BA 210: Operations Management

1. 1 BA 210: Operations Management

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3. 3 Today’s Roadmap and Objective To understand the importance of operations management, and focus on some key aspects: Total Quality Management Process Reengineering Value Chain Management

4. 4 Operations Management The management (design, operation, and control) of the transformation process that converts resources such as labor and raw materials into goods and services that are sold to customers Operations Management is about things like: Running Factories Delivering Services Processing Information Distribution & Logistics After-Sale Service It’s the “core,” the “guts” of the organization

5. 5 Operations Management as a System

6. 6 Why Is Operations Management Important? Every organization has a transformation process(es) manufacturing organization - produces physical goods service organization - produces nonphysical outputs (services) Competitive Advantage Strong operations management leads to responsiveness to customers; to quality; to efficiency. Global competitiveness U.S. manufacturing firms “woke up” to the strategic importance of operations mgmt after the 1970s steel, auto, etc. debacles.

7. 7 Total Quality Management Total Quality Management (TQM): - A philosophy of management based on continual improvement and responding to customer needs and expectations. Quality programs generally emphasize … – relentlessly track down the source of defects and eliminate it! Continual improvement: taking the attitude that a process/product can always be improved, over and over again, rather than the older attitude of a stable acceptable defect rate. The customer defines quality: Rather than the producer defining quality, find out customer needs, expectations and focus your entire process around meeting those. See also exhibit 2.8.

8. Key Components of TQM

9. 9 TQM applies to both Products & Services

10. 10 Example: TQM at Widget Co.’s accounting department Widget Co.’s accounting department has always focused on the accuracy of reports its provides. The firm adopts TQM and accounting joins in. After talking with departments that receive period-closing reports (“customers”), it becomes evident those departments would value receiving period-closing reports more quickly than the current 15 days (“customer defines quality”). Employees in accounting form teams charged with improving timeliness (“empowerment”) through analyzing and changing the process by which period-closing reports are produced (“focus on process”). One team finds preliminary reports could be provided within 5 days without major process changes, even though this is something the department would never have considered before its prior focus on accuracy (“customer focus”). Another team finds ways the period-closing process can be accelerated too. The time taken to produce the report is now carefully tracked (“accurate measurement”) and is steadily reduced as several initiatives are implemented over time (“continuous improvement”).

11. 11 The magical logic of “Quality is Free”

12. 12 Additional Quality Management Concepts Quality Circles: Groups of employees who meet regularly to discuss ways to increase quality ISO 9000 – A series of international quality management standards that set uniform guidelines for processes to ensure that products conform to customer requirements. Widely accepted internationally; often required of suppliers Six Sigma - … “Black belt” TQM - it is essentially a zero-defects standard Just-in-Time (JIT) inventory: System in which parts or supplies arrive at an organization when they are needed and not before.

13. 13 Some problems encountered with TQM Quality can lead to a “quality bureaucracy” as each process is laboriously documented and a “quality police” as every change made must be certified, which can cause frustrating delays. Quality has a long-term, “do it right” orientation that may conflict with pressures to “do it now” to meet short-term goals. Quality requires empowerment on the front line – a major challenge for mechanistic, command-and-control organizations. Quality improvement projects can overwhelm the organization (there’s lots to fix!) and lead to disillusionment unless priorities are set and expectations are managed.

14. 14 Today’s Roadmap and Objective To understand what Operations management is, and focus on some key aspects: Total Quality Management – The dominant operations management development over the past 20 years. Process Reengineering Value Chain Management

15. 15 Process Reengineering Process Reengineering: The fundamental rethinking and radical redesign of business processes to achieve dramatic improvement in critical measures of performance. Michael Hammer: “It is time to stop paving cow paths.” That is, automating or rationalizing fundamentally flawed processes is a sure road to failure. Instead, “reengineer” business processes by breaking away from old rules & using information technology.

16. 16 Process Reengineering Example Ford Managers are considering how to reduce their accounts payable staff by 20%, to 400. They visit Mazda and are stunned to find the entire department is 5 people. Ford decided to radically redesign their process. How did they do it?

19. 19 Problems with process redesign efforts Getting it right is problematic: Who wants to re-engineer their job out of existence? In general, reengineering tends to be tightly tied to job reductions, which of course create tremendous anxiety. There have been many cases where companies form re-engineering teams and then the companies downsize and fire people who were on the teams, which they’d promised not to do. Companies often bring in consultants who don’t have the deep knowledge necessary to generate an optimal plan. Process re-engineering is a major change effort; the commitment required to succeed is often underestimated The work has only started when the re-engineering plan is complete Hammer even wrote a second book about how hard it was to really gain the benefits of reengineering, for this reason.

20. 20 Contrasting TQM and Reengineering

21. 21 Today’s Roadmap and Objective To understand what Operations management is, and focus on some key aspects: Total Quality Management – The dominant operations management development over the past 20 years. Process Reengineering Value Chain Management

22. 22 Value Chains & Management Value chain - entire series (chain) of work activities that add value at each step of the transformation process value - performance characteristics, features, and attributes, etc., of goods and services which customers value Value chain management - managing a sequence (chain) of activities along a value chain Aims to create the highest value for customers Goes beyond cost reductions (efficiency focus) to include goals such as responsiveness to customers (effectiveness) Broader than supply chain management

23. 23 Stages in a Value Chain

24. 24 Value Chain Management:A new way to think about strategy Goal: create a value chain strategy driven by the end customer’s needs Full and seamless integration among all members of the chain, … each participant specializes and adds a component of value to the overall process The participants work together much as if they are a crossfunctional team the better the collaboration among chain participants, the better the customer solutions and the higher the efficiency

25. Why Value Chain Management?

26. 26 Example: IBM’s value chain and particularly the link to resellers In 1998, IBM spent $233 to handle each order it received, much of it “order management” – getting the order in, at the right price, answering questions, etc. IBM had long required that all customer interactions be mediated by an IBM employee – typically a sales representative. IBM removed this requirement, allowing it to integrate its order fullfillment process with its customers procurement processes electronically. Now customers can do for themselves much of what IBM used to do for them, with greater convenience and lower cost. For example, enter orders and check status. Costs along the value chain are reduced; both sides gain. IBM saves on processing costs; resellers have been able to reduce inventory by 30% because they can get orders in more quickly and know better when they will be shipped. In a separate arena, IBM now has a set of approved configurations, which means that large corporate orders don’t have to be vetted by the corporation’s IT department, saving tremendously because previously the error rate on orders was over 50%.

27. 27 Video Look for: Quality? Value chain management? Other key observations: Emphasis on Speed Role of Information Technology Variation across firms

28. 28 Operations Management:Further Study If you kind of like BA210 but its too soft and fuzzy, operations management might be worth exploring. You have the tangible challenge of efficient production merged with the people challenges of getting the factory floor humming harmoniously, or getting people to work well across organizations. Read this business novel: The Goal, by Eliyahu Goldratt and see what you think. It’s an engaging, if corny, story coupled with some really fundamental concepts. Used in MBA curriculums a lot.

29. 29 Next Up: Innovation Read section of Ch 13 on Stimulating Innovation (p. 354-357): Testing 123: Do 13-15 Only Read in Readings Packet: Harvard Business Review (Sep-Oct ’99) by Von Hippel, Thomke & Sonnack: “Creating Breakthroughs at 3M.” Fortune Magazine article on 3M