OPERATIONS

MANAGEMENT
Strategy and Analysis

Meet 5

Dr. ZEINYTA AZRA HAROEN, MM

1. Operations As a Competitive Weapon

Strategic Choices
2. Operations Strategy
3. Process Management
4. Management of Technology
5. Work-Force Management
6. Total Quality Management
7. Statistical Process Control
 Design Decisions
8. Capacity
9. Location
10.Layout
Operating Decisions
11.Supply-Chain Management
12.Forecasting
13.Inventory Management
14.Aggregate Planning
15.Material Requirements Planning
16.Just in Time Systems
17.Scheduling
18.Managing Projects
OPERATIONS AS A COMPETITIVE WEAPON

Chapter 1
DEFINITION
This day, the term OPERATION MANAGEMENT refers
to the direction and control of the processes that
transform inputs into finished goods and services.

The Operations Management System

External environment

Customer or client
participation

Inputs : Operations and

processes
• Workers Outputs
• Managers 1 3
• Equipment  Goods
• Facilities 5  Services
• Materials
•Services 2 4
• Land
• Energy Information
performance
FIVE CATAGORIES OF DECISIONS TYPES
 Strategic choices : strategic decision that effect a
company’s future direction.

 Process : processes are fundamental to all activities that

produce goods and services.

 Quality : Quality issues underline all processes and work

activities

 Capacity : The types of decision in this category often

require long-term commitments.

 Operating decisions : Operating decision deal with

operating the facility after it has been built.
BASIC STEPS OF DECISION MAKING

 Recognize and clearly define the problem

 Collect the information needed to analyze

possible alternatives

 Choose the most acctractive alternative and

implement it
 The Operations Management As a Function

TYPES OF
ORGANIZATIONS FUNCTIONS SKILL AREAS

• Accounting
Manufacturing • Manufacturing  Quantitative methods
• • Distributing
 Organizational behavior
Construction • Construction  General management
• • Engineering
Transportation • Transportation
0
 Information systems
• Operations  Economics
•  International business
Health care • Health care  Business ethics and law
• • Finance

• Human resources
• Marketing
 CONTINUUM OF CHARACTERISTICS
OF MANUFACTURING AND SERVICE OPERATIONS

More like a More like

manufacturing a service
organization organization

 Physical, durable product Intangible, perishable produc 

 Output can be inventoried Output cannot be inventoried 
 Low customer contact High customer contact 
 Long response time Short response time 
 Regional. National or Local markets 
international markets Small facilities 
 Large facilities Laborl intensive 
 Capital intensive Quality not easily measured 
 Quality easily measured
SIMILARITIES (Manufacturing - Services)

 Manufacturing do not just offer products, and service organizations do not

just offer services. Both types of organizations normally provide a package
of goods and services. Customers expect both good services and good food
in restaurant, and manufacturing firm also offer many customer services.

 Despite the fact that service providers can’t inventory their outputs,
they must inventory the inputs for their product.

 As for customer contact, many service operations have little outside

customer contact, such as the back-room operations of a bank or baggage
handling area at an airport.
Some Trends That Impact on Operation Management

 Service sector growth

 Productivity changes
 Global competition
 Competition based on quality, time and technology
 Environmental, ethical, and work-force diversity issues
 Service Sector Growth : Percentage of Job in the US Service Sector

Manufacturing, mining,
40 Other services
and construction
Percentage of work force

30

Wholesale
and retail sales
20

Government
10

0
1957 1967 1977 1987 1997
 Productivity Changes : US and Worldwide Productivity Growth
Whole economy
Manufacturing
100
3 2.8 2.8
80

2 1.9

Percent
Percent

60

40
1.0 1.0
1
20

0
0

France
United
State

Japan

Britain
Germany
1950s 1960s 1970s 1980s 1990s
(to date)

A. Average Annual Growth In B. Current Value Added Per Hour Worked

Productivity for US Business Sector by Sector and Country
GLOBAL COMPETITION
Today business accept that to prosper they must view customers,
suppliers, facility locations, and competitors in global term.
Operation Management as an Interfunctional Imperative

• Cross-functional coordination

• Achieving cross-functional coordination

Operation management as a competitive weapon

Business and government leader increasingly are recognizing
the importance of involving the whole organization in making
strategic decisions in order to compete globally
OPERATION STRATEGY

Chapter 2
COMPETITIVE PRIORITIES : Link Between Corporate
Strategy and Functional Area Strategy
Market analysis Socioeconomic
and business
• Segmentation environment
• Needs assesment
Corporate strategy

• mission
• goals
• distinctive competencies

COMPETITIVE PRIORITIES
Future direction
Operation Marketing Capabilities
• global strategy • cost
• new products / • quality Finance • current
services • needed
• time
• plans
• flexibility Others
Functional area strategies

• finance
• marketing
• operations
CORPORATE STRATEGY
Defines the business that the
company will pursue, new
opportunities and threats in the
environment, and the growth
objectives that it should acheive
STRATEGIC CHOICES
• Mission : A firm’s mission statement answers fundamental question :
• What business are in ? Where should we be ten years from now ?
• Who are our customers (or clients)
• What are our basic beliefs ?
• What are the key performance objectives and by which
we measure success ?

• Environment : The external business environment in which a firm competes

changes continually, and an organization needs adapt

• Core competencies : are organization’s unique resources and strengths

that management considers when formulating strategy.
Competencies include the following :
• Work force
• Facilities
• Market and financial know-how
• System and strategy
GLOBAL STRATEGIES
May include buying foreign parts or services, combating
threats from foreign competitors, or planning ways to
enter markets beyond traditional national boundaries

STRATEGIC ALLIENCE
1. Collaborative effort
2. Joint venture
3. Licensing of technology
MARKET ANALYSIS
Market Segmentation
Identifying groups of customer which enough in common to warrant the design
and provision of product or services that the larger group wants and needs.

Market segmentation can be formed from:

• Demographic factors
• Psychological factors
• Industry factors

Needs assessment
Identifying the needs of each segment and assesses how well competitors
are addressing those needs

Market needs may be grouped as follows :

• Product/service needs
• Delivery system needs
• Volume needs
• Other needs
COMPETITIVE PRIORITIES
Eight possible competitive priorities

Cost 1. Low-cost operations

Quality 2. High-performance design
3. Consistent quality
Time 4. Fast delivery time
5. On-time delivery
6. Development speed
Flexibility 7. Customization
8. Volume flexibility
FLOW STRATEGY
CORPORATE STRATEGY

Future Competitive
Capabilities
direction priorities
Operation Strategy

Flow Strategy
• Flexible flows
• Intermediate flows
• Line flows

• Process decision
• Quality decisions
• Capacity, location,
and layout decision
• Operating decision
A CONTINUUM OF FLOW STRATEGY
None
Flexible flows
• Tool and die shop
Jumbled flows • Health center
• General medical
practice

Intermediate
FLOW PATTERN

Jumbled, but flows

with some • Branch office
dominant • Print shop
flows • Health clinic

Line flows

• Oil refine
• Cafeteria
• Assembly plant
Linier flows
None

Low volumes Moderate High volume

or one-of-a-kind volume
products or
services
VOLUME
FLOW STRATEGY AND COMPETITIVE PRIORITIES
Linking Flow Strategy with Competitive Priorities

Flow Strategy
Flexible Flows Line Flows

Tendency for customized products Tendency for standardized products

and services, with low volumes and services, with high volumes
High-performance design quality Consistent quality

More emphasis on customization More emphasis on low cost

and volume flexibility

Long delivery times Short delivery times

FLEXIBILITY
 WHY MANUFACTURING
FLEXIBILITY?
• Critical source of competitive advantage. The
key of survival [ploss ’92].

FLEXIBLE
Luwes menghadapi pelanggan yang beragam. (jenis
barang/jasa, harga, mutu, pengiriman).
 ALASAN PERUSAHAAN LEBIH
LUWES
• Meningkatkan income pelanggan → pilihan terbaik,
kualitas lebih baik, pelayanan khusus.
• Pesaing memperkenalkan produk bentuk baru,
kualitas beragam, harga beragam.
• Perubahan selera pelanggan yang cepat
• Zelenovic ’82
• Garret ’86 Flexibity connotes that
• Mandelbaum ’90 manaufacturing should
• develop the ability to handle
Gupta ’92
variability or uncertainty in:
• Upton ‘94
• Product mix
• Output
• Input
• Process sequence
 SO WHAT?
• This translates into fostering the ability to
handle varied, difficult, complex,
unstructured and non standard task.
(Hall ’83; Wheel - Wright ’84; Upton ’94)
 MENCAPAI FLEKSIBILITAS
TINGGI?

Tidak Mudah

It should rather be planned and managed carefully

Companies are becoming increasingly anxious to build

supporting infrastructure* at the plant level that will
help them accomplish flexibility (*people, system)
 SEBAB KEGAGALAN UNTUK
MENCAPAI FLEKSIBILITAS?

The reason ……. is not because they do not

have the right technology but because they
either fail to stress worker training or do not
understand its importance.
 3 CONSTRUCTS
• Manufacturing flexibility
• Work force management practices
• Managerial performance
 MANIFESTASI MANAJEMEN
FLEXIBILITY
• New product flexibility
• Volume flexibility (adjust capacity)
• Product mix flexibility
• Delivery time flexibility
• Modification flexibility (customize product)

One common element:

The ability to handle variability in some form.
 THE WORK FORCE MANAGEMENT
PRACTICES:
It is likely to occur when a manager interact
with:
 Subordinates
 Superior
 Peers
 Outsiders
 UKURAN ?
1. Net-working, team building, supporting,
mentoring, inspiring, rewarding →
relation oriented practices.
2. Participative leadership and delegation
practices.
3. Work oriented practice planning, problem
solving monitoring.
FORECASTING
Chapter 12
Forecasting
Forecasting is a prediction of future events used for planning purposes.
Forecasting methods may be based on mathematical models using historical
data available, qualitative method drawing on managerial experience, or
a combination of both.

Demand Characteristic
Pattern of Demand
The repeated observations of demand for product or service in their order of
occurrence form a pattern known as a time series.

Five basic patterns of most demand time series :

1. Horizontal : the fluctuation of data around a constant mean.
2. Trend : systematic increase or decrease in the mean of the series over time.
3. Seasonal : repeatable pattern of increase or decreases in demand, depen-
ding on the time of day, week, month, or season.
4. Cyclical : less predictable gradual increases or decreases in demand over
longer periods of time (years or decades)
5. Random : unforecastable, variation in demand
Factor Affecting Demand
1. External Factors : beyond management’s control; a booming economy,
changes in government regulation.
Leading indicators : such as rate of business failure, are external factors
with turning point that tupically precede the peaks and troughs of general
business cycle.
Coincident indicators : such as unemployment figures are times series
with turning point that generally match those of the general business cycle.
Lagging indicators : such as retail sales, follow those turning points,
typically by several weeks or moths.

2. Internal Factors : internal decision about product or services design, price

and advertising promotions, packaging design, salesperson quotas or
incentives, and expansion or contraction of geographic market target areas
all contribute to changes in deman volume.
Demand management : describes the process of influencing the timing and
volume of demand or adapting to the undesirable effect of unchangeble
demand pattern.
Designing The Forecasting System
DECIDING WHAT TO FORECAST
Level of Aggregation. Few companies err by more than 5% when forecasting
total demand for all product. Individual item forecasting may be much higher.
By clustering several similar product or services in a process called aggregation,
componies can obtain more acurate forecast.
Unit of Measurement. The most useful forecast for planning and analyzing
operations problem are those based on product or services units, such as
Saturn SL-1s, express packages to deliver, or customers needing maintenance
service or repairs for their car, rather than dollars.

CHOOSING THE TYPE OF FORECASTING TECHNIQUE

Two general types of forecasting techniques : Qualitative and Qualitative Method

Qualitative Methodes includes Judgment Method : translate the opinions of

managers, expert opinions, consumer survey, and sales force estimates
into quantitative estimates.
Quantitative Method includes Casual Methods and Time Series Analysis.
Casual methods use historical data on independent variables, such as
promotional campaigns, economic conditions, and competitor’s action,
to predict demand.
Time series analysis is statistical approach that relies heavily on demand
data to project the future size of demand and recoqnizes trends and
Time horizon for decision requiring forecas :
Short Term : 0 - 3 months in the future
Medium Term : 3 months - 2 years into the future
Long Term : More than 2 years

DEMAN FORECAST APPLICATIONS

Time Horizon
Sort Term Medium Term Long Term
Application (0-3 months) (3 months - 2 years) (more than 2 years)

Forecast quantity Individual Total sales Total sales

products or Group or families
services of products or
services
Decision area Inventory mana- Staff planning Facility location
gement Production palnning Capacity planning
Final assembly Master production Process mana-
scheduling scheduling gement
Master production Purchasing
scheduling Distribution
Forecasting Time series Casual Casual
technique Casual Judgment Judgment
Judgment
Forecast With Computer
Three catagories of software package (Yurkiewicz, 1996) :
- Mannual systems, whereby user chooses the forecasting technique and
spesifies the parameter needed for specific forecasting model.
- Semiautomatic systems, whereby user specifies the forecasting technique but
the software determines the parameters for the model so that the most
accurate forecasts are provided.
- Automatic, whereby the software examines the data and suggest not only
the appropriate technique but also the best parameters for the model.

JUDGMENT METHODS
• Sales Force Estimates
Sales force estimates : forecast compiled from estimates of future demands
made periodically by members of company’s sales force.
The advantages :
- Slaes forces is the group most likely to know products or services customers
will be buying in the future and in what quantitative.
- Sales territories often are divided by district or region, so can be useful for
inventory management, distribution and sales staffing purposes.
- The forecasts of individual sales force members can be combined easily
to get regional or national sales.
The disadvantages :
- Individual biases of the salespeople may taint the forecast.
- Salespeople may not always be abble to detect the difference between what
customer “whant” and what customer “needs”
- If the firm uses individual sales as a performance measure, salespeople may
underestimate their forecasts so that their performance will look good when
the exceed their projections or may work hard only until they reach their
required minimum sales.

• Executive Opinion
Executive Opinion : forecasting method in which the opinions, experience,
and technical knowledge of one or more managers are summarized to arrive
at a single forecast.

• Market Research
Market Research : systematic approach to determine cunsomer interest in
a product or service by creating and testing hypotheses through
data-gathering surveys.
- Designing a questionnaire
- Deciding how to administer the survey (phone polling, mailing or intervew)
- Selecting a representative samle of households to survey
- Analyzing the information using judgment and statiostical tools.
• Delphi Method
Delphi Method : process of gaining consensus from a group of experts while
maintaining their anonymity.
Some sortcomings :
- The process can take a long time.
- Responses may be less meaningfull that if expert were accountable for
their responses.
- There is little evidence that Delphi forecasts achieve high degrees of accuracy.
- Poorly designed questionnaires will result in ambiguous or false conclusion.

Guidelines for Using Judgment Forecasts

Judgment forecasting is clearly needed when no quantitative data are available
to use quantitative forecasting approach.
Guidelines for adjust the result of quantitative forecasts (Sanders and Ritzman, 1992) :
- Adjust quantitative forecast when their track record is poor and the decision
maker has important contextual knowledge.
- Make adjustment to quantitative forecast to compensate for specific event.
 Linear Regression
• In linear regression, one variable, called a dependent variable, is
related to one or more independent variable by a linear equation.
• In the simplest linear regression models, the dependent variable is a
function of only one independent variable, and therefore the theoritical
relationship is a straight line:

Y=a+bX
where
Y = dependent variable
X = independent variable
a = Y-intercept of the line
b = slope of the line
• The objective of linear regression analysis is to find values of a and b
that minimize the sum of the squared deviations of the actual data
points from the graphed line.
• The sample correlation coefficient, r, measures the direction and
strength of the relationship between the independent variable and the
dependent variable.
Linear Regression Line Relative to Actual Data

Y Deviation,
or error

Estimate Regression
of Y from equation:
Dependent variable

regression
equation
Y=a+bX

Actual
value of Y

Value of X used
to estimate Y

X
Independent variable
 Time-Series Methods
• Naive Forecast
• Estimating The Average
– Simple Moving Averages Method
Sum of last n demands D1 + Dt – 1 + Dt – 2 + … + Dt – n + 1
Ft+1 = =
n n
where
Dt = actual demand in period t
n = total number of periods in the average
Ft + 1 = forecast for period t + 1

– Weighted Moving Averages Method

– Exponential Smoothing
Ft+1 = Ft + α ( Dt – Ft )
 Including A Trend
At = α (Demand this period) + (1 – α) (Average + Trend estimate last
period)
= α D + (1 – α) (A + T )
t t–1 t–1

Tt = β (Average this period – Average last period)

+ (1 – β) (Trend estimate last period)
= β (At – At – 1) + (1 – β) Tt – 1
Ft + 1 = At + Tt
where
At = exponentially smoothed average of the series in period t
Tt = exponentially smoothed average of the trend in period t
α = smoothing parameter for the average, with a value between 0 and 1
β = smoothing parameter for the trend, with a value between 0 and 1
Ft + 1 = forecast for period t + 1
 Seasonal Patterns
1. For each year, calculate the average demand per season by dividing
annual demand by the number of seasons per year.
2. For each year, divide the actual demand for a season by the average
demand per season. The result is a seasonal index for each season in
the year, which indicates the level of demand relative to the average
demand.
3. Calculate the average seasonal index for each season, using the
results from step 2. Add the seasonal indices for a season and divide
by the number of years of data.
4. Calculate each season’s forecast for next year. Begin by estimating
the average demand per season for next year. Use the naive method,
moving averages, exponential smoothing, trend-adjusted
exponential smoothing, or linear regression to forecast annual
demand. Devide annual demand by the number of seasons per year.
Then obtain the seasonal forecast by multiplying the seasonal index
by the average demand per season.
 Choosing A Time-Series Method
Forecast Error
Measures of Forecast Error
E t = D t – Ft
where
Et = forecast error for period t
Dt = actual demand for period t
Ft = forecast for period t
The cumulative sum of forecast errors (CFE)
CFE = Σ Et
Ē = CFE / n
MSE = ( Σ Et2 ) / n
δ= (Σ(Et – Ē)2) / (n – 1)
MAD = ( Σ Et ) / n
MAPE = ( [Σ Et / Dt] 100 ) / n
 Choosing A Time-Series Method
Forecast Error
Tracking Signals
Tracking signal = CFE / MAD
MADt = α Et + (1 – α) MADt – 1
 Criteria For Selecting Time-Series
Methods
1. Minimizing bias
2. Minimizing MAD or MSE
3. Meeting managerial expectations of changes in the components of
demand
4. Minimizing the forecast error last period
 Using Multiple Techniques
• Combination Forecasts
• Focus Forecasting