Production and Operations management Lecture notes

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Production and Operations Management –MGT613 VU Lesson 01 INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT POMA ¾ Previously called Production Management ¾ Then Production and Operations Management ¾ Often called Operations Management ¾ Should not be confused with Operations Research or Production Management which are the domain of Mechanical and Industrial Engineering. THE COURSE CONTENT Tentative Course Content Units of Learning wise ¾ Unit I ( Introduction and Productivity, Strategy and Competitiveness) ¾ Unit II ( Forecasting) ¾ Unit III ( Design of Production Systems) ¾ Unit III ( Quality) ¾ Unit V ( Operating and Controlling the System) Tentative Course Content Lecture wise ¾ Unit I ( 5 Lectures) ¾ Unit II (3 Lectures) ¾ Unit III ( 12 Lectures) ¾ Unit III ( 10 Lectures) ¾ Unit V ( 15 Lectures) History of Management ¾ Frederick Taylor and Gilbreths (Lillian and Frank Gilbreth) are pioneers of transforming management to scientific domain. ¾ Borrows a lot of information from Engineering and Management to give an overall bigger picture of operating and managing any organization. Difference between Operations Management and Research ¾ OR relies on mathematical modeling and OM relies on practical scenarios/industrial cases. ¾ OR domain and tool of Engineers while OM is considered to be one of the critical tools of Managers. ¾ OR considered more powerful to improve the whole system where as OM can be applied to a part of the system. ¾ OR relies on mathematical modeling while OM relies on practical scenarios/industrial cases. Why Study OPERATIONS MANAGEMENT ¾ Operations Management form core of any organization’s senior leadership. ¾ What are organizations ¾ An organization is a business entity that can work for profit or non profit purposes to generate a value added product or service for its customers. ¾ Whether profit or non profit, the role of an OPERATIONS MANAGER is to sustain, protect, and project the company’s operations side. ¾ Why Operations Manager ¾ Every organization must manage processes and operations by which processes are performed. © Copyright Virtual University of Pakistan 1 Production and Operations Management –MGT613 VU ¾ An operations Manager controls the processes by which value is added from conversion of inputs to outputs. ¾ Why Operations Manager ¾ Inputs include materials, inventory, services, land, and energy, human and capital resources. Bridge between Management and Engineering ¾ Two Islands named Engineering and Management ¾ Operations management uses foundations of both Engineering and Management. ¾ Bridge Basics , Extension of road from both ends till they meet at the centre and fuse to give strength and allow the foundations to give added strength to the bridge ¾ Bridge between Management and Engineering. The primary responsibility of an Operations Manager working at any level, for production or service based organization, is to help and facilitate the building of walls. It’s a demanding job but at the time takes the same amount of time required by people who are creating hurdles and end up building walls in stead of bridges. ¾ Also, it is important at this point in time to understand that the Strength of the Chain is equal to the strength of the weakest Link, so if your analysis, as an operations manager consists of both Engineering and Management Links. Any weakness of analysis in Engineering or Management Link would lead to an overall weak analysis. A balanced approach would be to make best use of the strength and overcome the weaknesses. As a rule of thumb, problem solving and decision making through Production and Operations Management would entail that both Engineering and Management aspects should be utilized to aim for the powerful systems ( over all big picture) approach. © Copyright Virtual University of Pakistan 2 Production and Operations Management –MGT613 VU Lesson 02 INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT ST RECAP OF 1 Lecture ¾ Course Content, Midterm and Final Exam ¾ Organization Definition ¾ Finance, Marketing and Operations ¾ Productive systems, Production and Service Systems ¾ Operations Management (The management of systems or processes that create goods and/or provide services) ¾ Operation Function ( Consists of all activities directly related to producing goods or providing services) Manufacturing and Service Definitions ¾ Manufacturing is the transformation of raw materials into finished goods for sale, or intermediate processes involving the production or finishing of semi-manufactures. ¾ It is a large branch of industry and of secondary production. Some industries, like semiconductor and steel manufacturer’s use the term fabrication. ¾ Service is defined as either as Services are deeds, processes, and performances. OR A service is a time-perishable, intangible experience performed for a customer acting in the role of a co-producer Definition of Service Firms Service enterprises are organizations that facilitate the production and distribution of goods, support other firms in meeting their goals, and add value to our personal lives. Role of Services in an Economy Production and Services Growth in Pakistan Can be attributed to the following sectors ¾ Private ¾ Public ¾ Public Private ¾ Government Key Areas of Responsibility for an Operations Manager Operations Managers job responsibility includes but is not limited to: ¾ Forecasting ¾ Capacity planning © Copyright Virtual University of Pakistan 3 Production and Operations Management –MGT613 VU ¾ Scheduling ¾ Inventory Management ¾ Quality Assurance and Control ¾ Motivating employees ¾ Deciding where to locate facilities Key Decision Areas for Operations Managers 5W2H Approach ¾ What : What resources/what amounts ¾ Why: The work is needed to be done ¾ When: Needed/ scheduled/ordered ¾ Where: Work to be done ¾ How much: Quantity to be produced or served, ¾ How: Designed/capacity planning ¾ Who: To do the work Decision Making Operations Manager spends most of their routine hours in making decisions under certainty or uncertainty. The various tools available to an Operations Manager include 1. Models 2. Quantitative approaches 3. Analysis of trade-offs 4. Systems approach Applications of Models in Operations Management Models Are Beneficial and effective to an Operations Manager primarily because of the following reasons ¾ Easy to use, less expensive ¾ Require users to organize ¾ Systematic approach to problem solving ¾ Increase understanding of the problem ¾ Enable “what if” questions ¾ Specific objectives ¾ Consistent tool ¾ Power of mathematics ¾ Standardized format Historical Development of OM ¾ JIT and TQC ¾ Manufacturing Strategy Paradigm ¾ Service Quality and Productivity ¾ Total Quality Management and Quality Certification ¾ Historical Development of OM (cont’d) ¾ Business Process Reengineering ¾ Supply Chain Management ¾ Electronic Commerce © Copyright Virtual University of Pakistan 4 Production and Operations Management –MGT613 VU Current Trends in Business Trends in Business in general and Operations Management which have shaped the industry and the technological support to the industry include the following:- 1. The Internet, e-commerce, e-business 2. Management technology 3. Globalization 4. Management of supply chains 5. Agility Production and Operations Management as Nucleus in the Organizations Operations occupy the central figure in any service or manufacturing organization. A small decision as it may seem can serious effect the workings and performance output in other units. Industrial Engineering Maintenance Distribution Purchasing Public Operations Relations Legal Personnel Accounting MIS Current Issues in OM The recent wave of telecom sector infrastructure consolidation and deregulation has led to a lot of foreign investors aggressively seeking new Pakistani partners. With the aid of operation management studies we can foresee the following current issues in Pakistan . These issues have already been addressed in Pakistan as well as in other countries. 1. Effectively consolidating the operations resulting from mergers 2. Developing flexible supply chains to enable mass customization of products and services 3. Managing global supplier, production and distribution networks 4. Increased “commoditization” of suppliers 5. Current Issues in OM (cont’d) 6. Achieving the “Service Factory” 7. Enhancing value added services 8. Making efficient use of Internet technology 9. Achieving good service from service firms What is a Production and Productive System? A productive system is defined as a user of resources to transform inputs into some desired outputs (products as well as services) where as production system refers specifically to only desired output in the form of products or manufactured goods. © Copyright Virtual University of Pakistan 5 Production and Operations Management –MGT613 VU It is important to understand that productive system reflects both production as well as services systems. We also need to understand the important transformations through which a raw material is converted a value added end product or service. ¾ Physicalmanufacturing ¾ Locationtransportation ¾ Exchangeretailing ¾ Storagewarehousing ¾ Physiologicalhealth care ¾ Informationaltelecommunications Our discussion throughout the semester would focus on what is a Service and what is a Good? In our course of discussion, we will collect numerous examples to better understand that Workers working for creation of a product, manufacturing units are simultaneously working to create a service? So the statement that Services never include goods and goods never include services can never be true. Production of Goods vs. Delivery of Services • Production of goods – tangible output • Delivery of services – an action and reaction between the provider /deliverer of services and the demander of services, bank teller, hair stylist. • Service job categories – Government – Wholesale/retail – Financial services – Healthcare – Personal services – Business services – Education Percent Service Employment for Selected Nations Percent Service Employment for Selected Nations (Source not Authenticated) Country 1980 1987 1993 2000 United States 67.1 71.0 74.3 74.2 Canada 67.2 70.8 74.8 74.1 Pakistan 13.3 16.0 18.0 23.9 Japan 54.5 58.8 59.9 72.7 France 56.9 63.6 66.4 70.8 Italy 48.7 57.7 60.2 62.8 Brazil 46.2 50.0 51.9 56.5 China 13.1 17.8 21.2 40.6 © Copyright Virtual University of Pakistan 6 Production and Operations Management –MGT613 VU Stages of Economic Development in Pakistan Pre- Use of Standard Society dominant human Unit of of living activity labor social life measure Structure Technology Pre- Agriculture Raw Extended Survival Routine Simple Industrial Mining ( muscle household Traditional hand tools ( 1947 to coal. Salt) power ( Joint Authoritative 1960)l Families) Industrial Goods Machine Individual Quantity Bureaucratic Machines ( 1960 – production tending of goods Hierarchical todate) Post- Services Artistic Community Quality of Inter- Information industrial Creative life in dependent ( Future) Intellectual terms of Global health, education, recreation Source of Service Sector Growth Pakistan is slowly but surely facing a change in its demographics, economics and more important social norms. This shift has often proven to be the source of service sector growth. ¾ Innovation Push and Pull theory e.g. Cash Management Services derived from products e.g. CD/Automobile/Video Rental Information driven services like finance brokerage services. ¾ Social Trends Aging of the population ¾ Increase in Life expectancy ¾ Two-income families, both the males and females of the family are working ¾ Growth in number of single people. Home as sanctuary Functions with in an Organization ¾ The Operations function consists of all activities that are directly related to production of a good or service. ¾ Operations function exist in services like healthcare, Police, Traffic, transportation, consultancy, food handling, restaurants etc. ¾ Operations function forms the core of all businesses. Operations and Marketing ¾ Value addition refers to conversion of raw materials to finished goods or services. ¾ Value added often refers to the difference between the cost of the raw material and the price of the finished good. ¾ The revenues from selling goods is used in betterment of existing product or service or R &D, investment in new facilities and equipments ¾ Weeding out or eliminating non value adding operations. E.g. storage of goods which have been produced ahead of scheduled production, increases storage and inventory costs. reducing storage cost would reduce transformation cost and thus increase value addition ¾ Marketing relates to selling of a good or service of the organization through advertising and pricing decisions. © Copyright Virtual University of Pakistan 7 Production and Operations Management –MGT613 VU ¾ Marketing department assesses the customer’s needs and communicate it to the operations people on short term and design people on the long term basis. ¾ Operations people need information about demand over a short range in order to purchase raw materials or manage inventory or schedule production plan where as the design people need information to redesign or simply design new products or services. ¾ Marketing provides valuable information about the competitors customers needs and communicate it to the operations people on short term and design people on the long term basis. Finance ¾ The finance function focuses on activities that relate to securing resources at favorable prices and then allocating these resources through out the organization. ¾ Finance and Operation Personnel exchange information and expertise in the following way. ¾ Budgets ¾ Economic analysis of investment proposals ¾ Provision of funds Historical Evolution of Operations Management ¾ Industrial revolution (1770’s) ¾ Scientific management (1911) o Mass production o Interchangeable parts o Division of labor ¾ Human relations movement (1920-60) ¾ Decision models (1915, 1960-70’s) ¾ Influence of Japanese manufacturers Simple Product Supply Chain Supply Chain: A sequence of activities and organizations involved in producing and delivering a good or service. Let’s apply the same concept to what we have on our breakfast table every morning, a simple loaf of bread. Suppliers’ Direct Final Distributor Suppliers Producer Suppliers Consumer Current Issues in OM An operations manager needs to prepare himself or herself for the following issues in the years to come whether its Pakistan or outside Pakistan. ¾ Effectively consolidating the operations resulting from mergers ¾ Developing flexible supply chains to enable mass customization of products and services ¾ Managing global supplier, production and distribution networks ¾ Increased “commoditization” of suppliers ¾ Current Issues in OM (cont’d) ¾ Achieving the “Service Factory” ¾ Enhancing value added services ¾ Making efficient use of Internet technology ¾ Achieving good service from service firms © Copyright Virtual University of Pakistan 8 Production and Operations Management –MGT613 VU Lesson 03 Meanings of Competitiveness, Strategy and Productivity We are already familiar with these three terms, for the sake of easy reference, let us revisit their definitions 1. Competitiveness refers to an aggressive willingness to compete 2. Strategy is an elaborate and systematic plan of action with defined resources and 3. Productivity refers to the ratio of the quantity and quality of units produced to the labor per unit of time or simply ratio of output to input How Organization Compete against each other Businesses since the beginning of time have competed against each other. On the basis of competition, various types of market exist for nearly all lines of products and services. We already know that absolute monopoly and perfect competition type of markets are not that pervasive, yet businesses try to avoid perfect competition and strive to go for absolute monopoly so they can enjoy no competition and exploit the customer sentiments for buying. We can identify the following common and widespread ways in which organizations can compete against other organizations. 1. Price: In our day to day routine observations, we often see that a lower price would attract more customers provided the product or service fulfils its intended use. Lower price helps an organization to increase its customer base. 2. Quality is an important dimension by which superior raw materials as well as high Skillman ship would ensure that product manufactured or service developed is offered to the customer with something extra. That something extra is nothing else but Quality. Quality is always offered free of cost, we will discuss this when we study in details Quality Management and Total Quality Management. 3. Product Differentiation refers to special features that make the product or service look more suitable to the customers like an automobile manufacturer decides to provide GPS system to selected customer at an additional price etc. 4. Flexibility is the ability to respond to changes. It may refer to changes in target sales, product feature like adding GPS device to all automobiles 5. Time refers to the period required to provide a product or service to a customer from the moment the order is booked to the delivery, also time required to rectify a shortcoming or mistake A. Competitiveness Competitiveness is how effectively an organization meets the needs and requirements of customers relative to other (Competitors) organizations that offer similar goods or services The key to successfully competing against the organizations competitors or rivals is to answer these two questions diligently I. What do the Customers Want? II. How can our business deliver the required Value to the customers? The first question begets a natural and logical answer which is that the customers want Value. Similarly the second question also asks for a logical answer which is the way organizations would deliver value to the customer as per the understanding of the organization. If an organization can understand that Value is always the tradeoff between performance and cost then it can adopt various means to provide value to the customer. © Copyright Virtual University of Pakistan 9 Production and Operations Management –MGT613 VU Mathematically speaking value equals the performance (of the product or service) divided by cost. Most organizations have different measurement rules attached in measurement of quality, speed and flexibility. Value= Performance/Cost= (Quality +Speed+ Flexibility)/Cost_______ Eq. 1 The equation above also captures the product differentiation concept, which in reality is an important dimension of quality. The concept of quality would be covered at a later stage, towards the middle of the semester. We can also say that, the customer is measuring performance with the help of Quality, Speed and Flexibility for the price or cost he is willing to pay. The point worth noting is that in most of the cases the three factors of performance would not be weighed equally in some cases, quality would be more important than speed or flexibility etc. We can thus make use of an important concept of assigning weights so the equation changes to Value= (w1 x Quality + w2 x Speed+ w3 X Flexibility) / Cost_______Eq.2 Where w1, w2 and w 3 are different weights and if they all have same value then equation 2 reduces to equation 1 again. IN other words, equation 2 is not only generic but more reflective of performance measurement of an organization. Different organizations assign different means to obtain the value of these weights by developing in- house or a consultant derived Performance Measurement Model (PMM). This can be used to obtain an overall performance score by measuring the success of a manufacturing company in its operational activities. The developed PMM measures a company's level of performance in critical dimensions and combines these performance scores to obtain a ranking score. A set of critical dimensions and their sub- components is fully defined, and performance scorecards are developed to guide the assignment of performance scores. Performance scores are assigned according to the level of intensity of a manufacturing company's investments, practices, actions or infrastructures in the critical dimensions. How Organizations can gain Competitive Advantage As Students of Organization Management, we can look at value in terms of the three important functions of any organization to see how organizations can gain competitive advantage 1. Marketing 2. Finance 3. Operations A. Businesses Gain Competitive Advantage by using Market based strategies 1. Identifying consumer wants and needs 2. Pricing 3. Advertising and promotion B. Businesses Gain Competitive Advantage by using Finance based strategies 1. Identifying sources of funds and applications of funds. 2. Capital and Financial Investments. 3. Financial Leverage ( Debt to Equity) and 4. Capital structure. © Copyright Virtual University of Pakistan 10 Production and Operations Management –MGT613 VU C. Businesses Gain Competitive Advantage by using Operations based strategies 1. Product and service design. The design is not only the starting point but allows certain features to be added which makes your product or service favorable to the customer. 2. Cost or Cost Leadership, offers the product or service at an economical price 3. Location refers to the Convenient point of sales, it can be a petrol pump (services) with an attached convenience store 4. Quality should always match the price and service. 5. Quick response aka Also known as Agility and an organization on this basis is often known as Agile Organization) 6. Flexibility. Flexibility change the car model from sedan to coupe based on your marketing divisions inputs. 7. Inventory management. Maintain safety stocks and critical spares. 8. Supply chain management. Develop and sustain an active and strong chain between suppliers and end customers. 9. Service .After sales service, owning the customers issue as your own, a concept which has failed PK in its quest for foreign market penetration. Throughout the semester our aim would be to identify and understand different types of strategies which have been exploited to the fullest by various organizations and adopted religiously as their actual Operational strategies companies. This has helped these organizations to gain competitive advantage over their counterparts. Common Reasons why Organizations Fail We can identify certain familiar reasons why Organizations fail to achieve a competitive advantage and end up loosing out to their competitors. These reasons are universal in nature and find the same footing in Pakistan as well as any other place in the world. 1. Too much emphasis on short-term financial performance. Quite often, cost cutting, profit maximizing at the cost of social responsibility or employee motivation is a failed strategy pursued by organizations, which just hastens their status to oblivion. 2. Failing to take advantage of strengths and opportunities. This is in reality failing to hold on to proven successful strategies or core competencies. Sometimes a change in leadership leads to change in strategy, where just for the sake of glory and high profits, organizations forget their core competence and opt for strategies and tactic which cause their downfall. 3. Failing to recognize competitive threats. This reason is the exact opposite of failure to make use of the organizations strengths. Quite often organizations decide to pursue status quo and ends up bringing no new product or service or even no innovation in its existing product or service line leading to lack of customer satisfaction, decline in profits and finally being declared a failure. 4. Neglecting operations strategy. This is definitely the most important reason of failure; organizations often end up employing non productive techniques which lead to inconsistent and failed operations. Absence of an Operations Strategy leads to 5. Too much emphasis in product and service design and not enough on improvement. Differentiation in terms of service and product, American companies in 1980s did that they never introduced incremental refinements rather went for big changes and thus lost to Japanese competitors. 6. Neglecting investments in capital and human resources. A total disregard to use the best resource. Capital and human resources in the long run make or break an organization. 7. Failing to establish good internal communications. Matrix organizations or hierarchy or such a strong structure that often the structure does not allow communication. © Copyright Virtual University of Pakistan 11 Production and Operations Management –MGT613 VU 8. Failing to consider customer wants and needs. This is actually indicative of an organizations lack of marketing research skills. This also shows that there is no respect to Customer Relationship Management Concept and certainly no respect to the customer. Mission/Strategy/Tactics Most of the organizations tend to answer the question that how does mission, strategies and tactics relate to their decision making and attaining distinctive competencies? Organizations over the years have mastered the art and technique of developing a vision and a mission statement, which helps them to come with functional strategies and practical tactics by which they can make judicious decisions and attain distinctive competencies Mission Strategy Tactics Mission Strategy Tactics 2. Strategy 1. Strategies are Plans for achieving organizational goals ¾ Mission is the reason for existence for an organization ¾ Mission Statement answers the question “What business are we in?” ¾ Goals provide detail and scope of mission ¾ Tactics are the methods and actions taken to accomplish strategies 2. Concept of Strategy for a Pakistani Automobile manufacturer ¾ Strategies are plans for achieving organizational goals ¾ Mission is to provide BEST AUTOMOBILES to individuals as well as BUSINESS organizations of Pakistan ¾ Mission Statement is to give you safe wheels to move around” ¾ Goals are to provide utility, and heavy equipment mobiles. ¾ Tactics consist of employing TQM methods to accomplish strategies Planning and Decision Making Planning and decision making concepts make use of setting a mission, goal, strategy and achieving the end result through some effective and practical tactic. In hierarchical order the organization first makes or develops a mission and employ tactics by developing operational procedures. Strategy Example You are a business student at Virtual University of Pakistan. You would like to have a career in business, have a good job, and earn enough income to live comfortably © Copyright Virtual University of Pakistan 12 Production and Operations Management –MGT613 VU Mission Goals Organizational Strategies Functional Goals Finance Operations Marketing Strategies Strategies Strategies Tactics Tactics Tactics Operating Operating Operating procedures procedures procedures Mission: Live a good life •Goal: Successful career, good income •Strategy: Obtain a Business Degree from VU. •Tactics: Select a business field of your interest and high market value •Operations: Register, buy books, take courses study, graduate, apply & get job Examples of Strategies 1. Low cost ( Cost Leadership/Economical ) 2. Scale-based strategies ( Critical Value) 3. Specialization ( Specific characteristics) 4. Flexible operations ( To change production design of products on the same infrastructure) 5. High quality ( exceeds customer requirements and satisfactions) 6. Service ( meets minimum standard specifications) Distinctive Competencies The special attributes or abilities that give an organization a competitive edge. 1. Price 2. Quality 3. Time 4. Flexibility 5. Service 6. Location © Copyright Virtual University of Pakistan 13 Production and Operations Management –MGT613 VU Lesson 04 Distinctive Competencies The special attributes or abilities that give an organization a competitive edge. 7. Price 8. Quality 9. Time 10. Flexibility 11. Service 12. Location A. Operations Strategy •Operations strategy – The approach, consistent with organization strategy that is used to guide the operations function. We first study strategy design process with example for manufacturing and Services. Strategy Design Process Strategy Process Example Customer Needs More Product Corporate Strategy Increase Organization Size Operations Strategy Increase Production Capacity Decisions on Processes Build New Factory and Infrastructure Strategy Design Process for Services Strategy Design Process for Services Strategy Map Desired Results ancial Perspective Improve Shareholder Value Customer Perspective Customer Value Proposition Internal Perspective Build-Increase-Achieve Learning and Growth Perspective A Motivated and Prepared Workforce © Copyright Virtual University of Pakistan 14 Production and Operations Management –MGT613 VU Relationship between Operations and Organizational Strategy •Organizational strategy is ¾ an over all big picture for the whole organization. ¾ Longer in time horizon ¾ Less detailed and broader in scope. •Operational Strategy is ¾ Narrower in scope and in more detail ¾ Prepared by middle management. ¾ Should be in line with the Organization strategy •Operational Strategy if ¾ Designed and implemented successfully can make an organization more successful. ¾ Organizations started focusing on operational strategies in early 1990s before that organizations focused on financial and marketing strategies. ¾ Operational strategies mostly function on two dimensions of quality management and service/manufacturing strategy. An operations Manager should avoid SUBOPTIMIZATION meaning his operational strategy for the department and divisions goals should not harm the overall Organizational strategy. He should opt for systems approach or a big picture approach or strictly base his operations strategy on Organizational strategy. Operations Strategy for Service Organizations Service Organizations in Pakistan function with a very detailed and elaborative Operations Strategy. It is important to identify the Strategy Design Process and able to recognize the concepts associated with Strategy Formulation. Service Organizations are no exceptions and work diligently to identify, nurture and protect their distinctive competencies. Service Organizations are busy carrying out detailed environmental scanning and also periodically carryout SWOT Analysis. As operations manager of a service based organization, one should be able to understand the importance of both Order qualifiers and Order winners. Order qualifiers are those significant characteristics that service customers perceive as minimum standards of acceptability to be considered as a potential purchase while order winners are the characteristics of an organization’s services that cause it to be perceived as better than the competitors services. A bank offering 10 percent return on customers’ holdings would be an order qualifier but if the same service has an additional characteristic of some added feature like availability of interest free loans for purchase of car or building of homes, then the banks service becomes order winner. Steps in Developing a Manufacturing/Service Strategy 1. Segment the market according to the product/Service group ( A person interested in buying a sedan car would rarely show interest in buying an SUV car, the market segmentation should be just and judicious) 2. Identify product/Service requirements, demand patterns, and profit margins of each group ( Your Market research department should be able to capture these with the help of MIS systems) 3. Determine order qualifiers and winners for each group ( Order Qualifiers would meet customer requirements and Order Winners would satisfy customers) 4. Convert order winners into specific performance requirements ( Continuous improvement always helps and it is what the Japanese has perfected through KAIZEN) © Copyright Virtual University of Pakistan 15 Production and Operations Management –MGT613 VU Key External Factors 1. Economic conditions should include both Micro and Macro Economics. 2. Political conditions require the organization to carryout PEST analysis. 3. Legal environment relates to government regulations for investor protection. 4. Technology .Gap Analysis focusing market leaders in the respective field. 5. Competition so as to expect no free lunches or no monopolies. 6. Markets are always free markets till proven otherwise Key Internal Factors 1. Human Resources include Trained, skilled and qualified employees. 2. Facilities and equipment are a good source for motivation, and obtaining competitive advantage over your competitors. 3. Financial resources. A higher Free cash flow makes a company outperform its competitors. 4. Customers include repeat customers, as well as customer relationship Management. 5. Products and services relates to how does the organization values itself whether it provides products or services that add value) 6. Technology .Legacy Systems or Technology that is competitive and has the potential to gain competitive advantage. 7. Suppliers .Companies have taken care of the supplier issue by making use of effective Supply Chain Management Strategies or use vertical or horizontal integration techniques. Strategic Service Vision Service Concept includes ¾ Service Levels refer to the important elements of the service to be provided, usually stated in terms of results produced for customers. ¾ Perception corresponds to the elements perceived by the target market segment, by the market in general, by employees, & by others. How do customers perceive the service concept. ¾ Delivery focuses on the efforts in terms of the manner in which the service is designed, delivered, marketed. ¾ Strategic Service Vision Operating Strategy ¾ Focus Area includes important elements of the strategy: operations, financing, marketing, organization, human resources, control. Also the central service area along with the location of investments ( human resource or Technology). ¾ Central Operations to control quality and costs, improve measures, incentives, rewards. The expected results should be evaluated in terms of, quality of service, cost profile, productivity, morale/loyalty of servers. Service Delivery System The important features of the service delivery system include role of people, technology, equipment, layout, procedures ¾ The capacity it has to provide at peak levels ¾ The extent to which it should help to insure quality standards, differentiate the service from competition, provide barriers to entry by competitors. ¾ Relatively Low (as compared to manufacturing) Overall Entry Barriers ¾ Economies of Scale Limited (not always but most of the time) ¾ High Transportation Costs ¾ Erratic Sales Fluctuations © Copyright Virtual University of Pakistan 16 Production and Operations Management –MGT613 VU ¾ No Power Dealing with Buyers or Suppliers ¾ Product Substitutions for Service ¾ High Customer Loyalty ¾ Exit Barriers Competitive Service Strategies (Overall Cost Leadership) ¾ Seeking Out Low-cost Customers ¾ Standardizing a Custom Service ¾ Reducing the Personal Element in Service Delivery (promote self-service) ¾ Reducing Network Costs (hub and spoke) ¾ Taking Service Operations Off-line Competitive Service Strategies (Differentiation) ¾ Making the Intangible Tangible (memorable) ¾ Customizing the Standard Product ¾ Reducing Perceived Risk ¾ Giving Attention to Personnel Training ¾ Controlling Quality Note: Differentiation in service means being unique in brand image, technology use, features, or reputation for customer service. Customer Criteria for Selecting an online Banking Service Provider in Pakistan We can apply our concepts of service to an online banking service provider in Pakistan. We investigate the service being provided by the bank by checking for availability, convenience, dependability, personalization, price, quality, reputation, safety and speed. This should help us understand the strength of service industry in a competitive environment especially in our country of Pakistan. CHARACTERISTIC REMARKS Availability 24 hour ATM or online financial transaction Convenience Site location from any internet equipped computer in and out of Pakistan Dependability On-time performance and correct information Personalization Know customer’s name and ID Price The fee a customer pays for online service Quality Reflected in service. Reputation Word-of-mouth and audited and examined by neutral bodies. Safety Customers online data is safe and inaccessible to others and hackers Speed Avoid excessive waiting in website loading and data available online. Online banking service providers are often checked for: ¾ Anti-competitiveness i.e. whether are not allowing other online banking service providers to enter the market by constructing barriers to entry ¾ Fairness indicates the concept of Yield management. Meaning whether the bank is actually providing the same return as it had promised to the customer ¾ Invasion of Privacy. Calling people through telephones or visiting offices thus making use of Micro-marketing concepts, which often makes the patron and customer feel that his privacy has been compromised. © Copyright Virtual University of Pakistan 17 Production and Operations Management –MGT613 VU ¾ Data Security. Banks make it a point that the financial records of the customers are not accessed by unauthorized personnel. ¾ Reliability. Banks always strive that their service is reliable and considered safe and usable by its customers. Most online banking service providers allow its customers to access their account statement, free of cost. Service Purchase Decision In order to understand further we evaluate the service organizations in terms of Purchase Decision. ¾ Service Qualifier: To be taken seriously a certain level must be attained on the competitive dimension, as defined by other market players. Examples are cleanliness for a fast food restaurant or safe aircraft for an airline. ¾ Service Winner: The competitive dimension used to make the final choice among competitors. Example is price of airline ticket or bus fare. ¾ Service Loser: Failure to deliver at or above the expected level for a competitive dimension. Examples are failure to repair auto (dependability), rude treatment (personalization) or late delivery of package (speed). Using Information to Categorize Customers ( For Call Centers in Pakistan) ¾ Coding grades customers on how profitable their business is. ¾ Routing is used by call centers to place customers in different queues based on customer code. ¾ Targeting allows choice customers to have fees waived and get other hidden discounts. ¾ Sharing data about your transaction history with other firms is a source of revenue. Quality and Time Strategies •Quality-based strategies ¾ Focuses on maintaining or improving the quality of an organization’s products or services ¾ Quality at the source •Time-based strategies ¾ Focuses on reduction of time needed to accomplish tasks ¾ Time Based Strategies: Organizations have registered reduction in time by employing the following “6” time based strategies. There are 6 time based strategies namely:- 1. Planning Time The time required to react to a competitive threat, or to adopt new technologies, or to approve changes to an existing facility 2. Products/Service Design Time The time needed to develop or market new or redesigned products or services 3. Processing Time The time required to produce goods or services, includes repairing equipment, quality training, inventory etc 4. Changeover Time is the time needed to change from producing one type of product or service to another. New model, new insurance /health service. 5. Delivery Time is the time needed to fill orders. 6. Response Time for complaints is the required to improve the model or service features according to customer inputs and improving employee working conditions. © Copyright Virtual University of Pakistan 18 Production and Operations Management –MGT613 VU Lesson 05 Productivity Productivity is a measure of the effective use of resources, usually expressed as the ratio of output to input .Also called Efficiency at times •Productivity ratios are used for ¾ Planning workforce requirements ¾ Scheduling equipment ¾ Financial analysis Productivity ¾ Partial measures is output/(single input) ¾ Multi-factor measures is output/(multiple inputs) ¾ Total measure is the output/(total inputs) Productivity Growth = Current Period Productivity – Previous Period Productivity Previous Period Productivity Productivity Growth = Unit less Quantity Partial Output Output Output Output measures Labor Machine Capital Energy Multifactor Output Output measures Labor + Machine Labor + Capital + Energy Total = Goods or Services Produced measure All inputs used to produce them Labor Productivity Units of output per labor hour Units of output per shift Value-added per labor hour Machine Productivity Units of output per machine hour Capital Productivity Units of output per Rs. input Dollar value of output per Rs. input Units of output per kilowatt-hour Energy Productivity Rupee value of output per kilowatt-hour Example What is the multifactor productivity “MFP”? if 7500 Units Produced and Sold for Rs.10/unit with Cost of labor of Rs.10,000, Cost of materials: Rs.5,000 and Cost of overhead: Rs.20,000. © Copyright Virtual University of Pakistan 19 Production and Operations Management –MGT613 VU Output Solution MFP = Labor + Materials + Overhead MFP = (7500 units)(100) 10,000 + 5,000 + 20,000 MFP = (750,000) 35,000 MFP = 21.420 Factors Affecting Productivity Productivity stands tall on four important pillars of Capital, Quality, Management and Technology. These pillars are also responsible for positively as well as negatively affecting the Productivity of the Organization. 1. CAPITAL An existing machine or facility if it is not functioning up to full capacity or turning out products which are not acceptable can lower productivity. A new machine or repair of existing machine would require capital input. 2. QUALITY Poor quality products would not meet customer requirements and would need repairs and reworks on the product to meet the standards. 3. MANAGEMENT With better scheduling, planning, coordinating and controlling activities of management the machine operations can be carried to improve productivity. 4. TECHNOLOGY Technological improvements have increased productivity. A machine of today would outperform machine of yesterday but may not withstand machines of tomorrow. CAUTION: Without careful planning technology can reduce productivity as it often leads to increased costs, inflexibility or mismatched operations. All leads to reduction in value. Other Factors Affecting Productivity ¾ Standardization We live in a world where for the sake of convenience, reliability and safety, majority of the products and services have been standardized. If for a moment any process whether it relates to manufacturing or services is made standard less, the vital concept of compatibility would be lost. Think for a moment if there is a fire at a Montessori school or at a crowded stadium, if there is no standardization of fire hose attached to the fire truck and fire hydrant present at the site, no effort would succeed in putting out the fire and saving the lives of the people. ¾ Use of Internet .Use of Internet/Extranet especially for the services side, even though there are knowledge base applications available for the manufacturing side as well but primarily it has the been the services side which has been able to exploit the resourcefulness of the Internet. ¾ Computer viruses. A lot of time IT based services industry have fallen a prey to computer viruses and hackers. ¾ Searching for lost or misplaced items. This speaks low about the coordinating activities and can lead to loss in production time and increase in idle time. Often this also leads to increase in replacement costs ¾ Scrap rates Any aberration in the raw materials or processed product can lead to increase in scrap. The increase in scrap rate in fact can decrease the utilization of resources in general and raw material ¾ New workers Organizations spend millions of Rupees every year to train their employees. A trained workforce is not only reliable and dependable but also ensures good Host of other Factors Affecting Productivity: ¾ Safety ¾ Shortage of IT Trained Workers ¾ Layoffs ¾ Labor turnover © Copyright Virtual University of Pakistan 20

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