Operations Management 101

Operations management aka OM or Execution Plan involves systematically managing production processes (of goods or service) to occur at their highest possible level of productivity. In OM terminology, the function is described as 'transforming inputs into outputs' where inputs are resources that include labor, machinery, materials, capital and methodologies while outputs include products, services and their outcomes like throughput (of units produced, customers served and so on through their system). The task of OM professionals may be described as exploring changes in different input factors in search of better productivity in outputs, however it is defined; whether revenue, quality, customer satisfaction and so on. This function relies heavily on data. Furthermore, to be effective, OM requires in-depth knowledge not only of the specific system being addressed but also external factors influencing on the system and each other that can justify or negate the insular benefit for the system. In other words, this discussion (along with its popular ratios) should be considered as only one dimension of OM that requires situation-specific considerations.

For context, OM is one of the 3 key essential functions within all organizations. The 3 are marketing, finance / accounting and operations. Being cross-functional  however, OM is practised within any other function; be it like human resourses management, supply chain management, customer service, quality assurance management, warehousing and so on.

Here is a diagram of the transformation process. When tackling your OM, consider how each of these points exist in your organization.

...

This post will cover beneficial uses of OM, calculating productivity ratios, decision-making with productivity analysis and some famous case studies.

top

Uses & Benefits of Operations Management

Whle all organizations, regardless of industry engage in operations management, not all do so in a very conscious and deliberate way. However, the following are ways in which the deliberate use of OM can be used and benefit organizations. 

• OM allows businesses to be deliberate about how goods or services are produced, ie business operations. This involves systematically learning the organizational goals, how people are organized within the organization, how products and services are produced, to deeply understand the costs associated with the production process. (Operations are very costly for businesses). 
• Example: this systematic approach prevents the reliance on potential misconceptions like the notion that more work hours and or having more workers are necessarily more productive. 
• OM answers questions like the following.
• What products should be produced? What design should be applied? (Product Management). Example(s):
• Standardized parts in manufacturing, even if using the mass customization model and then seeking cheaper prices from input suppliers to achieve scale economies with large orders.
• Should the business produce their product entirely or at all? What is required? If the business buys, from whom? (Supply Chain Management)
• In an attempt to shorten the leadtime (especially since their raw materials and food products do not have a very extended shelf life), they own several activities within the supply chain like potato farms, controlling a fleet of trucks for transporting raw materials, warehousing, distribution and delivery trucks. 
• How much stock should you maintain? When should you re-order? (Inventory Management)
• FritoLay raw materials like oil, potatos, corn and seeds do not have a very extended shelf life. Consequently, 'holding costs' (ie the cost of holding inventory) are great (because of potential loss). In response, FritoLay mitigated that risk. They opened production facilities near to raw materials and consumers. This reduces the time needed for the product to remain on the shelf. Additionally, to produce the product, there is only one efficiency-oriented assembly line that lasts an average of only a few hours. After that point, their internal storage for each batch is only 2.5 days worth of products.  
• What are the short- and long-term schedules (Forecasting & Production Capacity Planning)
• FritoLay base forecasts on historical sales, new product introductions,production innovations and promotions and dynamic local (tentpole-motivated) demand forecasts. 
• What are your needs in materials, personnel, overheads, etc? (Operations scheduling)
• Caste study: Colins Title Company (below) illustrates factor analyses regarding the possible introduction of new overheads to improve outputs
• Fritolay reduces staff turnover with several measures like competitive wages and paid uniforms among other things.
• Which quality should be used? (Quality Management)
• How should the facilty be used in production? How should the space be arranged? (Facility Management)
• Case study: McDonald's revolutionized their production to ensure positive customer experience that delivered on expectation for fast food; food that took 30 minutes and not 3 hours.
• Presentations to explain how and why the organization functions: Business plan

Historical developments in OM that improved productivity include standardization of parts in manufacturing, assembly line design, use of statistics, process analysis and mass customization. Recently, there has been pressure for OM to also consider ethical and environmental issues.

top

Calculating productivity

The single-factor productivity ratio for calculating productivity is as follows.

Productivity = Outputs of goods or services produced / Inputs used 

 

Example:

1,000 cakes produced

5 labor hours used

productivity = outputs / inputs

productivity = 1,000 cakes / 5 labor hours

productivity = 200 cakes per labor hour

As illlustrated below, when considering options for improving productivity, OM practitioners perform a 'productivity analysis' by calculating the percentage changes in inputs and outputs from the old to new systems. For a single situation, they may use whichever variable in the system as inputs or outputs and re-run the analysis as many times as they wish. More reflective of real life however, they may combine multiple factors in their calculations. However, to do this 'multiple-factor productivity' ratio, they will need to combine variables whose values can be standardized. The easiest and most common example of this is converting inputs into a dollar value.

Case study: Colins Title Company 

OLD System

Inputs	Outputs
. Workers: 4 . Work hours / day: 8 . Total Wages: $640 . Overheads: $400	8 units daily

 

NEW System

Inputs	Outputs
. Workers: 4 . Work hours / day: 8 . Total Wages: $640 . Overheads: $800	14 units daily

 

Here is the contrast between old and new systems and then the productivity analysis. In the example immediately below, the practitioner is interested in productivity per work hours.

OLD system	NEW system
productivity = 8 units / 32 work hours = 0.25 units per work hour	productivity = 14 units / 32 work hours = 0.43 units per work hour  Productivity analysis +75%*, more units per work hour

* change as a percentage of the old system:

0.43 - 0.25 units = 0.19 units

0.19 units / 0.25 = 75%

Using the same situation, the practitioner is interested in productivity regarding expenditure (and no longer work hours). Furthermore, the practitioner combines multiple costs because they have a standardized measurement, dollars.

Productivity = Outputs of goods or services produced / (Input 1 + Input 2) used 

OLD system	NEW system
productivity = output / (wages + overheads) costs = 8 units / ($640 + $400) = 0.0077   per dollar spent	productivity = output / (wages + overheads) costs = 14 units / ($640 + $800) = 0.0097 units per dollar spent Productivity analysis +26%, more outputs

top

Productivity Analysis for Decision-making: Switch to the new system?

Here is an efficient format for presenting the results. 

 

Productivity Analysis
	OLD system: Without new overheads	NEW system: With new overheads	% change (+ increase, - decrease)
Units per day	8	14	+75% in units
Overheads per day	$1,040	$1,440	+38% units per overheads
Labor productivity	0.25 units per hour	0.44 units per hour	+75% units per labor productivity
Multi-factor productivity	0.0077 unts per dollar	0. 0097 unts per dollar	+26% units per costs (labor, overheads)

 

When reporting on the results, explain whether the productivity has risen or fallen. Assuming it has risen, report specifically how this rise has occurred. For instance, increased productivity always occurs because 1) output increased while maintaining or decreasing inputs or 2) inputs decreased while maintaining or increasing outputs.

Do not perform productivity analyses on only outputs.  Notice how tempting it would be to run with the large 75% results for that one variable alone. Rather consider: each single factor alone; as well as multiple factors together once they can be measured with a standardized means.

Re single-factor analyses, consider the implications of altering each individual. For instance, if the increase in overheads relates to fixed (ie versus variable) overheads, that fact should be highlighted and then specially investigated further as a matter for risk management. Afterall, increased fixed costs increase business risk (ie the threat of financial failure because of factors, in this case fixed costs, that lower profitability if the these factors become excessive).

The multi-factor analysis is likely more trustwothy because, as seen in this case, the results can be more sobering with lower overall percentage changes. However, whether multi-factor analyses are more appropriate depend on your business circumstances.

As suggested earlier, extend the bases for your decision-making process beyond these ratios. Consider in-depth knowledge of the organization and its goals. For instance, if high quality is particularly important to your type of product (such as a speciality product), ensure that you are sacrificing quality in the name of increasing productivity. 

top

Case studies of how OM improved productivity.

Case study: 

Starbucks hired analysts to find ways of saving time. The following are among the the proposed changes that translated into improved productivity by 27% or roughy 4.5% annually and , in turn, increased yearly revenue per outlet by $200,000 to $400,000 within 6 years.

> To stop requiring customer signatures on credit card purchases under $25, to save 8 seconds per transaction.

> To change the ice cream scoop size to save 14 seconds per drink.

> To get new and better espresso machines to save 12 seconds per shot.

Taco Bell improved productivity by making the following changes.

> revised the menu

> designed meals for easy preparation

> shifted some preparation to suppliers

> efficient layout and automation

> training and employee empowerment

> new water and energy saving devices

This video illustrates the OM casestudy of FritoLay.

Examples of OM-related professional societies include American Society for Quality (ASQ), Project Management Institute (PMI) and so on.

Skills required for successful OM 

Previously, I discussed how the job interview process should pay special attention to the skillset required of the interviewees. The following are considerations specific to OM about OM managers. 

• detail oriented and analytical, especially quantitative (regarding issues that include input costs, processing costs, inventory costs, quality management costs, scale economies and so on)
• people skills that can be used to influence change
• tech-savviness and willingness to learn new technology
• can keep in mind and honor the goal of delivering customer value.

CONTENT RELATED TO OPERATIONS MANAGEMENT

• Business plan
• Breakeven analysis
• Demand. Understanding consumer demand can help you plan the appropriate level of inventories (not too much that can become costly or too little that you can not meet growing demand.)
• Managerial accounting
• Strengths and weaknesses of your business' distribution channels

Notes:

• Throughput refers to the amount of inputs or outputs passing through the 'transformation' system or process.
• A management system refers to the set of policies, processes and procedures used to fulfill required tasks. As shown in the case studies above, old and new scenarios are referred to as the old and new 'systems'.