b203a midterm material omar abu-jbara -...

B203a – Midterm Material – Omar Abu-Jbara

Author: Omar Abu-Jbara

Course Code: B203a

Course Title: Business Functions in Context I

Content: Midterm material

[Operation; 1,2,6,10,12,15,17,20]

[Chapter Numbers are based on the old edition books]

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For any inquiry or TMA assistance do not hesitate to contact me.

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Contact Details: E: [email protected]

W: +965-50620600

mailto:[email protected]

Author: Omar Abu-Jbara - E: [email protected] - W: +965-50620600

2

Operation - Chapter 1

Operation Management Definition & its Function

Operations management is the activity of managing the resources that are used in the

production process and delivery of products and services (from shelf to shelf). It is one of the

core functions of any business.

Operation managers are the people who have particular responsibility for managing the

resources which compose the operations function. They are primary responsible to support

the operation function to make sure that they understand operation`s needs and help in

satisfying these needs. They might be called the ‘fleet manager’ in a distribution company,

the ‘administrative manager’ in a hospital, or the ‘store manager’ in a supermarket.

Operations function is the arrangement of resources that are devoted to the production

and delivery of products and services. Every organization has an operations function because

every organization produces some type of products and/or services. The operations function

is central to the organization because it produces the goods and services which are its

reason for existing, but it is not the only function. There are core and support functions;

The core functions that is fundamental to any organization to operate;

A- The marketing function; which is responsible for communicating the organization’s

products and services to its markets in order to generate customer requests.

B- The product/service development function; which is responsible for creating new

and modified products and services in order to generate future customer requests.

C- The operations function; which is responsible for fulfilling customer requests for

service through the production and delivery of products and services.

The support functions than enable the core functions to operate effectively;

A- The accounting and finance function; which provides the information to help

economic decision-making and manages the financial resources of the organization.

B- The human resources function; which recruits and develops the organization’s staff

as well as looking after their welfare.



3

The Input –Transformation – Output Process

All operations can be modelled as input–transformation–output processes. They all have

inputs of transforming resources, which are usually divided into ‘facilities’ and ‘staff’, and

transformed resources, which are some mixture of materials, information and customers.

Few operations produce only products or only services. Most of operations produce some

mixture of tangible goods or products and less tangible services.

Inputs to the process; There are two set of inputs to any operation’s processes;

Transformed resources; that are treated or converted in the process (part of the output);

A- Materials; operations which process materials could do so to transform or shape

their physical properties, for example; manufacturing operations, warehouses.

B- Information; operations which process information could do so to transform their

informational properties; for example; research companies, financial analysts.

C- Customers; operations which process customers could do so to change their

physical properties (similar to materials): for example, hairdressers or dentists.

However, there are dominants in the operation. Ex; a bank is concerned with processing

inputs of material in producing printed statements for its customers, concerned with

processing inputs of customers in advising them regarding their financial position, concerned

with processing inputs of information in analyzing the customer financial positions.

Transforming resources; that act upon the transformed resources;

A- Facilities; the buildings, equipment, plant and process technology of the operation.

B- Staff; the people who operate, maintain, plan and manage the operation.

Outputs from the process; Products and services are different in the respective of their

tangibility, storability and life extent. Some operations produce just ‘pure product’ and other

‘pure services’ but most operations produce mixture of two in term of ‘facilitating services’;

Services that are produced by operation to support its products, and the term of

‘facilitating products’; that are produced by an operation to support its services.



4

Characteristics of Operation processes

Although all operations processes are similar in that they all transform inputs, they do differ

in a number of ways, known as the four Vs, are particularly important:

A- The volume dimension:

- The level or rate of output from a process. - A key characteristic are repetition and systematization. - Ex :( McDonald’s Burgers vs. small cafeteria menu)

B- The variety dimension:

- The range of different products or services produced by a process. - A key characteristic are flexibility and standardization. - Ex :( A taxi service vs. bus service)

C- The variation dimension

- The degree to which the rate of level of output varies from process overtime. - A key characteristic is patterns of demand. - Ex :( lunchtime vs. other times in a restaurant)

D- The visibility dimension

- The degree to which operation is exposed to its customers (customer-contact). - A key characteristic is staff skills of customer contact. - Ex :( Regular shop vs. Internet shop)

- Mixed high and low visibility processes; in an airport some activities are totally ‘visible’ to its customers such as information desks answering people’s queries they called Front-office staff. While, other parts of the airport have little of customer ‘visibility’, such as the baggage handlers they called Back-office staff.

The implications of the "4Vs" of operations: All four dimensions have implications for the cost of creating the products or services. Ex; (High volume, low Variety, low variation and low customer-contact all help to keep down processing cost). While (Low volume, high variety, high variation and high customer-contact carry additional costs to the operation).



5


Top management performance objectives for operations

Top management has the most immediate impact on its performance because they

represent the interests of the owners. Effective operations management can;

1- It can reduce the cost of producing products and services and bring efficient. 2- It can increase revenue by achieve the customer satisfaction. 3- It can reduce the risk of operational failure by having a well-designed operation 4- It can provide the basis for future innovation. 5- It can reduce the amount of investment needed by increasing the effective capacity

of the operation and by being innovative.

Operation performance objectives

Day-to-day operations require a set of objectives that relates specifically to its basic task of

satisfying customer needs and contribute to competitiveness. There are five objectives;



6

A- Quality (Being Right);

- By ‘doing things right’, operations influence the goods and services quality.

- Externally, quality is an important aspect of customer satisfaction or dissatisfaction.

- Internally, quality operations both reduce costs by having fewer mistakes and

increase dependability by leading to stable and efficient processes.

- Check Figure 2.5 Page 41.

B- Speed (Being Fast);

- By ‘doing things fast’, operations influence the goods and services delivery speed.

- Externally, speed is an important aspect of customer service.

- Internally, speed both reduces inventories by decreasing internal throughput time

and reduces risks by delaying the commitment of resources.


C- Dependability (Being On Time);

- By' doing things in time' for customers to receive their goods and services exactly

when they are needed, or at least when they were promised.

- Externally, dependability is an important aspect of customer service.

- Internally, dependability within operations gives stability when each part of the

operations concentrates on improving its own area of responsibility. Also

dependability saves time and money unlikely, if there were inefficient use of time

that will lead to extra costs.


D- Flexibility (Being able to Change);

- By ' changing what they do', operations influence the goods and services flexibility.

- Externally, flexibility is an important in different four aspects;

Products-service flexibility; the operation ability to produce new/modified outputs.

Mix flexibility; the operation ability to produce a wide range of outputs

Volume flexibility; the operation ability to change the level of its outputs.

Delivery flexibility; the operation ability to change the timing of the delivery. - Internally, flexibility speeds up response, saves time and maintain dependability.


E- Cost (Being Productive);

- By ‘doing things cheaply’, operations influence the goods and services cost.

- Externally, cost is an important aspect of reducing prices & increasing profitability.

- Internally, low costs within operations are a generally attractive objective to others.


“We will take the example of; hospital, bus company, supermarket and automobile plant.”



7


The supply network perspective

A supply network perspective: It means sitting an operation in the perspective of all the other operations which it interacts mainly are its suppliers and its customers. In other word, it's the network of supplier and customer operations that have relationships with an operation. While the materials, information, ideas and people are all flow through the network of customer-supplier relationships formed by all these operations.

Supply side: The chains of suppliers, suppliers’ suppliers, etc. that provide parts, information or services to an operation "Downstream".

Demand side: The chains of customers, customers’ customers, etc. that receive the products and services produced by an operation "Upstream".

First-tier: The description applied to suppliers and customers who are in immediate relationships with an operation with no intermediary operations.

Second-tier: The description applied to suppliers and customers who are separated from the operation by first-tier suppliers and customers.

Immediate supply network: the elements that have direct contact with an operation.

Total supply network: The operation that form the network of the suppliers & customers.

Why we consider the whole supply network? - Helps in understanding how to compete effectively within the network throughout looking beyond the immediate contacts to understand why customers and suppliers act as they do.

- Helps in identifying particular significant links within the network parts throughout understanding the downstream end "service" and upstream parts "info" of the network.

- Identify long-term strategic changes which affect the operation throughout assisting or replacing the weak links to enhance the organization competitive position.



8

Configuring the supply network

Changing the shape of the supply network; may involve reducing the number of the operation suppliers or even bypassing customers and suppliers to make direct contact with customers' customers or suppliers' suppliers "cutting out the middlemen" this called disintermediation ex: amazon. Another trend about the supply network sees any business surrounded by four players; suppliers, customers, competitors and complementors that can be both friends and enemies at different time this called co-opetition ex: Mac & Pepsi. The supply-networks view prompts three particularly important design decisions;

1- Outsourcing; how should the network be configured? 2- Operations location; where should each part of the network be located? 3- Long-term capacity; what's the physical capacity should each part of network have?

1- In-house or outsource? Do or Buy? "The vertical integration decision

No business does everything that is required to produce its products and service alone. For example: banks do their own credit checking through specialist credit checking agencies. Outsourcing decisions involve shaping the fundamental nature of any business, while do or buy decisions involve when individual components or activities are being considered, and vertical integration involve when it owns the whole operations, which is defined in terms of;

A- The direction of vertical integration refers to the organization will to own operations on its supply side or demand side (up-backwards or down-forwards).

B- The extent of vertical integration relates to whether an organization wants to own a wide span of the stage in the supply network.

C- The balance among stages refers to whether operations can trade with only their vertically integrated partners or with any other organizations.

Organizations in different circumstances with different objectives take different decisions. However there are some factors that should be considered in the decision making process;

- If an activity has long-term strategic importance to a company (In house), - If an activity has a specialized skills, capabilities or knowledge (In house), - If the operations performance is too superior to any potential supplier (In house), - If the poor operations performance would exceed any potential supplier (In house).

Outsourcing and Offshoring are two supply network strategies that are often confused. Outsourcing means deciding to buy-in products or services rather than perform the activities in-house. While Off-shoring means obtaining products and services from operations that are based outside the country (lower cost region) to reduce the overall operation cost.



9

2- The location of capacity

Location decisions will usually have an effect on an operation`s costs as well as its ability to serve its customers and its revenue. Location decisions once it taken are difficult to undo.

Reasons for location decisions

A- Changes in demand for their goods and services; - A change in location may be promoted by customer demand shifting. - Ex: a manufacturing company might choose to expand its existing site or own a larger

site, or even keep its existing location and find an additional location for operations.

B- Change in supply of their inputs. - Changes in the cost or the availability of supply of inputs to the operation. - Ex: a manufacturing company might choose to relocate its operations to a part of the

world where labour costs are low than its original location that has become expensive.

The balanced objectives of the location decision

A- The spatially variable costs of the operation. (Geographical location) B- The service that the operation is able to provide to its customers. C- The revenue potential of the operation.

The first two objective are related for the not profit organization while the last two objectives are related for profit organization. However, in making decisions about where to locate an operation, operation managers are concerned with minimizing spatially variable costs, maximizing revenue and customer services.

The supply/demand-side factors of the location decision

Location techniques

There are two techniques that help the managers in the choice of alternative locations, (the center-of-gravity method and the weighted-score method). The weighted-score method is a technique by operation managers for comparing the attractiveness of alternative locations that allocates a score to the factors that are significant in the decision, and weights each score by the significance of the factor. The procedure involves;

A- Identify the criteria which will be used to evaluate the various locations. B- Establishing the relative importance weighting of each criterion. C- Rating each location according to each criterion.



10


Planning & Controlling Definition

Planning and control is the reconciliation between the operation recourse to supply

products and services, and the demands requirement of its customers. In other

word, it's the set of day-to-day activities that run the operation on an ongoing basis.

Planning is a formalization of what is intended to happen in the future" objectives ",

but it does not guarantee that an event will actually happen, although plans are

based on expectations.

Controlling is the process of coping with the changes, redrawing plans in the short

term. It also means that an intervention will need to be made in the operation to

bring it back ‘on track’

Long- medium and short-term planning and control

In the long-term, the emphasis is on planning rather than control where operation managers use aggregated demand forecasts. They also determine the aggregated resources and set the objectives in financial terms.

In the medium-term, the emphasis is on detailed planning

and control where operation managers use a partially

disaggregated demand forecasts. They also determine the

contingencies that might happen, and set the objectives in

financial and operational terms.

In the short-term, the emphasis is on control rather than planning where operation managers use disaggregated demand forecasts. They also make interventions to resources to correct the plan deviation, and set the objectives in operational terms.

The volume-variety effect on planning and control Operations which produce a high variety of products or services in relatively low volume

such as an architect's practice will clearly have customers that require a different set of

factors and use processes which have a different set of needs from those operations which

produce a low variety of products or services in high volume such as an electricity utility.



11

Supply & Demand affect planning and controlling

Planning and control is the process of reconciling demand with supply, hence the nature of the decisions taken to plan and control an operation will depend on the nature of demand and the nature of supply in the operation. There are differences in demand and supply which can affect the way in which operations managers plan and control their activities.

Uncertainty in supply and demand

A combination of uncertainty in the operations ability to supply, and in the demand for its product and service, is particularly difficult to plan and control. The degree of uncertainty in demand affects the balance between planning and control. The greater the uncertainty, the more difficult it is to plan and greater emphasis must be placed on control (fast-food cafe).

Dependent and independent demand

Dependent demand, when the demand is relatively predictable because it is dependent

upon some factor which is known, ex: number of car manufactured in a car plant will

determine the demand level of tires. Therefore; the process of the demand forecasting is

relatively straightforward involving materials requirements planning.

Independent demand, when the demand is relatively unknown because it is dependent

upon variable factors, ex: customer numbers for a tire replacement service and their needs

are unpredictable. Therefore; the process of the demand forecasting is risky "being out of

stock" involving inventory planning and control.

Responding to demand

Dependent and independent demand concepts are closely related to how the operation chooses to respond to demand. There are three approaches for responding to demand;

A- Resource to order; in case of dependent demand, an operation will start the process

of producing products only when they are requested to, ex: specialist house builder.

B- Make to order; in case of confident demand, an operation produces partially its

standard products in advance to satisfy its specific customers, ex: house builder.

C- Make to stock; in case of high demand, an operation will produce the goods ahead of

any order because it's difficult to create the products on a one-off basis, ex: cinemas.



12

Planning and controlling activities

Planning and control require the reconciliation of supply and demand in the terms of

volume, timing and quality. There are mainly four activates for the planning and controlling;

scheduling, loading, sequencing and monitoring & control.

Monitoring and controlling the operation

Having created a plan for the operation through

loading, sequencing and scheduling, each part of the

operation has to be monitored to ensure that planned

activities are indeed happening. Any deviation from

the plans can then be corrected through some kind of

intervention in the operation, which itself will

probably involve some re-planning.

Push and pull control

One element of control is periodic intervention into the activities of the operation. An

important decision is how this intervention takes place. The key difference within the

operational intervention is those which push work through the operation processes when it

is done and those which pull work only when it is required.

In a push system of control, activities are scheduled by means of a central system and

completed in line with central instructions. By contrast, in a pull system of control, the pace

and specification of what is done are set by the ‘customer’ workstation, which ‘pulls’ work

from the previous 'supplier' workstation. Hence, customer is the only trigger for movement.

However, the ease with which control can be maintained varies between operations.

Understanding the differing principles between push & pull is important because they affect

the inventory system. Push favored by MRP operations while pull favored by JIT operations.



13


Inventory Definition

Inventory or stock; is defined as the stored accumulation of “transformed resources or transforming resources” in a transformation system. However, almost all the operations keep transformed inventory whether it was material inventories or information inventories or even customer’s inventories which normally called queues.

Inventory Importance

Inventory occurs in operations because the timing of supply and demand does not always

match. If the supply of any item occurred exactly when it was demanded, the item would

never be stored. In other word, inventory is created to compensate for the differences in

timing between supply and demand. There are five main reasons for keeping inventory:

A- To cope with random or unexpected interruptions in supply or demand (buffer). B- To cope with an operation's inability to make all products at the same time (cycle). C- To allow different stages of processing to operate at different speeds (de-coupling). D- To cope with planned fluctuations in supply or demand (anticipation). E- To cope with transportation delays in the supply network (pipeline).

Disadvantages of holding Inventory

Inventory plays an important role in the operations performance. However, there are a number of negative aspects of inventory;

A- Inventory ties up money which could be used more productively, B- Inventory incurs storage costs, C- Inventory may become obsolete as alternatives become available, D- Inventory can be damaged, or deteriorate, E- Inventory could be lost, or be expensive to recover, F- Inventory might be hazardous to store requiring special facilities for safe handling, G- Inventory uses space that could be used to add value, H- Inventory involves administrative and insurance costs.



14

The volume decision – how much to order

In making a decision on how much to purchase, operations managers must try to identify the costs which will be affected by their decision. Several types of costs are directly associated with order size;

A- Ordering cost; include the clerical tasks of preparing the order. B- Price discount cost; offered on large orders but extra costs offered for small orders. C- Stock-out cost; failing to supply our internally and externally customers. D- Working capital cost; lag between paying out suppliers & receiving from customers. E- Storage cost; include renting, heating, lighting and insuring the warehouse. F- Obsolescence cost; risk that items might become obsolete or deteriorate with age. G- Operating inefficiency cost; high inventory levels prevent seeing operation problems.

There are two points to be made about this list of costs. The first three costs will decrease as order size is increased. While, the other costs generally increase as order size is increased.

The economic order quantity (EOQ) formula: The most common approach to deciding how much of an item to order when stock needs replenishing. This approach attempts to find the best balance between the advantages and disadvantages of holding stock. Holding costs (CH) include; working capital, storage and obsolescence risk costs, while ordering costs (Co) include; cost of placing the order and price discount costs.

Solve the below equations when the demand is 1000 $, CH is 10 $ and Co is 200 $;

A- EOQ = √𝟐 𝐂𝐨 𝐃

𝐂𝐇

2

= √𝟐 𝐱 𝟐𝟎𝟎 𝐱 𝟏𝟎𝟎𝟎

𝟏𝟎

2

= 200

B- Number of orders / year = 𝑻𝒐𝒕𝒂𝒍 𝑼𝒔𝒂𝒈𝒆 (𝑫) / 𝑬𝑶𝑸

1000/200 = 5 𝑡𝑖𝑚𝑒𝑠

C- Annual ordering cost = 𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒐𝒓𝒅𝒆𝒓𝒔 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓 ∗ 𝑶𝒓𝒅𝒆𝒓𝒊𝒏𝒈 𝒄𝒐𝒔𝒕 𝒑𝒆𝒓 𝒐𝒓𝒅𝒆𝒓

5 ∗ 200 = 1000 $

D- Annual holding cost = 𝑴𝒆𝒅𝒊𝒂𝒏 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 (𝑬𝑶𝑸/𝟐) ∗ 𝑯𝒐𝒍𝒅𝒊𝒏𝒈 𝒄𝒐𝒔𝒕 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕

(200/2) ∗ 10 = 1000 $

E- Total annual cost = 𝐂𝐇 𝐐

𝟐+

𝐂𝐨 𝐃

𝐐=

𝟏𝟎 𝐱 𝟐𝟎𝟎

𝟐+

𝟐𝟎𝟎 𝐱 𝟏𝟎𝟎𝟎

𝟐𝟎𝟎= 1000 + 1000 = 2000 $



15

Inventory analysis and control systems

In order to control complex operation systems, inventory managers have to do two things;

first, they have to discriminate between different stocked items to apply a degree of control

to each item according to its importance. Second they need to invest in an information-

processing system which copes with their particular set of inventory control circumstances.

Inventory priorities – the ABC system: Is an approach that allows inventory managers to concentrate their efforts on controlling the more significant items of stock. It involves ranking the stock items according to their usage value (usage rate x individual value). This phenomenon is known as “Pareto law” or as “80/20 rule”. There are three different ranks;

A- Class A items; those 20% or high usage value items (80% of total usage value). B- Class B items; those 30% or medium usage value items (10% of total usage value). C- Class C items; those 50% or low usage value items (10% of total usage value).

------------------------------------------------------------------------------------------------------------------------ A

------------------------------------------------------------------------------------------------------------------------ B

------------------------------------------------------------------------------------------------------------------------ C



16


Lean Synchronization

Different terms are used to describe what we call “lean synchronization”; The concept of

Synchronization means that the flow of products and services always delivers the perfect

quality, in the exact quantities, exactly when needed and exactly where required, Where the

concept of lean stresses on the elimination of waste, while the concept of JIT emphasize the

idea of producing items only when they are needed. Therefore; we use the term

“Lean Synchronization” because it’s the best description for the impact of these ideas on

flow and delivery, it aims to meet demand immediately with perfect quality and no waste.

Lean Synchronization & MRP

A- Lean Synchronization “Pull system”:

- Excellent at controlling, weak at planning.

- Derived from end customer demand.

- Minimized lead times and encourage resources flexibility.

- Works best when the demand is independent (tyre-fitting service).

- Meet demand immediately through simple control system.

- Decision making is largely decentralized; don’t rely on computer-based system.

B- Material Requirement Planning “Push system”:

- Excellent at planning, weak at controlling.

- Derived from the master production.

- Fixed lead times with fixed operation environmental system.

- Works best when the demand is dependent (Car plant).

- Meet projected demand through complex control system.

- Decision making is largely centralized; relies on computer-based system.



17


Quality Importance

Higher quality has a beneficial effect on both revenues and costs. Revenue can be increased

by better sales and enhanced prices in the market, while costs can be brought down by

improved efficiencies, productivity and the use of capital. There are two points of view;

The operation's view of quality;

Quality is defined as 'consistent conformance to customers' expectations'. The use of the

word ‘conformance’ implies that there is a need to meet a clear specification, While the use

of the word ‘Consistent’ implies that conformance to such specification isn't an ad hoc event,

and the use of ‘customers’ expectations’ recognizes that the product or service must take

the views of customers into account, which may be influenced by price. We can say that; the

operation`s view of quality is concerned with trying to meet customer`s expectations.

The customers' view of quality;

Customers' expectations shaped by past experiences, individual knowledge and history

which is perceived in different ways. Hence, quality needs to be understood from a

customer’s point of view since sometimes they might be unable to judge the technical

specification of the service or product. We can say that; the customers’ view of quality is

concerned with what he or she perceives the product or service to be.

Reconciling the operation's and the customer's views of quality;

To create a unified view, quality can be defined as the degree of fit between customers’ expectations and customer perception of the product or service. Using this idea allows us to see the customers’ view of quality as the result of the customers comparing their expectations of the product or service with their perception of how it performs. Hence, the customer’s view of quality is shaped by the gap between perception and expectation. There are number of factors that influence the gap between expectations and perceptions. They might be controlled and some of them not controllable. They are categorized into; the operation`s domain that influenced by the management responsibility for designing the product or service and providing the required quality specification, while the customer`s domain is influenced by previous experience, market image and word-of-mouth information.



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Diagnosing Quality Problems

Quality is best modeled as the gap between customers' expectations and their perceptions

about certain product or service. Modeling quality based on the perception-expectation gap

allows the development of a diagnostic tool. Such gap explained into four types;

Gap 1: The customer’s specification – organization specification gap;

Perceived quality could be poor because there may be a mismatch between the customers

expected specification and the organization’s internal quality specification. For example, a

car may be designed to need servicing every 10,000 kilometers but the customer may expect

15,000-kilometre service intervals.

Gap 2: The management concept – organization specification gap;

Perceived quality could be poor because there is a mismatch between the product or service

concept by the management and the way the organization has specified quality internally.

For example, the concept of a car might have been for an inexpensive, energy-efficient car,

but the need for a climate control system made it costly and less energy-efficient.

Gap 3: The organization quality-specification – actual-quality gap;

Perceived quality could be poor because there is a mismatch between internal quality

specification and actual delivered quality ‘conformance to specification’. For example, the

internal quality specification for a car may be that the gap between its doors and body must

not exceed 7 mm. However, because of inadequate equipment, the gap in reality is 9 mm.

Gap 4: The actual-quality – communicated-image gap;

Perceived quality could be poor because there is a gap between the actual delivered quality

to the customer and the organization’s external communications or market image. This

happen because the marketing function has set unachievable expectations or operations are

not capable to meet the customers' expected level of quality. For example, an advertising

campaign for an airline might show a cabin attendant offering to replace a customer’s shirt

on which food or drink has been spilt, whereas such a service may not in fact be available.



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Conformance to specification

"Conformance to specification" means producing product or providing service to its design

specification. Organizations normally examine the concept by achieving six sequential steps;

Step 1: Define the quality characteristics of the product or service;

Much of the product or service qualities have been specified into its design. But not all the

design details are useful in controlling quality. Many products & services are influenced by

two or more elements within the total package. Therefore it is necessary to understand the

individual characteristics of each element in the package. Identifying where each

characteristic of quality lies is useful because it is the first step towards understanding which

part of the total service should be given responsibility for maintaining each aspect of quality.

Step 2: Decide how to measure each quality characteristic;

These characteristics must be defined in a way that enables them to be measured and then

controlled. This involves taking a very general quality characteristic and breaking it down

into its fundamental elements. The measures used by operations to describe quality

characteristics are of two types: Variable measures are those that can be measured on a

continuously variable scale (length, weight or time). Attributes measures are those which are

assessed by judgments (right or wrong, works or does not work).

Characteristic S1: Car characteristic S2: Car measures

Variable Attributes

Functionality Speed, Road-holding Acceleration test Is the ride satisfactory?

Appearance Shape, Door gaps Blemishes visibility Is the color suitable?

Reliability Failure mean time Fault average time Is the ride reliable?

Durability Useful life Life of the car Is the car life predicated?

Recovery Ease of repair Fault repairing time Is the service acceptable?

Contact Sales staff skills Level of help provided Is the customer well served?

Step 3: Set quality standards for each quality characteristic;

After identifying the measurable quality characteristics the operation need quality standards

otherwise they won’t be able to measure the performance. The quality standard is that level

which defines the boundary between acceptable and unacceptable. Such standards are

constrained by operational factors such as; the factory technology and product cost limit.

Step 4: Control quality against those standards;

After setting up appropriate standards the operation need to check that the products or

services conform to those standards. This step involves three decisions:

A- Where in the operation should they check that it is conforming to standards?

B- Should they check every product or service or take a sample?

C- How should the checks performed? “Statistical Process Control or acceptance sampling”

Step 5-6: Find and correct causes of poor quality and Continue to make improvements;

The most important & difficult steps since they cover the overall operational improvement

area. It involves total quality management (TQM) in shaping how quality is improving.



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Total Quality Management (TQM)

TQM is an effective system for integrating the quality development, quality maintenance

and quality improvement efforts of the organization to meet customer satisfaction. It's an

approach that puts quality at the heart of everything done by the operation.

TQM consider all costs of quality;

The costs of controlling quality may not be small; therefore it is necessary to examine all the

costs and benefits associated with quality. These costs of quality are usually categorized as;

A- Prevention costs, incurred in trying to prevent failures and errors from occurring;

- Identifying potential problems before poor quality occurs.

- Improving the design of products and services to reduce quality problems.

- Training and development of personnel in the best way to perform their jobs.

- Process control through Statistical process control (SPC).

B- Appraisal costs, associated with controlling quality at the production processes;

- Setting up the statistical acceptance sampling plans.

- Obtaining processing inspection and test data.

- Investigating quality problems and providing quality reports.

- Conducting customer surveys and quality audits.

C- Internal failure costs, associated with errors dealt with inside the operation;

- The cost of scrapped parts and material.

- Reworked parts and materials.

- The lost production time as a result of coping with errors.

- Lack of concentration due to wasted time on troubleshooting.

D- External failure costs, associated with errors going out the operation to customers;

- Loss of customer goodwill affecting future business.

- Payments to avoid litigation.

- Guarantee and warranty costs.

- Providing excessive capability.



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Performance Measurement

Performance measurement is the process of quantifying action. Performance is defined as

the degree to which an operation fulfills the five performance objectives at any point in

time, in order to satisfy its customers. The five performance objectives can be regarded as

the dimensions of overall performance that satisfy customers.

Performance measures factors; the performance objectives can be broken down into more

detailed measures such as; level of customer complaints, lateness complaints, order lead

time, product range or machine efficiency. Also they can be aggregated into composite

measures such as; customer satisfaction, operations agility or resilience. These composite

measures may be further aggregated to a functional strategic measures such as; market

objectives, financial objectives, or operations objectives to generate the broad strategic

measures such as; overall strategic objectives. More aggregated performance measures

have greater strategic relevance as they help to draw a picture of the overall performance.

While, more detailed performance measures have greater diagnostic power as they provide

a descriptive picture of performance.

Performance measures Importance; Organizations need to achieve some balance between

having a few straightforward key measures (KPI) that reflect strategic objectives, and having

detailed measures that flesh out each key performance indicator. Hence if organizational

strategy is unclear, it will be difficult to have a narrow range of key performance indicators.

Benchmarking

Benchmarking, is the process of learning from others "stimulating creativity ". It involves comparing one’s own performance against other operations. Its concept based on the idea; the problems & developments of managing processes are supposed to be shared elsewhere.

Types of benchmarking, internal; is a comparison between operations within the same organization. External; is a comparison between operations within different organization. Non-competitive is a comparison between competitors in different markets. Competitive is a comparison between competitors in same markets. Performance is a comparison between the levels of achieved performance in different operations. Practice is a comparison between an organization’s operations practices and those adopted by another operation.

Benchmarking as in improvement tool, some businesses failed to derive maximum benefit

from it due to misunderstanding about its philosophy; It’s continues process of comparison

not one-off project. It provides ideas that lead to solutions not direct solutions, it's a process

of learning & adapting in a logical manner, and it means devoting resources to the activity.


Prepared By Tutor: Omar Abu-Jbara

For Contact: [email protected]

+965-50620600

EOQ & ABC Examples

Q.A local distributor for a national tire company expects to sell approximately 9,600 tires of

a certain size next year. Annual Carrying cost is 20% of the Cost of one tire which is $ 80,

and ordering cost is $75.

Calculate the following:

1. EOQ in units

2. Number of orders per year

3. Annual ordering cost

4. Annual Holding cost

5. Total Annual cost

Busy Bee is a toy store that sells different kind of toys. The demand for a specific toy X is

estimated to be 225 units per year. The manager of the toy store order 50 units of the toy X

every time he makes a new order. The cost of placing an order is estimated to be $10 per

order. The annual holding cost for toy X is estimated to be $5 per unit.

1- Calculate the annual ordering costs, holding costs and total costs based on:

a) The manager’s order size.

b) EOQ

2- Did the store manager make a good estimation on the order size?

3- How much money would the store manager save if he orders the EOQ instead

of his estimated order size?

4- Explain two types of costs from which ordering costs are derived.

The operations manager of ESLA Company is trying to discriminate between different

stocked products to apply the appropriate degree of control for each product according to

its importance. To perform an ABC analysis, the following inventory data was provided:

Products Value per unit Average monthly usage

P10 40 20

P20 20 20

P30 120 25

P40 125 40

P50 10 20

A. Calculate the usage value for each product, and the cumulative usage value

percentages.

B. Classify the different products into ABC categories and explain.

b203a midterm material omar abu-jbara -...

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