BA 32
John Meindl
This course develops the major themes and strategies of Operations Management
within both manufacturing and service organizations. The primary objective is to
familiarize you with the basic concepts, techniques, methods, and applications of
operations management. Topics include operations strategy, process choice, capacity
management, quality management, inventory management, supply chain
management, and new product & process development. We will also discuss some of
the latest manufacturing philosophies, such as World Class Manufacturing (WCM),
Lean manufacturing, Mass Customisation and Agile manufacturing.
Operations management focuses on carefully managing the processes to produce and distribute products and services. Usually, small businesses don't talk about "operations management", but they carry out the activities that management schools typically associate with the phrase "operations management." Major, overall activities often include product creation, development, production and distribution. (These activities are also associated with Product and Service Management. However product management is usually in regard to one or more closely related product -- that is, a product line. Operations management is in regard to all operations within the organization.) Related activities include managing purchases, inventory control, quality control, storage, logistics and evaluations. A great deal of focus is on efficiency and effectiveness of processes. Therefore, operations management often includes substantial measurement and analysis of internal processes. Ultimately, the nature of how operations management is carried out in an organization depends very much on the nature of products or services in the organization, for example, retail, manufacturing, wholesale, etc.
Operations management is an area of business that is concerned with the production of goods and services, and involves the responsibility of ensuring that business operations are efficient and effective. It is also the management of resources, the distribution of goods and services to customers, and the analysis of queue systems.
APICS The Association for Operations Management also defines operations management as "the field of study that focuses on the effective planning, scheduling, use, and control of a manufacturing or service organization through the study of concepts from design engineering, industrial engineering, management information systems, quality management, production management, inventory management, accounting, and other functions as they affect the organization" (APICS Dictionary, 11th edition).
Operations also refers to the production of goods and services, the set of value-added activities that transform inputs into many outputs.[1] Fundamentally, these value-adding creative activities should be aligned with market opportunity (see Marketing) for optimal enterprise performance.
Origins
Historically, the body of knowledge stemming from industrial engineering formed the basis of the first MBA programs, and is central to operations management as used across diverse business sectors, industry, consulting and non-profit organizations.
[edit]Operations Management Planning Criteria
- Control by creating and maintaining a positive flow of work by utilizing what resources and facilities are available
- Lead by developing and cascading the organizations strategy/mission statement to all staff
- Organize resources such as facilities and employees so as to ensure effective production of goods and services
- Plan by prioritizing customer, employee and organizational requirements
- Maintaining and monitoring staffing, levels, Knowledge-Skill-Attitude (KSA), expectations and motivation to fulfill organizational requirements
- Performance Measures for the measurement of performance and consideration of efficiency versus effectiveness[2]
Are You Giving Your Management These Results?
Cost Savings – Management wants Purchasing to save money. But successfully achieving and reporting cost savings requires a careful approach. Be sure to align your definition of cost savings with management’s definition, track your cost savings, and focus on total cost reduction, not just price reduction at any cost.
Productivity Improvements – Management will always expect you to do more work with fewer resources. No matter whether you’re in a tactical or strategic purchasing organization, there are many productivity metrics that you can choose from to track productivity gains: PO’s per buyer per day, average length of sourcing cycle, man-hours per dollar saved, etc.
Brand/Differentiation Support – Your organization’s mission or vision statement should give you some clues as to how your organization wants to be perceived in the marketplace and how it wants to be differentiated from its competition, such as offering higher quality, faster cycle time, better service, lower cost, or something similar. Make sure that your decisions and metrics support your management’s brand and differentiation strategy. As brainless as this sounds, you’d be surprised how many organizations have a mission of being the “highest quality provider” in their industry, yet their purchasing departments measure only cost savings.
Customer Satisfaction – Sometimes, being in purchasing can make you feel separated from your organization’s customers. But management relies on things that you’re responsible for, like assuring continuity of supply, to keep its promises to its customers. Realize that you can personally be responsible for your organization’s failure to meet customer expectations. In this day of tough competition, organizations simply have to meet customer expectations to survive and you have a critical role in that survival.
Positive Cash Flow – In some organizations, the timing of monetary receipts and payments is critical. Those organizations cannot afford to have more cash leaving the company than coming in during certain periods. Be aware of that and negotiate appropriate terms with your suppliers. But don’t just pay them late and hope that they don’t notice like some organizations do!
Published by the Massachusetts Institute of Technology, Center for Advanced Educational Study (MIT-CAES), Cambridge, MA02139
What Is Supply Chain Optimization?
Some sourcing situations involve constraints and complexities. Constraints are limits on your decision, for example:
- A requirement that you must select two suppliers (as opposed to one, three, or any other number)
- No supplier has the capacity to handle 100% of your business
- A requirement that a certain percentage of your award must be placed with diversity suppliers
Examples of complexities may be:
- A large number of line items being bid
- Suppliers offering discounts at different volume levels and/or combinations of line items
- Various delivery locations with differences in the suitability of certain bidders to supply some of them
- A choice of freight lanes at differing costs
When you encounter situations with lots of constraints and complexities, it becomes quite challenging to figure out the best supplier selection. For these types of situations, some purchasing departments utilize supply chain optimization technology to support their decisions.
Simplified, supply chain optimization is a technology that applies “rigorous mathematical techniques to a well-defined sourcing scenario to produce an optimal award allocation,” according to Michael Lamoureux, president of ToP KaTS Consulting and editor of the Sourcing Innovation Blog. Supply chain optimization helps purchasing departments “arrive at the best decision out of all the possible alternatives.”When there are multiple bidders, multiple constraints, and lots of complexities, there can be a massive number of alternatives and combinations! And the more options there are, the higher the probability that you will make a suboptimal decision.
While it is possible to work out some slightly complex bid analyses by hand, there is a significant chance that using supply chain optimization technology can save money, save time, and reduce errors. But supply chain optimization may not be appropriate for every organization or spend category.
According to Lamoureux, “You would use [supply chain optimization] to source high-value core commodities, parts, and materials for which there are capacity constraints, associated risks, and multiple potential suppliers.” And because supply chain optimization technology requires a significant investment – Lamoureux estimates a premium of “anywhere from $100,000 per year to a few million” dollars above the cost of a standard eSourcing application - it is typically adopted by larger organizations who are able to achieve a larger return on investment due to their spend volume.
Are Major Technology Breakthroughs Looming?
In the late ‘90’s, the field of supply chain technology exploded with new innovations such as eProcurement, reverse auctions, and more. The bursting of the dot-com bubble slowed the pace of innovation but, in 2006, we are seeing the return of innovative technology in the supply chain field as well as the Internet in general.
Today’s PurchTips explores three emerging supply chain technology innovations: software delivery, community intelligence, and buyer-supplier collaboration.
Community Intelligence: Today’s supply chain technology providers are “oriented to create a virtual community that’s constantly transacting and collaborating and exchanging information,” says Minahan. Community Intelligence includes inter-company information about supplier capabilities and performance, benchmarking data, and best practices that are accessible to the “Community” of users of a supply chain system. Some speculate that supply chain systems will someday feature Community-wide access to peer-input supplier ratings, not unlike a corporate purchasing version of eBay’s seller feedback functionality.
Buyer-Supplier Collaboration: A casualty of the dot-com bust was the buzzword “C-Commerce” for Collaborative Commerce – a vision of the future that buyers and suppliers would collaborate seamlessly online. With collaborative tools like wikis now populating other portions of today’s cyberspace, the buyer-supplier collaboration envisioned earlier is likely ready for prime time. Minahan cites three particular examples of technology-facilitated collaboration:
- Both buyers and sellers will be able to expose and share their excess inventory across the Community.
- Community members will engage in collaborative supply chain planning and logistics route sharing.
- Buyers will grant suppliers access to buy from their contracts where pricing or availability is more favorable, thereby reducing total supply chain costs.
What Is A 21st Century Procurement Department?
A recently certified SPSM had been asked to do a presentation on characteristics of "The 21st Century Procurement Department." He asked me for input on a few key areas and I'll share that input with you...
Structure & Alignment - Modern procurement departments structure themselves to achieve the perfect mix of centralized and decentralized buying. End users - not procurement - place orders for low-dollar items, using contracts set up by a centralized procurement staff. So transactions are decentralized, not decisions.
A centralized procurement staff is concerned not with order placement, but with establishing enterprise-wide contracts, managing relationships with those suppliers, and providing processes for decentralized transactions.
There is no one-size-fits-all way of aligning a procurement department. Some organizations align their procurement staff according to customer. Others align according to commodity. Still others align by supplier. The "best" way depends of the goals of the company.
Qualifications, Knowledge, & Skills - Because of the higher-level responsibilities of modern purchasers, they must have solid fundamental procurement capabilities, analytical skills (particularly in financial analysis), advanced computer expertise, and skills in contracts, project management, relationship building, strategy development, and negotiation.
The manager needs to have all of the skills of his/her employees plus the ability to:
- Align the procurement department with the mission and vision of the overall organization
- Implement initiatives and best practices that support the mission and vision of the overall organization
- Lead people and the procurement function in general
Software & Intangibles - Modern organizations are adopting or "growing into" spend management.
technology solutions which blend eProcurement, reverse auction, spend analysis, and other capabilities. As far as intangibles, they focus on delivering measurable results aligned with organizational objectives and collaborating with suppliers to achieve a competitive advantage.
In addition, procurement departments are enlarging their role in the supply chain. Once simply just the interface for external "inputs," procurement departments are now also expanding towards the organization's "outputs." This involves managing inventory, taking responsibility for logistics, and, in the future, even being a more significant part of a customer collaboration team.
Here are three ways you can reduce costs in the supply chain without driving your suppliers out of business...
- Eliminate Redundancies In The Supply Chain. For all supply chain partners, create a flow chart of all activities involved in the procurement, set up, production, inspection, storage, and transportation of all materials and components that go into the final product. You will likely find activities that are repeated by different supply chain partners (e.g., outgoing inspection by one supply chain partner immediately followed by incoming inspection by another). If you can work with your supply chain partners to eliminate such redundancies, you can reduce their costs and, as a result, your price.
- Shift Tasks To The Most Efficient Supply Chain Partner. Sometimes the capabilities of supply chain partners overlap. Let's consider a customer's purchase of engraved plaques. The customer's immediate supplier may do direct marketing, fulfillment, and engraving. That supplier's supplier may do design, manufacturing, and engraving. In this case, who should do the engraving? The most efficient supply chain partner should, assuming that either can meet quality, delivery, and service standards. But this means that you have to question "the way we've always done it" so that you can do it the best way.
- Leverage The Supply Chain's Buying Power. Often, the products and services purchased by second tier suppliers are also purchased by a first-tier supplier. Many times, that first-tier supplier gets a better price than the second-tier suppliers. In cases like these, the first-tier supplier can negotiate to add second-tier suppliers' volume onto its agreements, thereby getting even deeper discounts for itself and reducing total cost throughout the supply chain.
Are You Planning For Procurement Risks?
Risk analysis is a powerful project management technique. You can use risk analysis to address the risks that make your procurement job unnecessarily difficult.
A risk analysis is “figuring out what can go wrong and how to either avoid it or fix it,” said Diana Lindstrom, a former strategic sourcing manager for a huge telecommunications firm and currently the president of Los Lobos Consulting – a company specializing in project management and coaching project managers. “By figuring out what can go wrong – identifying risks – we’re one step ahead of Murphy’s Law.”
Great project managers see projects in a logical sequence of systematically executed events. Developing a procurement risk analysis is no different.
“Once we’ve identified the risk, then we assign a level to that risk,” Lindstrom explains. “You can use 1 through 10, ABC, or any other ranking system.”
The final piece of the procurement risk analysis is the plan. “The risk plan includes the steps necessary to avoid the risk or mitigate the fallout from the risk if it does happen,” she says. “By knowing the risks, understanding how likely each one is to occur, and having a plan in place to deal with it, we’re able to successfully complete projects.”
Using a risk plan can help a procurement department demonstrate its value to the organization. “Most internal customers don’t understand why procurement needs to follow all the steps that are laid out by the company. And they don’t care,” she notes. “So, using a risk plan becomes an educational tool. It teaches folks what happens if the procurement steps are not followed. It shows them in black and white what can happen – the risk – and how procurement professionals deal with it – the plan. It shows them that procurement wants to help them do business in a less risky way.”
So, in summary, identify risks, assign levels to those risks, determine the steps to avoid or mitigate the risks, and share the plan with stakeholders.
How Modern Is Your Purchasing Department?
The purchasing function has changed dramatically over the last several years. And it continues to change and evolve almost daily. This edition of PurchTips contains 10 characteristics of modern purchasing departments. Use it as a checklist.
If your department doesn’t meet each criterion on this list, don’t be discouraged. Instead, use this checklist as a set of goals to which you aspire. So, without further fanfare, here are 10 signs of a modern purchasing department…