According to Naylor ‘operations management is concerned with creating, operating and controlling a transformation system that takes inputs of a variety of resources and produces outputs of goods and services needed by customers.’ (John Naylor, Introduction to operations management, page 5, second edition, 1996)

Operations management is as necessary and appropriate in a manufacturing organization as it is in a service organization. It is not just to do with the producing a ‘product’ more effectively and efficiently, it is to do with producing any output. Although obviously a key area that operations management can contribute to is the ‘operations’ or production function itself.

Manufacturing and services: differences

The differences between manufacture and service operations are obvious when the service is entirely produced at the delivery point. Some examples are: entertainment, fast food and medical diagnosis. When the service is regularly it is achievable to reduce costs by standardization of goods and incorporation of rules to make operations and control straightforward. On the other hand, such mass service operations are different from mass production.

For mass service operations customer care is very important while for mass production technical skills in arranging flows of goods come first. . The largest part of successful firms have discovered ways of getting staff to apply interactive skills routinely and repetitively when the customer is so directly involved in the process.

Manufacturing

Operations management is combined by the following elements:

• Supply chain
• Quality control
• Project management
• Inventory control
• Equipment and material planning

Supply chain

A supply chain is the process of moving goods from the customer order through the raw materials stage, supply, production, and distribution of products to the customer. All organizations have supply chains of varying degrees, depending upon the size of the organization and the type of product manufactured. These networks obtain supplies and components, change these materials into finished products and then distribute them to the customer.

(http://www.rosshorwood.com/eQualitySeal/SupplyChainDefinitions.html 1/2/2006)

Here we will analyze how the supply chain works in a just in time manufacture.

As we can see in figure 1, supply chain includes the suppliers, the process, the inventory and the customers.

Suppliers--->Process--->Inventory----->Customers

Figure 1 - Just in time manufacture

Suppliers

The selection of suppliers has to do with the selection of resources. These resources can be categorized as follows:

• Material resources
• Capital equipment
• Labour
• Information

There are such types of purchasing strategies such as supply base optimization, global sourcing, longer term suppliers relationships, early supplier design involvement etc.

A company that produces clothes for example needs many different types of raw materials in order to design a variety of men’s and women’s clothing in several levels of quality. If this company deals only with local suppliers it takes the risk to buy a specific type of raw materials and in expensive price, but if it follows global sourcing it may find a variety of raw material and in better prices. Also the selection of the location that has its plant and the equipment of it are significant.  In the era of globalization many companies have its plants in developing countries (China, India, Hong Kong etc) where are tax-free, there is good infrastructure (airports, ports, highways), the labor is cheap, and the government offers free land to companies to have their plants. Furthermore in these countries companies can find high-tech equipment in very low prices. Companies equip their plants with the latest technology machines, that provides them fast and secure production.

Also the information flow in the organization is a very serious aspect of the supply chain. Companies use several tools as ERP, CRM and other in order to improve the information flow. CRM (Customer Relationship Management), is a process or methodology used to learn more about customers' needs and behaviours in order to develop stronger relationships with them. ERP (Enterprise resource planning), is a suite of module software applications that help companies better manage their businesses.

For example Best Buy that has transformed its supply chain from a high-volume distribution mechanism to a customer-facing operation that drives strategy as well as product. According to Ken Cotrill from Harvard Business Week (http://hbswk.hbs.edu/item.jhtml?id=5175&t=operations&iss=y 2/2/2006) Best Buy by using new information systems develops its supply chain by having greater access to information and better information flow. The supply chain is being relied upon to recover the flow of information. Sales associates will have access to detailed data on product flows from the time an item is manufactured to its arrival at a shop and will thus be able to provide customers with more reliable information on when objects will be available. And stores will be able to communicate changes in floor plans to distribution centres where loads are built and dispatched.

According to Bob Willett, Best Buy's chief information officer and executive vice president of operations, the company is developing this communication capability as part of a three-year project to revamp its IT systems. Furthermore that dispatchers and store associates will have better information on the status of loads. For instance, there will be automatic aware about incidents such as delays in port. A new tool for predictive modelling saves information on past problems; when similar situations occur, it recalls the solutions. Administrators can utilize this data to help them execute corrective actions. In addition, some seventeen Best Buy suppliers are using a process known as collaborative planning, forecasting, and replenishment (CPFR) that automates replenishment by linking suppliers and buyers electronically. 

Production

The production process is essentially affected by the inventory policy that the company follows. When a company does not want to keep many products in its inventory assembles just in time system (JIT). A broad set of developments in operations management over the past 10 years had as a basis the JIT system. These include lean manufacturing, mass customization, business process reengineering, total productive maintenance, agile manufacturing, and quick response distribution systems. These can collectively be termed time based operations management.

There are many ways of looking at just – in – time system. These are through the five zeros, kanban system, and other. Here we will analyse the Kanban system. Kanban can take a number of forms but essentially does the same job. Product Kanban is the most straightforward form of Kanban.

For example, when a company uses Product Kanban, production or materials ordering upstream is only carried out when a downstream operation signals it is needed i.e. a component is used downstream and it is simply replaced. The signal may be a painted square on the ground (when the square is empty of components then that is the signal to produce upstream), a card (when a component is used a card is passed upstream) or even so-called fax-ban or e-ban. Whatever the signal the effect is the same when a set number of components are used (1-10,000 depending on the component) then and only then will upstream operations receive the authority to begin production or order a specified number of that component to fill the requirement.

Distribution channels

There are several ways that products can be delivered to customer. One is through retail shops that customers goes there and buy the product, another is direct from the factory to customer through online order etc.
Nowadays is very common customers buying products online, giving their order waiting the product in front of their door posted or delivered by parcel companies. According to comScore Networks, which tracks consumer behavior, in America some $82 billion was spent in 2005 buying things over the internet, 24% more than in 2004. (The Economist, February 11th – 17th 2006, page63). Furthermore that according to The Economist the boom is global, especially now that more companies are outsourcing production.

Companies can cut costs by using the internet to sell their products direct to the customers and not pay too much in logistics to transfer their products to resellers or retailers. Furthermore that, customers are very excited when they do not have to leave their home or their job in order to go to the shop but they wait the product be delivered to them.

Services

In order to understand how supply chain works in the service industry we will use an example of a call center.

Suppliers

As countries adopt more open outward oriented approaches to economic growth and development, and local markets throughout the world are being deregulated and liberalized, foreign firms are looking to locate part of the service process in other countries where there are cost advantages. These might be cheaper resources of labor, raw materials and components, or have preferential government regulation. Although developing countries may present high levels of risk they also present the potential for higher levels of profit. Many developing countries with growing economies and increasing incomes may be the idealistic place for foreign firms to transfer their service providers there.
The advantages are:

• 24×7 operations: dispersing call centers across the world assists organizations in creating true “round-the-clock” operations at a lower cost than manning a call center 24 hours a day in the US or in Europe.
• Employees’ interest: call center’s employees in Europe and US often are young unqualified and inexperienced people that see this job as a stop-gap job and that inflects negatively to the quality of the provided service. In addition in developing countries and especially in India the same work attracts University graduates that see the call centers as offering a career .
• Flexibility: using hosted services, organizations have the flexibility to switch the offshore location for the call center, based, for example, on changing the business needs, or political or cost changes, and provide better services to its customers.
• Access in new technology: In developing countries technological innovations are almost an everyday phenomenon. IT companies from all over the world have their labs there and new products come in touch with the public earlier there
• Cost reduction: In developing countries the labor cost is very low. It is immensely profitable for companies to colder customer service centers in the United States and Europe, and move them to India, where the workers are paid about $2,400 US per year (http://www.gnp.org/india.htm 6/5/2004).
• As it concerns the information flow in many traditional call centers have now implemented a Customer Relationship Management (CRM) system. A CRM system enables your customers to have a consistent level of customer service across all channels of communications. This encompasses inbound calls, emails, faxing, text chat and web collaboration.

The extensive interaction between a customer and the call center agent requires a sophisticated CRM system. A tremendous amount of data is generated, which is captured and then accessed by the user. If a customer sends an email and later contacts a live service agent by phone, the agent has immediate access to the entire customer history, including the email. The technology and functionality of a CRM system enables the call center agent to deliver a high level of service to the customers.

Production & Distribution channels

The JIT scheduling concept of regularity has wide potential in service operations. In call center it is common to have regular questions from customers. Also as far as it concerns the distribution channels in the service industry and more specific in a call center, there is a direct relationship between the customer and the company, avoiding resellers, retailers and other interveners.

Total quality management

Total Quality Management is a management approach that originated in the 1950's and has steadily become more popular since the early 1980's. Total Quality is a description of the culture, attitude and organization of a company that strives to provide customers with products and services that satisfy their needs. The culture requires quality in all aspects of the company's operations, with processes being done right the first time and defects and waste eradicated from operations. (http://www.isixsigma.com/library/content/c021230a.asp 2/2/2006)

Total quality management can be applied both on manufacturing production and services.

Services

There are many theories and techniques that total quality management has. Here we will be concentrated on the six sigma method.

Vytra call center.

Vytra Inc. is a New York HMO with 250,000 customers and 30 basic product lines. They have used Six Sigma since 1997. Vytra implemented Activity Information Modelling (AIM) in its Call Centre, reduced its costs by over $500,000 (16%) and improved numerous dimensions of its service quality. They now know the exact cost of each service, product and customer that they use for accurate pricing, profit forecasting and product design. (Case Study link)

AIM-Activity Information Modelling TM was developed by Gary Meyer. It collects, organizes, analyses and models thousands of data points about activity, service-product and customers in a few weeks. AIM's models deliver precise cost and quality information as well as the causes and drivers of performance so changes can be made quickly. AIM and its related technologies and methodologies are being used by more than 300 organizations throughout the US and Canada.

Finding Cost Opportunities in Poor Quality

AIM collected, analyzed and measured these Six Sigma metrics within Vytra's operations:

• The resolution of every call type in 22 quality dimensions such as "closed to the customer's satisfaction", "closed - customer no satisfied", "transferred to Care Management", etc.
• The quality metrics and process times of all 8 services the Call Center provides.
• The quality and process time of all 61 different call type procedures.
• The quality and service metrics for each of its 31 customer segments.
  

These were metrics that Vytra wanted and needed for its Six Sigma effort but could not determine without AIM.

Now they have performance reports with quality measures as well as models that show the cause and effect of quality.

According to Kerry Edwards the Director of Member Services and responsible for any interaction with members:

• "By using AIM they have saved over $500,000 in their Call Center."
• "AIM tells you what you're doing that's not efficient."
• "AIM makes it possible for them to see, in time and cost, where their problems or mistakes are occurring and what's causing them."
• "AIM is a great tool to learn more about everything in your business environment in depth. They can track and trend quickly and make good business decisions."
• "It doesn't require a tremendous amount of effort, and it's such an easy tool that they don't even document all the issues that it's allowed us to fix."
• "They have been able to pin-point training and support issues that have cut costs and improved service."
• "They can now sell different products at different prices to accurately reflect what they cost them."
  

Manufacturing

Motorola

According to Dan Tegel, Ph.D., MBB, Global Director, Digital Six Sigma Business Improvement, Motorola , and Rick Kriva, Vice President, Product Management, Motorola (http://www.pdma.org/visions/oct04/six-sigma.html 4/2/2006),  less than half of Motorola’s merchandise were achieving their business case entitlement. Some were producing higher and some were producing lower-than-expected margins. For a corporation, this type of deviation is the opponent. This missed chance due to late launches and missed forecasts represented a $1 billion dollar opportunity for Motorola.

The Motorola approach

This multifaceted approach of integrating Six Sigma into the entire process - Six Sigma for Product Development (SSPD) - included a three-pronged focus:

• portfolio development
• product commercializationand technology.
  

Portfolio development

Their new model has increased the probability of making the right bets on the right product mix. In order to reduce the risks that the commercialization and technology-development candidates are not terminated or recycled prematurely, they applied Six Sigma to the portfolio-planning process. From this action, Motorola’s directors expect improved utilization of their manufacturing resources, as the enabled-portfolio planning process becomes more challenging with respect to releasing projects that are adequately resourced. The success at this point is that the new process will reduce engineering time wasted on wrong or ill-defined product ideas.

In the new model, once the portfolio architecture is "validated" through the portfolio-planning process, they immediately create product commercialization teams. These teams include engineering, software development, marketing, and supply chain disciplines. These teams are qualified in applications that ensure product specifications match true customer needs. They name this part of the development process Design for Six Sigma (DFSS).

Product commercialization

Simultaneously, Marketing for Six Sigma (MFSS) is used by the marketing teams in order to search for more value in the value chain, as well as to improve forecasting accuracy and pricing models.

Technology development

They also apply Six Sigma in a third area - the Technology Development arena. If an idea generated in the portfolio-planning process has significant technology risk, then the idea goes into their Technology Development for Six Sigma (TDFSS) Process. In TDFSS, they decouple technology development from the commercialization process, instead of developing technology in the last few months of product launch. The TDFSS tools help them develop technology that is robust and tuneable across technology platforms and modules.

The bottom line

The reward from all these is that in the end, they can expect great results. Motorola’s product development teams are very grateful for the increased clarity and rigor that SSPD has brought to development. Even better, their customers are excited from all these new products!

Impact of operations management.

The way that a company operates affects many sectors. For example, Toyota and other car manufacturers have Environmental Action Guidelines for their plants. Also as part of the plan, Toyota is requiring its business partners, specifically suppliers, to meet goals set forth in its Green Supplier Guidelines.
(http://www.toyota.com/about/environment/manufacturing/NA_plants.html 5/2/2006)

Another example is the rise of the profits of parcel business from the internet sales. “the internet has had  a profound effect on our business” says David Abney, UPS’s international president. UPS now handles more than 14m packages worldwide everyday. (The Economist, February 11th – 17th 2006, page63)

References

(John Naylor, Introduction to operations management, page 5, second edition, 1996)
(http://www.rosshorwood.com/eQualitySeal/SupplyChainDefinitions.html 1/2/2006)
(http://hbswk.hbs.edu/item.jhtml?id=5175&t=operations&iss=y 2/2/2006)
(The Economist, February 11th – 17th 2006, page63)
(http://www.gnp.org/india.htm 6/5/2004)
(http://www.isixsigma.com/library/content/c021230a.asp 2/2/2006)
(Call-Center-Reduced-costs (isixsigma.com) 3/2/2006)
(http://www.pdma.org/visions/oct04/six-sigma.html 4/2/2006)
(http://www.toyota.com/about/environment/manufacturing/NA_plants.html 5/2/2006)

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