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CHAPTER2

LITERATURE REVIEW AND THEORITICAL FRAMEWORK

2.1 Literature Review

2.1.1 Management

According to Robbins and Coulter (2009:22-23) management is coordination and oversight of the work activities of others so that their activities are completed efficiently and effectively by the people responsible for doing them. A manager is someone who coordinates and overseas the work of other people so that organizational goals can be accomplished (Robbins and Coulter, 2009:21).Simply speaking, a manager is someone who do management.

Daft and Marcic (2005: 7) more specifically said that, “ Management is the effective and efficient attainment of organizational goals through planning, organizing, leading, and controlling organization resources.”

Dyck and Neubert (2011:7) stated that management is the process of planning, organizing, leading, and controlling human and other organizations resources in order to achieve organization goals effectively.

Therefore, management is the process ofplanning, organizing, leading, and controlling all organization’s resources effectively and efficiently to achieve organization goals.

From the explanation above, management has four functions (Robbins and Coulter, 2009:24), which are:

  1. Planning. Defining goals, establishing strategy, and developing plans to coordinate activities.
  2. Organizing. Determining what needs to be done, how it will be done, and who is to do it.
  3. Leading. Motivating, leading, and any other actions involved in dealing with people.
  4. Controlling. Monitoring activities to ensure that they are accomplished as planned.

2.1.2 Functions of Organization

To create goods and services, all organizations have three basic functional areas (Stevenson, 2009:4), which are:

  1. Finance, which is responsible for securing financial resources at favorable prices and allocating those resources throughout the organization, as well as budgeting, analyzing investment proposals, and providing funds for operations.
  2. Marketing, which is responsible for assessing customer wants and needs, and selling and promoting the organization’s goods or services.
  3. Operations, which is responsible for producing the goods or providing the services offered by the organization.

2.1.3 Operations Management

Operations is a function or system that transform inputs into outputs of greater value, and operations management designs, operates, and improves productive systems – systems for getting work done (Russel and Taylor, 2011:p2).

Operations Management is one of the three major functions of any organization, and it is integrally related to all the other business functions. All organizations market (sell), finance (account), and produce (operate), and it is important to know how the operations management activity functions (Heizer and Render, 2011:36). That’s why operations management is important to be studied.

Schroeder (2008:4) stated that operations is responsible for supplying the products or service of the organization. Operations managers provide value for the customer at the lowest costby making decisions regarding the operations function and its connection with other functions and by managing the transformation process.

Operations management is the management of systems or processes that create goods and/or provide services (Stevenson, 2009:4).Heizer and Render said that, “Operations management (OM) is the set of activities that creates value in the form of goods and services by transforming inputs into outputs. Activities creating goods and services take place in all organizations. In manufacturing firms, the production activities that create goods are usually quite obvious.”

Operations management is the set of activities to manage and control the production of goods or services to make it optimal within the organization in order to satisfy customer.

Three main points in operations management are (Schroeder, 2008:4):

  1. Decisions. Decision making is an important element of operations management. Since all managers make decisions, it is natural to focus on decision making as a central theme in operations. This decision focus provides a basis for dividing operations into parts according to major decision types.
  2. Functions. Operations is a major function in any organization, along with marketing and finance. The operations function is responsible for supplying or producing products and services for the business.
  3. Process. As noted above, operations managers plan and control the production process and its interfaces. This process view not only provides a common ground for defining service and manufacturing operations as transformation process but is also a powerful basis for design and analysis of operations.

Based on Lisboa, Gamis and Yasin (2012) quoted from a subsequent research by Cámison and Lopez (2010), in such operational environments, achieving and sustaining a competitive advantage is no easy task. There are three strategies provides an opportunity for operations manager to achieve competitive advantage (Heizer and Render, 2011:67-69), such as:

  1. Differentiation refers to distinguishing the products or services of a company in a way that the customer perceives as adding value. Differentiation is cocnerned with providing uniqueness that is difficult to be imitated by other companies.
  2. Low cost leadership entails achieving maximum value as defined by customers. Company provide products or services with the lower cost that result in lower price that other competitors.
  3. Response is the entire range of values related to timely product development and delivery. Response refers to flexible response, reliable response and quick response in achieving competitive advantage. Flexible means ability to match changes in a marketplace. Reliable means to be trusted and relied by the customers. Quick response means can deliver products or services to customers in short time.

2.1.3.1 Ten Strategic Operations Management Decisions

According to Jay Heizer and Barry Render (2011:p71) differentiation, low cost, and response can be achieved when managers make effective decisions in 10 areas of operations management. These collectively known as operations decisions. The 10 decisions of operations management that support missions and implement strategies are:

  1. Goods and service design: designing goods and services defines much of the transformation process. Costs, quality, and human resource decisions are often determined by design decisions. Design usually determine the lower limits of cost and the upper limits of quality.
  2. Quality: the customer’s quality expectation must be determined and policies and procedures established to identify and achieve that quality.
  3. Process and capacity design: process options are available for products and services. Process decisions commit management to specific technology, quality, human resource use, and maintenance. These expenses and capital commitments determine much of the firm’s basic cost structure.
  4. Location selection: facility location decision for both manufacturing and service organizations may determine the firm’s ultimate success. Errors made at this juncture may overwhelm other efficiencies.
  5. Layout design: material flows, capacity needs, personnel levels, technology decisions, and inventory requirements influence layout.
  6. Human resources and job design: people are integral and expensive part of the total system design. Therefore, the quality of work life provided, the talent and skills required, and their cost must be determined.
  7. Supply-chain management: these decisions determine what is to be made and what is to be purchased. Consideration is also given to quality, delivery, and innovation, all at a satisfactory price. Mutual trust between buyer and supplier is necessary for effective purchasing.
  8. Inventory: inventory decisions can be optimized only when customer satisfaction, suppliers, production schedules, and human resource planning are considered.
  9. Scheduling: feasible and efficient schedules of production must be developed; the demands on human resources and facilities must be determined and controlled.
  10. Maintenance: decisions must be made regarding desired levels of reliability and stability, and systems must be established to maintain that reliability and stability.

2.1.3.2 Operations Planning Activities

As mentioned before operation managers plan the production process in organization. To achieve competitive advantage, operations managers must have good plan for production.

Competitiveness is how effectively an organization meets the want and needs of customers relative to others that offer similar goods and services (Stevenson, 2009:40). It’s hard for organization to meet demand because demand keeps changing. So, organization can do demand forecasting for next production.

According to Heizer and Render (2011:544), demand forecasting can address short-range, medium-range, and long-range problems. Long-range forecast help managers deal with capacity and strategic issues and are the responsibility of top management. Top management formulates policy-related questions, such as facility location and expansion, new product development, research funding, and investment over a period of several years. Medium-range planning begins once long-term capacity decisions are made. This is the job of operations managers. Scheduling decisions address the problem of matching productivity to fluctuating demands. Medium (or intermediate) range planning is accomplished by building an aggregate production planning. Short-range planning may extend up to a year but is usually less than 3 moths. This plan is also the responsibility of operations personnel, who work with supervisors’ foremen to “disaggregate” the intermediate plan into weekly, daily, and hourly schedules. Tactics for dealing with short-term planning involve loading, sequencing, expediting, and dispatching.

2.1.4 Forecasting

Bozarth and Handfield (2012:p270) stated that a forecast is an estimate of the future level of some variable. The variable is most often demand, but it can also be supply or price.

According to Heizer and Render (2011:136), forecasting is the art and science of predicting future events. Forecasting may involve taking historical data and projecting them into the future with some sort of mathematical model.

Forecasting is necessary because all organizations operate in an atmosphere of uncertainty but decision must be made today that affect the future of organization (Hanke and Wichern:1).

Forecasting is an estimation of future level from the past data that is used to make decision within company in uncertainty condition.

There are some approaches forecasting. According to Heizer and Render (2011:139), there are two general approaches for forecasting, such as qualitative approach and quantitative approach. In this thesis, the author is not using qualitative methods. There are two categories in quantitative which are:

  1. Time Series Model predict on the assumption that the future is a function of the past. These models use past data to forecast the future data.
  2. Associative Models, incorporate the variables or factors that might influence the quantity being forecast.

2.1.4.1Time Series Forecasting

One of time series model is least square regression or linear trend line. According to Russell and Taylor (2011:512), a linear trend line is a linear regression model relating demand to time. The linear equation is

where

a = y-axis intercept

b = slope of the line

x = the time period

y = forecast for demand for period x

There parameters of the linear trend line can be calculated using the least squares formulas for linear regression:

where

n = number of periods

= the mean of the x values

= the mean of the y values

Analyzing time series means breaking down past data into components and then projecting them forward. A time series has five components (Stevenson, 2009):

  1. Trend is the long-term upward or downward movement of the data over time. Changes in income, population, age distribution, or cultural vies may account for movement in trend.
  2. Seasonality refers to short-term, failry regular variations generally related to factors such as the calendar or time of day. Evans and Collier (2007:444) said that seasonal patterns are characterized by repeatable periods of ups and downs over short time periods of time.
  3. Cycles are wavelike variations of more than one years’s duration often related to a variety of economic, political, and even agricultural conditions.
  4. Irregular variation is due to unusual circumstances such as severe weather conditions, strikes. Evans and Collier (2007, p446) said that, “Irregular variation one-time variation that is explainable.”
  5. Random variation is residual variations that remain after all other components have been accounted for. Evans and Collier (2007:446) said that random variations (sometimes called noise) are the unexplained deviation of a time series from a predictable pattern, such as a trend, seasonal, or cyclical pattern. There are no discernible pattern, so it cannot be predicted.

According to Heizer and Render (2011:153)understanding seasonal variations is important for capacity planning in organizations that handle peak loads. Seasonality is expressed in terms of the amount that actual values differ from average values in the time series. Analyzing data in monthly or quarterly terms usually makes it easy for a statistician to spot seasonal patterns, seasonal indices can be developed by using a multiplicative seasonal model.

Krajweski, Ritzman, and Malhotra (2007, p521) also suggested to use multiplicative seasonal method to forecast seasonal demand for all of the seasons. Multiplicative Seasonal Method is a method where seasonal factors are multiplied by an estimate of average demand to arrive at a seasonal forecast.

Seasonal factor or seasonal index is used to make seasonal adjustment to average demand. It shows the up and down movements in the forecast.

Here are the steps of multiplicative seasonal method (Heizer and Render, 2011:153-155):

  1. Find the average historical demand each month by summing the demand for that month in each year and dividing by the number of years of data available.
  2. Compute the average demand over all months by dividing the total average annual demand by the number of seasons.
  3. Compute a seasonal index for each season by dividing that month’s actual historical demand (from step 1) by the average demand over all months (from step 2).
  4. Estimate next year’s total annual demand.
  5. Divide this estimate of total annual demand by the number of months, then multiply it by the seasonal index for that month. This provides the seasonal forecast.

2.1.5 Aggregate Planning

Lisboa, Gomes, and Yasin (2012) stated that as an open operational system, the organization must adopt operational practices which are consistent with the open system orientation. The open system organization must be able to read the competitive environment in order to determine the demand, which reflects the customers’ timely requirements. Once the demand is determined, the organization must arrange operational plans to meet the demand. Aggregate Production Planning (APP) is the process, which generates and evaluates these plans.

Based on the journal by Liu, Chua, and Yeoh (2011), aggregate production planning (APP) has received much interest from both the industrial and academic fields, and aims to identify production, inventory and work force levels to meet fluctuating demand requirements over an intermediate-range planning horizon (Chase and Aquilano 1992). Various approaches have been developed to formulate and resolve the corresponding problems within the manufacturing context (Nam and Logendran 1992). In manufacturing industries, aggregate production planning (APP) is used to best utilize human and equipment resources to meet fluctuating customer demand.

Meanwhile, Buxey (2005) said that seasonal demands cause special difficulties in scheduling production and ensuring that the right resources will always be on hand. Aggregate planning has proved popular among researchers to solve the problem.

Schroeder (2008, p265) mentioned that aggregate planning is concerned with matching supply and demand of output over the medium time range, up to approximately 12 months into the future. The aim of aggregate planning is to set overall output levels in the near to medium future in the face of fluctuating or uncertain demand.

Meanwhile, according to Heizer and Render (2011:544) aggregate planning is concerned with determining the quantity and timing of production for intermediate future, often from 3 to 18 months ahead. Operations manager try to determine the best way to meet forecast demand by adjusting production rates, labor levels, inventory levels, overtime work, subcontracting rates, and other controllable variables.

So it can be concluded that aggregate planning is the approach to determine the quantity and time of production to meet demand for medium or intermediate time range (3-12 months) in the future.

According to Lisboa, Gomes, and Yasin (2012) the main objective of production planning models is to generate solutions that generate a minimal cost for a specific planning period.

The objective of aggregate planning is to meet forecasted demand while minimizing cost over the planning period. For manufacturers, the aggregate schedule ties the firm’s strategic goals to production plans (Heizer and Render, 2011:544).

Meanwhile, Sukendar and Kristomi (2008) said that, the objectives of aggregate planning are:

  1. Develop a feasible production plan that will achieve a balance between demand and supply by considering which is the lowest cost from all production plans.
  2. As an input resource planning to support production planning.
  3. To achieve stability between production and labor with fluctuative demand.

Aggregate planning means combine resources to set a best plan for intermediate-range. In business, best plan means plan that can meet customer demand in lowest cost. So, in aggregate planning, operations manager calculate the cost of all possible alternative and choose the lowest one.

2.1.5.1 Aggregate Planning Costs

According to Schroeder (2008, p270) most aggregate planning methods determine a plan that minimizes cost. These methods assume that demand is fixed; therefore strategies for modifying demand are less considered. When demand is considered given, the following cost should be included:

  1. Hiring and layoff costs. The hiring cost consists of the recruiting, screening and training cost required to bring new employee up to full productive skill. The layoff cost includes employee benefits, severance pay and other costs associated with layoff.
  2. Overtime and under time costs. The overtime costs often consist of regular wages plus a 50 to 100 percent premium. The cost of under time is often reflected by the use of employees at less than full productivity.
  3. Inventory-carrying cost. Inventory-carrying costs are associated with maintaining the product in inventory; they include the cost of capital, variable cost of storage, obsolescence, and deterioration.
  4. Subcontracting costs. The cost of subcontracting is the price that is paid to a subcontractor to produce the units. Subcontracting costs can be either more or less than the cost of producing units in-house.
  5. Part-time labor costs. Because of differences in benefits and hourly rates, the cost of part-time or temporary labor will probably be less than that of regular labor.
  6. Cost of stock out or back order. The cost of taking a back order or the cost of a stock out should reflect the effect of reduced customer service. This cost is extremely difficult to estimate, but it can be related to the loss of customer goodwill and the possible loss of future sales.

2.1.5.2 Planning Options