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Operations Management For Dummies
Published:
December 2, 2021
Overview
The plain language guide to getting things running smoothly in the world of business
Operations management is all about efficiency, and Operations Management For Dummies is all about efficiently teaching you what you need to know about this business hot topic. This book tracks typical operations management MBA courses, and it will help you un-muddle concepts like process mapping, bottlenecks, Lean Production, and supply chain management. Learn to step into a business, see what needs improving, and plug in the latest tools and ideas to shape things up in any industry.
This latest edition covers, you guessed it, digital transformation. Technology is completely upending operations management, and Dummies walks you through the latest, so you can stay at the front of the pack. Other new
stuff inside: supply chain traceability, ethical sourcing and carbon footprint, business resiliency, and modularizing the supply chain. It’s all here!
- Optimize operations and increase revenue with strategies and ideas that make businesses run better and cheaper
- Get easy-to-understand explanations of complex topics and theories in operations management
- Learn how operations management is affected by digital transformation and sustainability concerns
- Evaluate, design, improve, and scale all sorts of processes, regardless of business size or area of operation
Businesses can't operate successfully without effective operations and supply management. That makes Operations Management For Dummies a must—for MBA students and business professionals alike.
In business, operations management is the development, execution, and maintenance of effective processes — whether used continuously for the production and delivery of goods or services or for the one-time execution of a major project. Some mathematical formulas come in handy to keep business operations running as smoothly as possible, from managing inventory to estimating the time and cost of a special project.
About The Author
Mary Ann Anderson is Director of the Supply Chain Management Center of Excellence at the University of Texas at Austin.
Edward Anderson, PhD, is Professor of Operations Management at the University of Texas McCombs School of Business.
Geoffrey Parker, PhD, is Professor of Engineering at Dartmouth College.
Articles From The Book
3 results
Operations
Articles
Everyone makes mistakes, especially when just starting out in a new job or activity. There are certain mistakes that rookie operations managers tend to make. Don’t feel too bad if you’ve made all of them; even experienced operations managers sometimes make them, too. But if you haven’t yet slipped up on these missteps, just knowing about them increases your chances of avoiding them.
Operations
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What’s currently called operations management evolved from a long line of discoveries, inventions, and revolutions. You may find it hard to believe that there was a time when products weren’t mass-produced and available on command. If a person wanted something, she had to make it or persuade someone to make it for her.
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What makes a company world class, or the best at what it does? A firm’s operations are a pivotal element in what customers experience. Consumers can say why they like a certain product or service — and why they don’t. Operations spend company money, interface with customers, and make achieving business goals possible.
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What skills do you need to be an effective operations manager? Though there’s no single profile for the ideal operations manager, most successful managers do have certain skills and traits. If you’re wondering whether operations management is for you, you may want to ask yourself the following questions. The answers are based on surveying many ops people in many industries.
Operations
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The management of one-time projects to install new operations or change existing operations is a major discipline for operations managers. Though based on similar skills used in optimizing ongoing operations, project management focuses on the completion of a discrete project on time, on budget, and in scope, as planned and approved.
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No simple standard equation exists to tell you how much capacity you need — right now or in the future — or when exactly your operations management should add capacity. Determining the correct capacity level for your business at any given time to satisfy customer demand takes a great deal of assessment and careful consideration because demand fluctuates, and adding capacity takes time and money.
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The bullwhip effect exists in all supply chains — it’s the root of the boom and bust cycles that occur in many operations — and it can be devastating if not properly managed. Fortunately, you have ways to manage the bullwhip and minimize its impact. The bullwhip effect is triggered by several different causes.
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All quality management and improvement movements share the same basic foundation, regardless of what your company calls its quality program (some companies spend more time coming up with clever names for the program than actually implementing it). This foundation is built on continuous improvement and statistical analysis.
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After you identify the risks in your operations management project, you need to figure out a way to handle them. The best way to handle risks for a given project depends on the nature of the risk and the specifics of the project.
Here are the three basic varieties of risk:
Variance risk: Some risks have a probabilistic distribution resulting from uncertainties from concerning knowledge, materials, labor productivity, etc.
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Demand isn’t always consistent; demand can vary for many reasons and your operations management is dependent on understanding these trends. Recognizing why demand varies also helps you increase your operation forecast’s accuracy. Specifically, watch for these factors that may trigger variations in your demand:
Cycles are wavelike occurrences that repeat over longer periods of time.
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Heijunka is the Japanese term for production leveling. The goal of heijunka is to reduce operations batch size as much as possible while still meeting production volume targets. Heijunka facilitates just-in-time (JIT) production and significantly reduces all levels of inventory in a system. This contrasts with traditional production that tended to increase batch sizes to reduce downtime due to setups.
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Good operations management is essential for quality. Quality begins with a product’s design, which determines how well the product will meet customers’ needs and, to a large extent, drives the cost of production. Therefore, it’s critical that marketing, product design, and manufacturing work together.
Quality function deployment (QFD) is a structured approach for integrating customers’ requirements into a product; it’s also the process used to create the product.
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How you manage your operations may not seem important from a customer perspective, but nothing could be further from the truth. From a customer’s perspective, two theories are in play: how long the customer waits in line and how long the customer thinks he’s waiting in line.
If you must make a customer wait, you can make the time more comfortable and seem shorter than it really is by managing the customer’s perception of the waiting time.
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One of the major characteristics of a lean company is the relationship operations managers maintain with their suppliers. Lean organizations such as Toyota view their supply chain as an extension of the company, not as an adversary, as is common in traditionally managed companies.
For a healthy relationship with suppliers, follow these rules:
Minimize the number of suppliers.
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Quality is a pillar of any lean organization. Poor quality contributes significantly to the waste that lean companies strive to eliminate. In lean organizations, quality is the responsibility of everyone. Line workers are trained to detect poor quality, identify the causes of poor quality, and implement improvements.
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Quality improvement programs aren’t a new concept or late-breaking fad in operations management. Companies have been using methods such as total quality management (TQM) and statistical process control (SPC) for decades. These traditional quality improvement initiatives have turned into what’s become known as Six Sigma quality.
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Eliminating waste, or muda as the Japanese call it, is the core of the lean approach to business and is key to good operations management. Waste exists in any process, and the goal of smart business is to identify it and get rid of it.
The process flow diagram is a useful tool for identifying waste. The flow diagram is a visual representation of the process that you can use to identify those activities that don’t add value to the end product.
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Most companies know that designing and maintaining a strong and reliable supply chain is vital to profitability and long-term survival. It is important to improve supply chain management through better communication, accountability, and inventory management.
Better communication
Through modern information technology, companies are now able to share two critical data points with their suppliers: actual customer demand and the amount of inventory on hand.
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One size doesn’t fit all when it comes to building a supply chain. Each company needs to consider its goals and operation management strategy when designing a supply chain. Companies also need to account for the cultural aspects of their suppliers because communication is key to any successful relationship.
Language barriers and the meaning of different phrases can vary across cultures, leading to misunderstandings in directions.
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There are a number of ways to track the progress of your operations project. One of the simplest is to set up milestones during the project planning phase of the project life cycle. If there are enough milestones and they are spaced relatively evenly, you can get a good idea of where you are in the project by tracking which milestones have been completed on a regular basis.
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Most companies are aware of the bullwhip effect and the damage it can inflict on their business. Yet many managers still fall into the traps that trigger bullwhips. Here are some basic techniques for avoiding the bullwhip effect. These techniques may seem simplistic, but many companies don’t follow them.
Share information
Demand exists at every level of a supply chain, but the only demand that really matters is the end customer’s demand for the final product.
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When you’ve finished entering timing data for a forward pass analysis, you can create the backward pass analysis for your operations, which determines the latest times an activity can be started and finished without compromising the timing of the project as a whole. Follow these steps to complete this part of the diagram.
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New products are like babies — they need constant attention by operations management and they change rapidly. New products are said to be in the incubation phase and are typically prototypes; their design can change quickly in response to market reception. You must be flexible and responsive when managing a product in this phase.
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A large part of a product’s cost to manufacture is determined by the product design itself. The design affects operations and determines how many components make up the product and dictates how these components must work together to provide the product’s necessary functionality. Consider using some of these design techniques that successful firms use when developing products.
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There are countless ways for an operations manager to design a process. What constitutes a good or bad design depends on what your objectives are. Some general rules of thumb can help you maximize your process design and achieve your goals.
Consider the effects of the placement of activities in the process. Serial processes have operations that must occur one after the other; parallel processes can occur simultaneously.
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Your corporate strategy ideally establishes the organization’s direction and the basis upon which the business and your operations will compete. Michael Porter, a leading expert on corporate strategy and competitiveness, proposed basic strategies for competitive advantage.
They include a focus on being the low-cost provider (Walmart), a focus on being the leader in innovation (Apple) or product quality (Toyota), or a focus on the differentiated needs of the customer (American Express).
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While it’s nice to know that your operations management project is ahead of schedule and under budget, the actions you’ll take are probably minimal (other than patting everyone on the back!). What you are really concerned about is whether your project is in trouble. What would be even nicer is to figure out whether the project looks like it’s headed in trouble before it actually is!
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Creating accurate and useful process maps requires considerable time and resources, but these maps are vital to any meaningful operations management process evaluation and improvement effort. Here’s some advice for creating an accurate process map:
Always ask why. While constructing an initial process map, find out why certain actions are being done.
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After a firm determines its corporate strategy and establishes its long-term capacity needs and production operation policies, focus shifts to aggregate planning. Aggregate planning usually presents a detailed plan for sales and operations that covers a period of 2 to 12 months. A company’s aggregate plan typically addresses the following three specific operational considerations:
Employment levels: How much manpower is needed to meet the set production rates?
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The best way to manage quality is not to make defects in the first place, and this begins with operations management. To do this, companies are finding that they must shift their entire focus away from who’s responsible for defects to how the process is creating defects.
Quality guru W. Edwards Deming once stated, “Workers are responsible for 15 percent of the problems; the system, for the other 85 percent.
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Operations management forecasts tend to be inaccurate, and you need to find out how (in)accurate your forecasting model is. Forecasting error is the difference between the forecast and actual values. Forecasts are inaccurate for many reasons. Here are some of the most common sources of errors:
Incorrectly identifying the relationship between variables: Identify the correlation between one variable and another.
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How do you manage your operations to most efficiently supply products to your customer? The product-customer interface typically follows one of two patterns: make to stock or make to order.
Make-to-stock
In a make-to-stock (MTS) process, you produce products and place them in a finished goods inventory (FGI) until you receive a customer order.
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Operations managers must sometimes cope with a number of special situations. These range from one-off projects to outsourcing processes and may include managing immature or obsolete products. Here’s some advice on managing special situations.
One-off projects
Operations managers must often deal with projects that are executed only once.
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Your business will become more efficient as a whole if you can improve your operations management behind the scenes. For the most part, anything that the customer doesn’t have to be directly involved in should be optimized only for business efficiency. When a customer takes a check to the bank for deposit, he’s unconcerned about how the money gets credited to his account — only that it does.
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Companies spend a lot of time and resources on process improvement projects that fail to produce the desired results in operations management. A primary reason that many projects fall short of expectations is because they fail to follow a structured approach.
Documenting where a process has been and where it needs to go provides a road map — with directions — that can save an enormous amount of time and resources that may otherwise be wasted on dead ends and cul-de-sacs.
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Though every operation manager’s dream is to have unlimited demand for her product or service, many businesses have more than enough capacity; customer demand is the actual bottleneck. In this case, an internal bottleneck no longer exists. Until you can increase the demand, there are some concrete things you can do to reduce your process expenses.
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Outsourcing a product for an operation managements project is much like smashing Humpty Dumpty. After its components have been scattered to dozens of suppliers all over the world, all the king’s men may have a very difficult job putting Humpty Dumpty back together again. Still, it can be done.
Incentives: Einstein said that physics models should be as simple as possible, but no simpler.
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Planning for an operations management project can be a process, and like all processes, it benefits from standardization and discipline. A successful project rests on three legs, much like a stool. It needs
Good processes to ensure that the appropriate actions are taken in the right sequence
The right people working on the project
Appropriate communication among project participants
The phases of the cycle
The purpose of a project plan is to translate goals into objectives and results.
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Successful operations management projects require a leader who can coordinate a number of people from different organizations with different objectives and skill sets. Yet they need to work together toward the same goal to complete the project.
Develop a project proposal with a team
A common vision aligns the efforts of the people who are going to execute the project.
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Figuring out how much time you need for various activities and operations is difficult. For this, try a critical path diagram. A critical path diagram identifies which activities need to be completed before other activities begin. These activities are also called predecessors and must be carried out before the subsequent dependent activities can begin.
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If, as an operations manager, you’re lucky enough to be in a situation where demand for your product or service exceeds your ability to make the products or deliver the service, then you want to find ways to increase your production so you can sell more. Effective management of your bottleneck, or constraint — resources that limit a process’s output — is a key to productivity and profitability.
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Inventory management is one of the most difficult tasks in operations because it’s hard to predict actual customer demand. You can approach inventory management in many different ways. The right one for any given situation depends on the specific business environment.
Establishing a cost-efficient inventory management system — a process that determines how much inventory you need and when — requires knowledge of three specific variables:
Customer demand forecast: Because point forecasts (a single estimate for expected demand) are always inaccurate, your forecasts should always include information on expected average demand and a measure of the potential variability in demand.
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Many products that make it out of the incubator fail in the growth phase. The growth phase is almost always turbulent. The product faces both internal and external obstacles. Demand, market forces, and the competition are rapidly evolving.
The characteristics and operation strategies for a product in the growth phase include rapidly increasing and unpredictable demand, gradual increases in competition and decreases in product price, expanding your supply chain, and investing in developing standard processes to improve scalability and begin to reduce defects.
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Although processes vary in many ways, they also share some common characteristics that apply across a broad spectrum of operations. Good operations management begins with understanding and preparing your processes to run as smoothly as possible.
Nearly all processes in operations have three major components:
Inventory: This includes not only the finished goods inventory (products that are complete) but also jobs (products or services) that are only partly complete in your process (known as work in progress, or WIP).
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Operations managers face a new challenge as a product matures. Its sales usually level off as the market becomes saturated. This saturation phase is usually a relatively calm period in which the demand, products, and competition are stable.
Despite the stability, this can be a challenging time for a company. Because the total market size is generally already determined, firms start looking for new ways to get a bigger slice of the existing pie by stealing market share from competitors.
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Most products reach a point at which sales start to decrease. This declining phase requires many important end-of-life operations decisions, such as when to permanently retire the product, how to handle the repair of existing products in the market, and what to do with current capacity.
The characteristics and operation strategies for a product in the decline phase include decreasing demand and prices, an emphasis on reducing costs through efficiency and reduction of inventory, shrinking your supply chain, and beginning to reallocate resources.
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You can take some measures in your operations management to help prevent the decline of a product or to avoid it stalling out in the saturation phase. Some products, such as baking soda or refrigerators, are fortunate enough to never reach the decline phase; they remain in the saturation phase for eternity, usually at a lower sales level than they reached at their peak.
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Few things are more disruptive to operations management than poor quality. Poor quality has a negative impact on all your process metrics. You will need to know how to manage your process given the current quality levels.
Poor quality wastes resources in three ways:
By producing the bad part in the first place
By having to “fix” the bad part (often called rework)
By having to find bad parts before they progress in the process or, in the worst case, before they’re sold to a customer
When you find defects in a product, you can either fix what’s wrong or scrap the product.
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Managing operations in the incubation phase and entering the growth phase is much easier for a company with multiple products in different phases of the curve than for one that has only one product that it’s trying to commercialize. Not only does the multiple-product company already have a reputation, but also, the products in the growth phase can help fund and fuel those products trying to survive incubation.
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Risk is a situation involving exposure to danger. Let’s face it: In life, risk is everywhere. In business, there are several types of risks you should be aware of and actions you can take to prevent the danger or protect yourself from it.
Types of business risk
As an operations manager, you’re likely to encounter the following risks, which can prove devastating to your business.
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In a process, some operations can process multiple flow units at a time and others can’t, so it’s important to analyze the operation batch size to maximize the total system’s capacity. To accommodate other operations in a process, a particular operation’s batch size may be lower than its maximum possible output.
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The transfer batch size refers to the number of units in operations management that move as a group from operation to operation. On a process map, the transfer action is represented as an operation even though it doesn’t add value to the end product because the step is necessary for the parts to move through the process.
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Managing outsourced projects is almost always more difficult than people expect. The learning curve — for operations managers, your firm and the supplier — that goes into the making of a smooth, successful relationship is often very difficult.
These are some ways to get to the facts about what outsourcing can and can’t do and how to overcome some common hurdles.
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With a critical path diagram complete, you can calculate a timing estimate for your operations project. Follow these steps to perform a forward pass analysis, which defines the earliest start times and earliest finish times for each activity. This also identifies the earliest finish time for the project as a whole.
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Aggregate planning is rooted in the manufacturing sector, but many of its concepts apply to service industries, too. Operations planning typically happens in service-based companies. Following are the factors that make planning for service unique and describe how to develop a plan for serve operations.
The difference in services
All sorts of businesses sell services, and some service products — such as those provided by restaurants and retail stores — contain many of the same operational elements as manufacturing-based organizations.
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Risk registers prioritize risks by likelihood of occurring and severity of impact if it does occur. In an ideal world, an operations project manager has access to a numerical probability of a risk occurring and the expected value (mean) of its impact in terms of cost or timing.
Usually, however, this information is not available, so you want to qualitatively rank the likelihood of experiencing the risk from 1 to 5, with 1 representing a “very low” probability to 5 representing a “very high” probability.
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Responding to risks when they occur is one of the great tests of an operations project manager. This is particularly complicated by three “laws” that work against efficiently completing the project. One law, Parkinson’s law, applies to times when things are going well. The other two, Brook’s law and Homer’s law, kick you when you’re already down.
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Any process that requires direct contact with the customer needs special attention by operations management. These face-to-face interactions reveal blemishes along with beauty marks to the customer. Examples of interface points include a customer entering a bank for service, a patient coming into a doctor’s office for an appointment, or a patron sitting down at a restaurant table.
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Material requirements planning (MRP) led to the development of enterprise resource planning (ERP). As the name implies, ERP integrates an entire company into one information system that operates on real-time data it receives from throughout the organization. The shared database ensures that every location and department can access the most reliable and up-to-date information.
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How effective is your inventory management process? To find out how well operations management is dealing with inventory, you must be able to measure it. Here are some common inventory metrics:
Average inventory level: As the name implies, this is the average inventory levels maintained in the system. Your goal is to reduce this without negatively impacting the other metrics.
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Managing inventory is an important way for a business to manage variations in demand. Inventory can provide a means to manage demand fluctuation so that process capacity and resource utilization are kept steady and used most efficiently.Of course, maintaining an inventory isn't cost-free or risk-free, because inventory represents tied-up cash and storage costs and comes with the risk that the inventory will spoil or become obsolete.
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A company’s master schedule focuses on creating the product or delivering the service that a company is in business to sell. Good operations management is essential. This commodity often requires materials and processes, and the collection of parts and activity can become complicated very quickly.
Gather information for the system
Material requirements planning (MRP) is a computerized information system designed to help manage the ordering and scheduling of the components, parts, and raw material that make up a company’s end product.
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Many things stand between a company’s operation management and its quality-centered end game. Among the obstacles are the tendency to lose focus on the goal of quality improvement, get sidetracked by a seeming “silver bullet” that promises to solve all the quality issues, or simply give up when the gains don’t come fast enough.
Operations
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In business, operations management is the development, execution, and maintenance of effective processes — whether used continuously for the production and delivery of goods or services or for the one-time execution of a major project. Some mathematical formulas come in handy to keep business operations running as smoothly as possible, from managing inventory to estimating the time and cost of a special project.
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Unlike processes, you don’t perform projects over and over again; they’re usually one-time efforts. The metrics of success for any operations management project depends on the objectives that the project is intended to meet. Yet many project leaders spend too little time before launching a project figuring out what they want to achieve.
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What follows is a sample project proposal for constructing and operating a concentrated solar power plant in the fictional country of Magrebia in North Africa. Concentrated solar plants use specialized parabolic mirrors to focus reflected sunlight onto a central receiver tube that runs the length of the mirror.
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Processes fall into four different categories for operations management based on the nature of their function. Some processes relate primarily to a product’s cost structure; others address the company’s product standardization needs, output volume, or production flexibility. Take a look at processes that focus on these types of business considerations and review general guidelines on how to best select a process to meet the requirements of your product.
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In many organizations, managers need to be aware of resources that perform more than one operation in a process or are shared across processes. For example, a receptionist in a doctor’s office not only greets patients but also collects payment and schedules future appointments.
Similarly, a product designer may design more than one type of merchandise in a given time period for different brands.
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Hiring a separate company to build a product or provide a service can make sense for some operations management projects because outsourcing may be cheaper, provide higher component quality, or reduce capital costs.
Outsourcing has continued to be a popular business tool since the turn of the 21st century. Here are some of the most compelling benefits of outsourcing:
Better quality: Sometimes another company is just better at building a product or delivering a service than your firm is.
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An aggregate plan provides the road map for business operations; it translates corporate strategy into a plan that can be implemented on the plant floor or on the front-line of service. For companies that sell physical products, this map details the production process. For service-based companies, the aggregate map identifies staffing levels and other resources needed to accommodate customer demand.
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If the goal of outsourcing is to gain a competitive advantage in the marketplace, operations managers need to seriously weigh the outsourcing option. For some businesses, sharing intellectual property with partners is basically an invitation for trouble. This trouble, often referred to as an outsourcing trap, can manifest itself in a number of ways:
Creating your own competitor: If you outsource enough of the parts of your product to suppliers, another firm may be able to buy those parts (or ones very similar) and put them together to create a competitive product.
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Processes vary in thousands of ways for different kinds of organizations with different kinds of operational needs. Start-up firms need to scale up rapidly, and the restaurant business requires some artistry. Pharmaceutical companies must stay focused on strict regulations, and firms in the personal computer industry must worry about shelf life.
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Point forecasts, or single-number predictions of demand, are generally always incorrect. You want an accurate forecast to inform your operations management. That’s why you need not only an expected value (what you think demand will be) but also a measure of your method’s forecasting error.
Here are the fundamental tenets of forecasting:
Aggregated forecasts are more accurate than disaggregated forecasts.
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Managing your operations to balance inventory in an effort to satisfy customer demand — that is, actual demand in the market for products and services — without exposing the company to unnecessary cost and risk is crucial. But this aspect of operations can be one of the toughest.
There’s just no way around it for most businesses: If you’re going to sell products, you need to have stuff available for customers to purchase.
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Maintaining inventory is expensive; it diverts resources from other areas of your operations. But not having enough inventory can lead to lost sales and inadequate customer service. Therein lies the rub. Getting too far off the delicate balance of appropriate inventory for your business puts you in dangerous territory.
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It’s important to identify what gives you the advantage over your competitors. These advantages are your core competencies, and you must protect them, especially if you’re planning to outsource any part of your business. These competitive advantages may be in the form of a new technology that you’ve developed, a new process that you’ve implemented to make a product, or a new way to use an existing methodology.
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The first and possibly most important risk management activity for an operations project is to brainstorm all the things that can go wrong. Do this during the planning phase — well before you begin actually executing the project. The most common tool for managing risk is a risk register.
To begin developing a risk register, consider the critical assumptions from the original project proposal that will harm the project if they are violated.
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A well-defined process doesn’t have many special cases or deviations, so documenting or describing operations and business processes in a clear and practical way ensures that everyone involved — employees, managers, and stakeholders — can see how specific operations relate to others and what happens at each point in a process.
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Operations managers first need to decide decide what to outsource. Outsourcing the wrong part of your product or service can result in poor quality, increased costs, and other mishaps. A poor outsourcing decision can result in key intellectual property being leaked or, worse, the creation of a new and fierce competitor.
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When assessing quality for operations management, the first question you need to ask is, “What is a quality product?” Only your customer can answer this question because quality is what the customer says it is. A quality product means different things to different people, and expectations differ from product to product.
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Getting the most out of your outsourcing relationship depends on several factors. One obvious factor that operations managers need to consider is that the supplier needs to be financially stable so that it does not go out of business while working with you. A less obvious but still important issue is a candidate supplier’s familiarity with serving firms similar to yours in terms of geography, product requirements, and sales volume.
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Operations management is a fundamental part of any organization. In fact, Forbes magazine reported in 2011 that about three quarters of all CEOs came from an operations background. Not all these CEOs studied operations in school; only some of them did. Many majored in finance, marketing, information systems, or engineering and ended up in operations at some point in their careers.
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You may have heard the saying “Quality is free.” Getting your operations management to implement an effective quality system is anything but free, but the alternative usually proves to be much more expensive.
Producing a quality product or service requires the whole organization to be onboard and involved. Quality begins in product design, requires attention in production, and must be at the forefront of customer service.