve operating efficiency, improve productivity and reduce costs. The ISO is composed of the national standard bodies of more then 100 countries. Some 180 technical committees conduct the work of ISO.

ISO-9000 Series:

The ISO 9000 series is a set of international standards on quality management and quality assurance. These standards are critical to doing business internationally. They must go through a process that involves documenting quality procedures and on-site assessments.

Series

Indications

ISO-9000

(Guidelines for use)

Helps companies determine which standards of ISO-9001, 9002, 9003 applies.

ISO-9001

(Quality system)

Outlines guidelines for companies that engage in design, development, production, installation and servicing of products or services.

ISO-9002

(Quality system)

Similar to ISO-9001 but excludes companies engaged in designing and development.

ISO-9003

(Quality system)

Covers companies engaged in final inspection and testing.

ISO-9004

(Guidelines for use)

The guidelines for applying the elements of the quality management system.

The above table shows that, ISO-9001, 9002 & 9003 are well-defined standards while ISO-9000 and 9004 only establish guidelines for operations.

ISO-14000:

The International organization for standardization (ISO) introduced new set of standards in 1996; ISO-14000 is intended to assess a company’s performance in terms of environmental responsibilities. It is developed to control the impact of an organization’s activities and outputs on the environment. The ISO 14000 standards can lead to benefits such as reducing the cost of waste management, conserving energy and materials, lowering distribution costs and improving corporate image.

Model Questions:

1. Describe, in details, the Methods of Quality Control.

2. What is Quality Certification? Discuss the themes of ISO-9000 series and ISO-14000.

===

Lecture –9

Inventory Management

Topics Covered:

n Definition of inventory

n Functions of inventory management

n Requirements for effective inventory management

n Costs involved with inventory

n Model Questions

DEFINITION OF INVENTORY

Inventory is a stock of any item or resources used in an organization. An inventory system or management is the set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished and how large orders should be.

According to Jain and Agarwal “Inventory in a wider sense is defined as idle resources of an enterprise, however it is commonly used to indicate materials, raw materials, finished, semi-finished, packing, spears and others - stocked in order to meet an expected demand or distribution in future.”

FUNCTIONS OF INVENTORY MANAGEMENT

Inventories serve a number of functions. Among the most important are the following:

· To meet anticipated customer demand,

· To smooth production requirements,

· To decouple components of the product - distribution system,

· To protect against stock-outs,

· To take advantages of order cycles,

· To hedge against price increases or to take advantage of quantity discount,

· To permit operations

01. To meet anticipated customer demand:

Inventories are referred to as anticipation stocks because they are held to satisfy expected average demand.

02. To smooth production requirement:

Firms that experience seasonal patterns in demand often build up inventories during off-season to meet overly high requirements during certain seasonal periods. Companies that process fresh fruits and vegetables deal with seasonal inventories.

03. To decouple components of the product-distribution system:

Historically, manufacturing firms have used inventories as buffers between successive operations to maintain continuity of production that would otherwise be disrupted by events such as breakdowns of equipment and accidents that cause a portion of the operation to shutdown temporarily.

04. To protect against stock out:

Delayed deliveries and unexpected increases in demand increase the risk of shortages. The risk of shortages can be reduced by holding safety stocks, which are stocks in excess of average demand to compensate for variabilities in demand and lead time. (Difference between ordering and receiving times).

05. To take advantages of order cycle:

To minimize purchasing and inventory cost, a firm often buys in quantities that exceed immediate requirements. This necessitates storing some or the entire purchased amount for later use. Similarly, it is usually economical to produce in large rather than small quantities.

06. To hedge against price increases or to take advantages of quantity discount:

Occasionally, a firm will suspect that a substantial price increase is about to be made and purchase larger than normal amounts to avoid the increase.

07. To permit operations:

The fact that production operations take a certain amount of time means that there will generally be some work-in-process inventory. In addition, intermediate stocking of goods - including raw materials, semi-finished items and finished goods at production sites as well as goods stored in warehouse - leads to pipeline inventories throughout a production-distribution system.

FACTORS CONSIDERED FOR EFFECTIVE INVENTORY MANAGEMENT OR REQUIREMENTS FOR EFFECTIVE INVENTORY MANAGEMENT

Management has two basic functions concerning inventory. One is to establish a system of keeping track of items in inventory and the other is to make decision about how much and when to order. To be effective, management must have the following: -

1. Inventory counting systems:

It can be periodic or perpetual. Under a periodic system a physical count of items in inventory is made at periodic intervals in order to decide how much to order of each item.

2. Demand forecast:

Inventories are used to satisfy demand requirements. So it is essential to have reliable estimates of the amount and timing of demand. Similarly, it is essential to know how long it will take for orders to be delivered.

3. Lead time information:

Managers need to know the extend to which demand and lead-time, might vary, the greater the risk of a shortage between deliveries.

4. Cost information:

Three basic costs are associated with inventories (holding cost, ordering cost and shortage cost), so effects or these costs should be considered during inventory management.

5. Classification system:

An important aspect of inventory management is that items held in inventory are not of equal importance in terms of amount invested, profit potential, sales or usage volume or stock out penalties. It would be unrealistic to devote equal attention to each and every item.

INVENTORY COSTS / COST ASSOCIATED WITH INVENTORY

The costs associated with inventory are as follows:

1. Holding or carrying costs

2. Ordering costs

3. Shortage costs

01. Holding or carrying costs:

It relates to physically having items in storage. This is cost to carry an item in inventory for a length or time, usually a year. Holding costs include interest, insurance, taxes, depreciation, obsolescence, deterioration, spoilage, pilferage, breakage, and warehouse cost.

02. Ordering costs:

It is the cost or ordering a receiving inventory. These include determining how much is needed preparing invoices, shipping cost, inspecting goods upon arrival for quality and quantity and moving the goods to temporary storage.

03. Shortage costs:

It results when demand exceeds the supply of inventory on hand. These costs can include the opportunity cost of not making a sale loss or customer good will and similar costs.

Model Questions:

1. What is inventory?

2. Discuss the functions of inventory management.

3. What are the requirements for effective inventory management?

4. What are the costs involved with inventory? Discuss.

===

Lecture –10

Inventory Management

Topics Covered:

n Economic Order Quantity (EOQ) model

n Problem on EOQ

n The Single Period Model

n Problem on Single Period Model

n Model Questions

ECONOMIC ORDER QUANTITY(EOQ) MODEL

Managers face conflicting pressures to keep inventories low enough to avoid excess inventory holding cost but high enough to reduce the frequency of orders & setups. A good starting point for balancing these conflicting pressures and determining the best inventory level for an item is finding the economic order quantity, which is the lot size that minimizes total annual inventory holding & ordering costs. The approach to determining the EOQ is based on the following assumptions:

1. Only one product is involved,

2. Annual demand requirements are known,

3. Demand is spread evenly throughout the year so that the demand rate is constant,

4. Lead time doesn’t vary,

5. Each order is received in a signal delivery,

6. There are no quantity discount,

When the EOQ assumptions are satisfied, cycle inventory behaves as shown in figure below:

A cycle begins with Q units held in inventory, which happens when a new order is received. During the cycle, on-hand inventory is used at a constant rate and because demand is known with certainty and the lead-time is constant, a new lot can be ordered so that inventory falls to zero precisely when the new lot is received. Because inventory varies uniformly between Q and zero, the average cycle equals half the lot size Q .

The ideal solution in an order size that causes neither a few very large orders nor many small orders, but one that lies somewhere between. The exact amount to order will depend on the relative magnitudes holding and ordering cost:

Ø Annual holding cost = (average inventory x unit holding cost)

=(Q/2 x H) [Q = order quantity]

[H = holding or carrying cost]

Ø Annual ordering cost = (no of order/year x ordering cost)

= (D/Q x S) [D = demand/year]

[S = ordering cost]

Ø So, Total Cost = [{(Q/2) x H} + {(D/Q) x S}]

Thus, with the given annual demand, the ordering cost per order and the annual holding cost per unit, one can compute the optimal or Economic Order Quantity by the following formula:

PROBLEM ON EOQ

A museum of natural history opened a gift shop two years ago. One of the top selling items at the museum’s gift shop is a bird feeder. Sales are 18 units per week and supplier charges $60 per unit. The cost of placing an order with the supplier is $45. Annual holding cost is 25% of a feeder’s value and the museum operates 52 weeks per year. Management choose a 390 –unit lot size so that new orders could be placed less frequently.

# What is the annual cost of the current policy of using a 390 unit lot size?

#Would a lot size of 468 be better?

#What is the EOQ?

THE SINGLE PERIOD MODEL

The single period model is used to handle ordering of perishables (fresh fruits, vegetables, seafood etc) and items that have a limited useful life (news papers, magazines, spear parts for specialized equipments). Analysis of single period situations generally focuses on two costs.

01. Shortage cost and

02. Excess cost

Shortage cost may include a charge for loss of customer goodwill as well as the opportunity cost of lost sales;

Shortage cost (C_s) = Revenue per unit – cost per unit

Excess cost pertains to items left over at the end of the period. In effect, excess cost is the difference between purchase cost and salvage value. that is,

Excess cost (C_e) = Original cost per unit – Salvage value per unit

The goal of the single period model is to identify the order quantity or stocking level that will minimize the long run excess & shortage cost.

The concepts of identifying an optimal stocking level is perhaps easiest to visualize when demand is uniform.

The service level is the probability that demand will not exceed the stocking level and computation of service level in the key to determining the optimal stocking level (S_o).

Service level = {Cs/(Cs₊ C_e)} [75% Ideal]

PROBLEM ON SINGLE PERIOD MODEL

Sweet cider is delivered quickly to Cindy’s cider bar. Demand varies uniformly between 300 liters to 500 liters per week. Cindy pays 20 cents per liter for the cider and charges 80 cents per liter for it. Unsold cider has no salvage value and can’t be carried over into the next week due to spoilage. Find the optimal stocking level for that quantity.

Model Questions:

1. Describe, with illustration, the model of Economic Order Quantity (EOQ).

2. Describe the Single Period Model.

===

Lecture –11

Supply Chain Management

Topics Covered:

· Meaning of Supply Chain Management

· Measuring supply chain performance

· Structural improvement of Supply Chain

· Improvement in Infrastructure of Supply Chain

· Virtual Supply Chain

· Model Questions

MEANING OF SUPPLY CHAIN MANAGEMENT

Supply chain: The sequence of business processes and information that provides a product or service from suppliers through manufacturing and distribution to the ultimate consumer.

Supply chain management: Planning, design, and control of the flow of information and materials along the supply chain in order to meet customer requirements in an efficient manner, now and in the future.

Also, supply chain management is defined here as something different from the supply chain itself. It is important to note that supply chain management requires attention to both information and materials flow. The information feedback loop is critical to effective management of the supply chain. Delays in information can lead to fluctuations in orders and in ineffective movement of materials.

A typical supply chain is shown below:

MEASURING SUPPLY CHAIN PERFORMANCE

Measuring Supply Chain Performance is the first step toward improvement. There are generally four measures of Supply Chain performance, which compare closely to the cost, quality, flexibility, and delivery measures for operations. The specific measures for supply chain performance are as follows:

Delivery. This actually refers to on‑time delivery: the percentage of orders delivered complete and on the date requested by the customer. Note that orders are not counted as delivered on time when only part of the order is filled or when the customer does not get the delivery on the requested date. This is a stringent definition, but it measures performance in getting the entire order to the customer when he or she wanted it.

Quality. A direct measure of quality is customer satisfaction, which can be measured in several ways. First, it can be measured relative to what the customer expected. For example, one company asks its customers, How well did we do in meeting your expectations? Responses are given on a five‑point scale: (5) greatly exceeded expectations, (4) exceeded expectations, (3) met expectations, (2) didn't meet expectations, (1) greatly disappointed. The company wants a high percentage of responses of 4 or 5, indicating that it is exceeding customer expectations. This is, of course, a tough standard.

A measure closely related to quality is customer loyalty. This can be measured by the percentage of customers who are still purchasing the product after having purchased it at least once. Customer loyalty is something that companies are very interested in achieving since it is much more expensive to find a new customer than to keep an existing one. Companies should compare both loyalty and customer satisfaction to that of their competitors; they should also monitor improvement made over time.

Time. The total replenishment time can be computed directly from inventory levels. If we assume there is a constant usage rate from the inventory, then the time in inventory is just the level of inventory divided by the usage rate. For example, if the inventory level is $10 million and we sell (or withdraw) $100,000 per day out of inventory, we have 100 days of inventory. In other words, a product spends 100 days on average from the time it enters inventory until it is withdrawn. The time spent in inventory should be computed for each part of the supply chain (supplier, manufacturer, wholesaler, and retailer) and added to get the total replenishment lead time.

Cost. There are two ways to measure cost. First, a company can measure total delivered cost, including manufacturing, distribution, inventory carrying costs, and accounts receivable carrying costs. Often these separate costs are the responsibility of different managers and are therefore not minimized from a total cost standpoint.

The second way to measure cost along the supply chain is to measure efficiency in value added or productivity. One measure of efficiency is as follows:

Efficiency = sales ‑ cost of materials / labor + overhead

It is important for management to set goals for these four separate areas of measurement. After constructing these measures, the company must then set goals for those it can control. By doing so, the supply chain can be improved by considerable amounts in most organizations.

STRUCTURAL IMPROVEMENT OF SUPPLY CHAIN

There are five forms of structural change of the supply chain:

· Forward and backward integration.

· Major process simplification.

· Changing the configuration of factories, warehouses, or retail locations.

· Major product redesign.

· Outsourcing logistics to a third party.

Forward and backward integration refers to ownership within the supply chain. If a manufacturer, for example, decides to buy a wholesale firm and distribute its products only through that wholesaler, then the integration is forward toward the market. On the other hand, if the manufacturer buys a supplier company, the integration is backward in the supply chain. If one firm owns the entire supply chain, there is total vertical integration.

Major process simplification is used to improve supply chains when the processes are so complex, or hopelessly out of date, that a major change is required. In this case, a clean slate approach is used, where the processes are designed from scratch without regard for the existing processes. This could include major conceptual changes in how business is conducted and major information systems changes.

The third way to restructure supply chains is to change the number and configuration of suppliers, factories, warehouses, or retail sites. Sometimes the distribution system is just no longer configured in the right way. For example, many companies have determined that they have too many suppliers and are reducing the number of suppliers by one‑half or more. This is being done to partner with the best suppliers to ensure JIT deliveries and certified sources of material. Another structural change of this type is occurring in Europe as it becomes a more unified market. As a result, companies are finding they need fewer plants and warehouses in different locations. A complete reconfiguration of the production and distribution facilities is underway at many companies.

Major product design is often needed to make improvements in the supply chain. Some companies have found that they have too many different product variations and types, some with extremely low sales. As a result, product lines are trimmed and redesigned to be more modular in nature. For example, Hewlett‑Packard found that it had to make many different models of laser printers because of the different power requirements in different countries. To get around this problem, the company decided to have a common laser printer design with a power supply module that could be inserted at the last minute to configure the printer for the particular country where it would be used. This postponement strategy saved the company millions of dollars.

Some companies have simply thrown up their hands and decided that the best approach is to outsource all inventory management, distribution, and logistics to a third party. For example, National Semiconductor concentrates on making semiconductors. When the product is produced it is given to Federal Express for inventory or distribution. Fed Ex then warehouses the product, takes incoming orders, and ships the product to the customer.

IMPROVEMENT IN INFRASTRUCTURE OF SUPPLY CHAIN

The objective of infrastructure change is the same as structural change: to remove sources of uncertainty or time from the supply chain. There are five ways this can be done.

Cross‑functional teams
Partnerships
Set‑up time reduction
Information systems
Cross‑docking

The use of cross‑functional teams is pervasive in many businesses today. Their purpose is to provide coordination that is lacking across the various departments and functions of a business. For example, a cross‑functional team is often used to plan and control the master schedule for manufacturing. The team consists of representatives from marketing/ sales, production, human resources, and accounting/ finance. The team develops a forecast of future expected orders, plans the capacity of manufacturing, and schedules customer orders. Everyone then agrees to work toward executing this plan. Without a cross‑functional team of this type, marketing makes a forecast, production uses a different forecast to plan production, and the capital is not made available to provide the capacity needed. Without a crossfunctional team, the functional silos are very effective in destroying any semblance of a master schedule that everyone can implement.

Partnerships with suppliers and customers provide coordination across businesses just like cross‑functional teams provide coordination within the business. Partnerships start with a commitment by both firms to establish a long‑term business relationship that will be mutually beneficial. The partners must develop trust for each other to make this work. Also, the partners will probably establish teams of employees from the two different firms to work together on important improvement projects. For example, a new product was developed over several months by a team of engineers from an appliance company and its key customer's site. This team worked very effectively together and made a final presentation to the senior executives from both firms. One executive turned to the other and said, "Which employees are yours and which ones are ours?" The team had become so integrated that it was difficult to tell the members apart.

In supply chain improvement it is often necessary to dramatically reduce the setup time of equipment so that smaller lots of the product can be economically produced. Once the lot size is reduced, inventory will also be reduced; the inventory will turn over more quickly, thereby more closely meeting the market need. Reducing setup time requires imagination and can be done for any piece of production equipment by simply getting ready for changeover before the machine is stopped and then making changes quickly once the machine is no longer running so that it can be put back into production as soon as possible. Watching the pit crews work during a road race gives a good idea of how quickly tires can be changed and cars refueled and put back on the track. A similar type of thinking can drastically reduce setup times in manufacturing and service from hours to a matter of minutes. Reducing setup time is one of the changes that can take many days out of the supply chain.

Changes to information systems are important in supply chains. One of the changes occurring in industry is obtaining sales data from the final customer and feeding this information back through the supply chain. Suppliers no longer just get orders from their customers; they also know the sales and inventory positions of the customers as well. This gives the supplier a basis for forecasting future orders and planning capacity. Sharing this kind of information is easy once partnerships have been established. However, using the downstream demand information will require improved information systems and new decision rules for capacity planning. These can be integrated into a revised information system.

Cross‑docking is an innovation in transportation attributed to Wal‑Mart. The basic idea is that a supplier's shipments are taken from various docks at the warehouse when they arrive and transferred directly to a Wal‑Mart truck at another dock. The items do not spend time in the warehouse inventory; they are simply moved from one dock to another. This provides the economy of full truckload shipments while also drastically reducing warehouse inventory. Cross‑docking is now being widely used wherever there is sufficient volume to make it possible.

VIRTUAL SUPPLY CHAINS

A virtual corporation produces a product or a service without employees or buildings. It exists to coordinate other companies that do the design, production, and distribution work. The virtual company can quickly form partnerships and then dissolve them when the need no longer exists. It is a very flexible form of organization that responds quickly to changing conditions.

Suppose that you wish to form a virtual corporation. The first thing you would do is to rent space for your offices, not buy the space. Then you would rent computers and phones to communicate with other companies, and you may hire a few contract employees from an employment firm to assist you. To design the product that you plan to produce, you would contract with a design engineering firm, which would suggest alternative product designs and carry the product design through to specifications. You would also hire a contract market research firm to assess the market and make marketing and distribution plans for you. Once the design was finished, you would contract out the manufacturing to one or more of the many firms that do this type of work. Then you would line up manufacturers' representatives to sell your product along with other products that they already handle. Finally, you would contract for the transportation, distribution, and warehousing through third‑party distribution firms. Now you have a virtual company. It produces a product or service without facilities or people; it has no fixed assets on the balance sheet. If the company is successful, the return on net assets (RONA), a common measure of financial performance, will be phenomenal.

But is this a good idea? When markets are rapidly changing and the company must adapt quickly, the virtual firm works well. On the other extreme, in a stable market the virtual firm may be too expensive to operate and unable to compete with traditional companies. We have described the extreme case; however, many firms only contract out a portion of their businesses and use traditional employees and assets for their core competencies. Using this approach, they protect their intellectual property and their knowledge of technology only in those areas where they plan to create a competitive advantage‑core competency areas.

Model Questions:

1. What is the meaning of Supply Chain Management?

2. How would you measure performance of supply chain?

3. Describe the forms of structural improvement of Supply Chain.

4. What are the ways of Improving Infrastructure of Supply Chain? Discuss.

5. How could you form a Virtual Supply Chain?

===

Lecture –12

Managing Technology

Topics Covered:

· Meaning of Technology

· Primary areas of Technology

· Technology and the Manager

· Technology Choice

· Model Questions

MEANING OF TECHNOLOGY

There are two definitions of technology. A very broad definition is that technology is the application of knowledge to solve human problems. A narrower definition is that technology is a set of know-how, processes, tools, methods and equipment used to produce goods and services. Know-how is the knowledge and judgment of how, when and why to employ equipment and procedures.

We must become managers of technology, as Peter Drucker argues, not only users of technology. For example, the United States has halted the construction of new nuclear power plants, because of the potentially dangerous environmental impact. A business, too, must choose the technology it uses not merely be driven by market and competitive forces. Also government has a role in ensuring that technologies used by business ultimately meet the needs of society at large.

PRIMARY AREAS OF TECHNOLOGY

Within an organization, technologies reflect what people are working on and what they are using to do that work. There are three primary areas of technology. Operations managers are interested in all three aspects of technology:

· Product Technology

· Process Technology &

· Information Technology

Product Technology:

Developed within the organization, Product technology translates ideas into new products and services. Product technology is developed primarily by engineers and researchers. They develop new knowledge and ways of doing things, merge them with and extend conventional capabilities and translate them into specific products and services with features that customers value. Developing new Product technologies requires close cooperation with marketing to find out what customers really want and with operations to determine how goods or services can be produced effectively.

Process Technology:

The methods by which an organization does things rely on the application of process technology. Some of the large numbers of process technologies used by an organization are unique to a functional area; others are used more universally.

Information Technology:

Managers use information technology to acquire process and transmit information with which to make more effective decisions. Information technology pervades every functional area in the workplace. Office technology includes various types of telecommunication systems, word-processing, computer spreadsheets, computer graphics, email online databases, the internet and the intranet.

TECHNOLOGY AND THE MANAGER

What should a manager know about technology? After all, shouldn’t the choice of technology be left to the scientists and engineers who have spent their lifetime considering technology? How can a manager master the intricacies of technology and make a proper decision?

We all make technological decisions in everyday life when we buy appliances, automobiles and electronics for our homes. For example, when we buy a refrigerator, we are interested in the arrangement of its interior shelves, how long it will last and how much electrical power it uses. We are not interested in the BTU cooling rating of the compressor and the frequency of the defrost cycle. In other words, we concentrate on the performance characteristics of the technology, not its technical details. While these attributes affect the performance of the technology, it is the performance itself, not the details, that is of interest to managers.

Technology choice is an extremely important decision and one that is of interest to managers in all functions. These decisions not only are technical in nature, they affect capital, human resources and information systems. Thus all managers should be interested in the choice of technology and how it affects the business as a whole.

TECHNOLOGY CHOICE

Aversion to capital investment is a common problem in industry. This problem is apparent in worn‑out factories, antiquated offices, and lack of integrated information systems, which are no longer competitive. Management seems to be more aware of the dangers of too much capital investment than too little.

What is needed is a technology strategy to obtain the right amount and type of technological investment. A technology strategy begins with a business strategy and operations strategy that describes the vision and mission of the firm. For example, if the mission is to be a low‑cost producer, the technology strategy should be aimed at developing technologies that enable low cost, and new technologies should be evaluated on their ability to lower costs. On the other hand, differentiated products, the technology strategy, the technologies developed, and the evaluation criteria should be oriented toward product differentiation.

A technology strategy sets an overall framework for development of new technology to support the mission. It ensures that technologies are not merely developed and justified one at a time, but implemented as part of a coherent strategy over time. As a result, the technology is integrated and provides a competitive advantage not easily imitated. Many firms justify their technology one proposal at a time and do not have a comprehensive technology development strategy.

Lack of investment in industry can sometimes be traced to improper use of capital‑budgeting techniques. Frequently, hurdle rates4 are set beyond the true cost of capital in order to keep out the so called bad proposals, to manage risk, or to reduce the capital required. For example, the hurdle rate may be set at 30 percent for new investments when the true cost of capital, including risk adjustment, is only 20 percent. As a result, the firm will not make new investments and gradually its technology can become inferior to competitors. While the problems with low hurdle rates are well understood, the corresponding problems with high hurdle rates are not nearly as well recognized.

When technological alternatives are evaluated, they should be considered with respect to the do‑nothing alternative. In other words, what happens if no investment is made and the competitors make the investment instead? The loss in cash flow as a result of not making the investment should be credited to the investment, since it is a direct result of the decision being made. Frequently, companies do not consider the loss of cash flow; thus they tend to under evaluate new investments.

Finally, capital investment often does not consider the revenue effect of new investments, since it is difficult to estimate and results in "soft numbers." Revenue effects can result from increases in quality, faster delivery, or more flexibility, which the customer may be willing to pay for or which may attract new customers. Revenue effects should be credited to the new‑technology proposal even though they may be difficult to estimate. Ignoring revenue effects is to assume they are zero, when in fact they may exceed the cost savings from the investment being considered.

As students of finance and accounting know, improper use of capital‑budgeting techniques can lead to a systematic disinvestment by the firm when the investments are not credited with the proper cash flows or when hurdle rates are too high. It is important to use net present value techniques correctly so that the right amount of new investment is made, not too much and not too little. The three most difficult areas to address are proper hurdle rates, crediting the do‑nothing alternative, and revenue effects.

Furthermore, investments should support a comprehensive technology strategy aimed at achieving or maintaining a competitive advantage. Managers in all functions should work to develop a technology strategy that considers not only operations issues but human resource effects, financial considerations, and market impacts. Developing a technology strategy on a cross‑functional basis will ensure that all of these factors are properly considered.

Model Questions

1. What do you mean by Technology?

2. What are the Primary areas of Technology? Discuss.

3. Show relationship between Technology and the Manager.

4. What should be considered regarding Technology Choice? Evaluate.

===

Lecture –13

Managing Technology

Topics Covered:

· Technologies in Manufacturing

· Benefits of Technology Investment

· Risks in Adopting New Technology

· Model Questions

TECHNOLOGIES IN MANUFACTURING

Although technological changes have occurred in almost every industry, many may be unique to an industry. For instance, a prestressed concrete block is a technological advance unique to the construction industry. Major developments in the design of automobiles will result in cars that are made from recyclable parts.

Some technological advances in recent decades have had a significant, widespread impact on manufacturing firms in many industries. These advances, which are the topic of this section, can be categorized in two ways: hardware systems and software systems.

Hardware technologies have generally resulted in greater automation of processes; they perform labor‑intensive tasks originally performed by humans. Examples of these major types of hardware technologies are numerically controlled machine tools, machining centers, industrial robots, automated materials handling systems, and flexible manufacturing systems. These are all computer‑controlled devices that can be used in the manufacturing of products. Software‑based technologies aid in the design of manufactured products and in the sis and planning of manufacturing activities. These technologies include computer aided design and automated manufacturing planning and control systems. Each of these technologies will be described in greater detail in the following sections.

Hardware Systems

Numerically controlled (NC) machines are comprised of (1) a typical machine tool used to drill, or grind different types of parts; and (2) a computer that controls the sequence of processes performed by the machine. NC machines were first adopted by U.S. aerospace in the 1960s, and they have since proliferated to many other industries. In more recent Is, feedback control loops determine the position of the machine tooling during the constantly compare the actual location with the programmed location, and correct as needed . This is often called adaptive control.

Machining centers represent an increased level of automation and complexity relative C machines. Machining centers not only provide automatic control of a machine, they also carry many tools that can be automatically changed depending on the tool d for each operation. In addition, a single machine may be equipped with a shuttle in so that a finished part can be unloaded and an unfinished part loaded while the machine is working on a part.

Industrial robots are used as substitutes for workers for many repetitive manual activities tasks that are dangerous, dirty, or dull. A robot is a programmable, multifunctional machine that may be equipped with an end effector. Examples of end effectors include a gripter to pick things up, or a tool such as a wrench, a welder, or a paint sprayer. Advanced capabilities have been designed into robots to allow vision, tactile sensing and hand‑to‑hand coordination.

Automated materials handing (AMH) systems improve efficiency of transportation, storage, and retrieval of materials. Examples are computerized conveyors, and automated storage and retrieval systems (AS/RS) in which computers direct automatic loaders to pick and place items. Automated guided vehicle (AGV) systems use embedded floor wires to direct driverless vehicles to various locations in the plant. Benefits of AMH systems include quicker material movement, lower inventories and storage space, reduced product damage, and higher labor productivity.

These individual pieces of automation can be combined to form manufacturing cells or even complete flexible manufacturing systems (FMS). A manufacturing cell might consist of a robot and a machining center. The robot could be programmed to automatically insert and remove parts from the machining center, thus allowing unattended operation. An FMS is a totally automated manufacturing system that consists of machining centers with automated loading and unloading of parts, an automated guided vehicle system for moving parts between machines, and other automated elements to allow unattended production of parts. In an FMS, a comprehensive computer control system is used to run the entire system.

Software Systems

Computer‑aided design (CAD) is an approach to product and process design that utilizes the power of the computer. CAD covers several automated technologies, such as computer graphics to examine the visual characteristics of a product, and computer‑aided engineering (CAE) to evaluate its engineering characteristics. Rubbermaid used CAD to refine dimensions of its Tote Wheels to meet airline requirements for checked baggage. CAD also includes technologies associated with the manufacturing process design, referred to as computer‑aided process planning (CAPP). CAPP is used to design the computer part programs that serve as instructions to computer‑controlled machine tools, and to design the programs used to sequence parts through the machine centers and other processes (such as the washing and inspection) needed to complete the part. These programs are referred to as process plans. Sophisticated CAD systems are also able to do on‑screen tests, replacing the early phases of prototype testing and modification.

CAD has been used to design everything from computer chips to potato chips. Frito‑Lay, for example, used CAD to design its O'Grady's double‑density, ruffled potato chip. The problem in designing such a chip is that if it is cut improperly, it may be burned on the outside and soggy on the inside, be too brittle (and shatter when placed in the bag), or display other characteristics that make it unworthy for, say, a guacamole dip. However, through the use of CAD, the proper angle and number of ruffles were determined mathematically; the O'Grady's model passed its stress test in the infamous Frito‑Lay "crusher" and made it to your grocer's shelf.

CAD is now being used to custom design swimsuits. Measurements of the wearer are fed into the CAD program, along with the style of suit desired. Working with the customer, the designer modifies the suit design as it appears on a human‑form drawing on the computer screen. Once the design is decided upon, the computer prints out a pattern, and the suit is cut and sewn on the spot.

Automated manufacturing planning and control systems (MP&CS) are simply computer‑based information systems that help plan, schedule, and monitor a manufacturing operation. They obtain information from the factory floor continuously about work status, material arrivals, and so on, and they release production and purchase orders. Sophisticated manufacturing and planning control systems include order‑entry processing, shop‑floor control, purchasing, and cost accounting.

BENEFITS OF TECHNOLOGY INVESTMENT

The typical benefits from adopting new manufacturing technologies are both tangible and intangible. The tangible benefits can be used in traditional modes of financial analysis, such as discounted cash flow, to make sound investment decisions. Specific benefits can be summarized as follows:

COST REDUCTION

Labor costs Replacing people with robots, or enabling fewer workers to run semiautomatic equipment.

Material costs Using existing materials more efficiently, or enabling the use of high tolerance materials.

Inventory costs Fast changeover equipment allowing for JIT inventory management.

Quality costs Automated inspection and reduced variation in product output.

Maintenance costs Self‑adjusting equipment.

OTHER BENEFITS

Increased product variety Scope economies due to flexible manufacturing systems.

Improved product features Ability to make things that could not be made by hand (e.g., microprocessors).

Shorter cycle times Faster setups and change‑overs.

Greater product output

RISKS IN ADOPTING NEW TECHNOLOGY

Although there may be many benefits in acquiring new technologies, several types of risk accompany the acquisition of new technologies. These risks have to be evaluated and traded off against the benefits before the technologies are adopted. Some of these risks are described next.

TECHNOLOGICAL RISKS

An early adopter of a new technology has the benefit of being ahead of the competition, but he or she also runs the risk of acquiring an untested technology whose problems could disrupt the firm's operations. There is also the risk of obsolescence, especially with electronics‑based technologies where change is rapid and when the fixed cost of acquiring new technologies or the cost of upgrades is high. Also, alternative technologies may become more cost‑effective in the future, negating the benefits of a technology today.

OPERATIONAL RISKS

There could also be risks in applying a new technology to a firm's operations. Installation of a new technology generally results in significant disruptions, at least in the short run, in the form of plantwide reorganization, retraining, and so on. Further risks are due to the delays and errors introduced in the production process and the uncertain and sudden demands on various resources.

ORGANIZATIONAL RISKS

Finns may lack the organizational culture and top management commitment required to absorb the short‑term disruptions and uncertainties associated with adopting a new technology. In such organizations, there is a risk that the firm's employees or managers may quickly abandon the technology when there are short‑term failures or will avoid major changes by simply automating the firm's old, inefficient process and therefore not obtain the benefits of the new technology.

ENVIRONMENTAL OR MARKET RISKS

In many cases, a firm may invest in a particular technology only to discover a few years later that changes in some environmental or market factors make the investment worthless. For instance, in environmental issues auto firms have been reluctant to invest in technology for making electric cars because they are uncertain about future emission standards of state and federal government, the potential for decreasing emissions from gasoline-based cars, and the potential for significant improvement in battery technology. Typical examples of market risks are fluctuations in currency exchange rates and interest rates.

Model Questions:

1. Briefly discuss the Technologies used in Manufacturing.

2. What are the Benefits of Technology Investment?

3. Discuss the Risks involved in Adopting New Technology.

====

Page updated

Google Sites

Report abuse