Absolute Essentials of

Operations Management

This short textbook consolidates all the key aspects of operations management
into a concise and easily accessible reference tool.
Comprising the management of creating goods and delivering services
to customers, operations management plays an essential role in the success
of any organization. This book discusses the main areas of operations
management, such as the design of the operations system, including product,
process and job design. It also covers the management of operations,
including lean operations and supply chain management.
Breaking the subject down into its key components, this book provides a
core introduction for undergraduate students studying operations management
as part of business and management degrees.

Andrew Greasley lectures in operations management and simulation

modelling at Aston Business School, Birmingham, UK. He is a renowned
textbook author that has taught at numerous institutions across the UK,
Europe and Africa.
Absolute Essentials of Business and Economics

Textbooks are an extraordinarily useful tool for students and teachers, as is

demonstrated by their continued use in the classroom and online. Success-
ful textbooks run into multiple editions, and in endeavouring to keep up
with developments in the field, it can be difficult to avoid increasing length
and complexity.
This series of shortform textbooks offers a range of books that zero in
on the absolute essentials. In focusing on only the core elements of each
sub-discipline, the books provide a useful alternative or supplement to tra-
ditional textbooks.

Absolute Essentials of Green Business

Alan Sitkin

Absolute Essentials of Operations Management

Andrew Greasley

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Absolute-Essentials-of-Business-and-Economics/book-series/ABSOLUTE
Absolute Essentials of
Operations Management

Andrew Greasley
First published 2020
by Routledge
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Title: Absolute essentials of operations management / Andrew Greasley.
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Identifiers: LCCN 2019036501 (print) | LCCN 2019036502 (ebook) |
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Subjects: LCSH: Production management. | Process control. | Project
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Contents

Preface vii

1 Introduction 1

2 Operations strategy 7

3 Process types 13

4 Process layout types 20

5 Facility design: supply, capacity and location 25

6 Process technology 31

7 Product and service design 37

8 Process design 43

9 Job design 48

10 Operations planning and control 52

11 Capacity management 57

12 Inventory management 67

13 Lean operations 71
vi Contents
14 Enterprise resource planning 77

15 Supply chain management 84

16 Project management 93

17 Quality 98

18 Performance measurement and improvement 107

Index 114
Preface

The aim of this book is to provide a concise treatment of operations manage-

ment. The book will zero in on the absolute essentials of the topic, to provide
a quick and convenient guide for students. The book is designed to com-
plement and not replace traditional textbooks that provide more in-depth
coverage and offer supplementary material in the form of case studies and
exercises. Operations management deals with the management of creating
goods and delivering services to the customer. It thus plays an essential
role in the success of any organization. The text covers the main areas of
operations management, including operations strategy and the design of the
operations system, including product, process and job design, and it covers
the management of operations, covering topics such as lean operations and
supply chain management. The target audience is undergraduates in busi-
ness studies and joint degrees where no prior knowledge of the subject area
is required.
1 Introduction

Operations management is about managing the transformation process that

produces or delivers goods and services. Not every organization will have
a functional department called operations, but each will undertake opera-
tions activities, because every organization produces goods and/or delivers
services.

The role of operations management

Operations management’s role is to manage the transformation of an orga-
nization’s inputs into finished goods and services (Figure 1.1).
The inputs to the transformation process consist of two categories of
resources. Transforming resources are the inputs that undertake the trans-
formation process on the transformed resources. The nature and mix of the
transforming resources will differ between operations. The following are
the two main types of transforming resources:

1 Facilities, such as buildings, equipment and process technology.

2 Staff: all the people involved in the operations process. In services, the
customer may well be involved as a transforming resource. Think of
a fast-food restaurant where customers are expected to order the food
and take it to their table and clear up afterwards.

The transformed resources, which are the inputs acted on by the transform-
ing resources, consist of three main types:

1 Materials: These can be transformed either physically (for example,

manufacturing), by location (for example, transportation), by owner-
ship (for example, retail) or by storage (for example, warehousing).
2 Information: This can be transformed by property (for example, by
accountants), by possession (for example, market research), by storage (for
example, libraries) or by location (for example, telecommunications).
2 Introduction

THE
INPUTS TRANSFORMATION OUTPUTS
PROCESS
TRANSFORMING RESOURCES
Goods and Services
Facilies
Staff

TRANSFORMED RESOURCES
Materials
Informaon
Customers

Figure 1.1 The role of operations management

3 Customers: They can be transformed either physically (for example,

by hairdressers), by storage (for example, hotels), by location (for
example, airlines), by physiological state (for example, hospitals) or by
psychological state (for example, entertainment).

The transformation process will itself transform the material, information

and customer resources in the way just described, in order to produce goods
and services.

The process view of operations

Three of the most important functional areas in an organization can be clas-
sified as the operations, marketing and finance functions. The marketing
function works to find and create demand for the company’s goods and ser-
vices by understanding customer needs and developing new markets. Mar-
keting and operations need to work closely together, because the marketing
function will provide the forecast of demand from which operations can
plan sufficient capacity to deliver goods and services on time. The finance
function is responsible for obtaining and controlling funds and covering
decisions such as investment in equipment and other operations resources
such as personnel and materials. The relationship between functions can
be seen as a number of subsystems within the system called the organiza-
tion. Thus, each function (such as marketing) can be treated using the same
input/process/output transformation model as the operations function. In
other words, each function in the organization can be treated as perform-
ing an operations activity since they are transforming inputs into outputs.
 Introduction 3
This implies that every part of the organization is involved in the operations
activity (to an internal or external customer), and indeed, the topic of busi-
ness process management (Chapter 18) is an indication of how operations
concepts are used across the organization.

Service operations management

Because of the increased importance of services, one of the developments
in operations management has been the need to integrate manufacturing and
service operations to ensure that they are compatible with each other and are
strategically aligned with the organization’s goals. The increasing promi-
nence of the service sector in the economies of developed countries is due to
an increase in what are termed ‘consumer services’ and ‘producer services’:

• Consumer services are services aimed at the final consumers, which

have risen in line with people’s increasing disposable income in devel-
oped countries. Once expenditure on essentials such as food and shelter
has been accounted for, people will then spend on purchases such as
travel, hotels, restaurants and other social and personal services.
• Producer services are used in the production and delivery of goods and
services and constitute firms providing services to other businesses,
such as consultancy advice, legal advice, information technology (IT)
and logistics. The rise of producer services indicates that although the
share of manufacturing is declining, it still plays an important part in
a nation’s economy. This is because many of the producer services are
actually in business to provide services to manufacturers and to other
service providers. Also, many of the services that are now outsourced
were once undertaken by manufacturers themselves and were thus for-
merly classified as part of the manufacturing sector.

There are a number of distinguishing features of services to consider.

Services are intangible

Goods are tangible – they are physical things that people can touch. A ser-
vice is intangible and can be seen as a process that is activated on demand.
In reality, both goods and services have both tangible and intangible ele-
ments and can be placed on a continuum ranging from low to high intan-
gibility. For example, the food in a fast-food restaurant is a major tangible
element of the service. The food in a restaurant is still an important ele-
ment, but other intangible elements, such as wait staff service and decor are
important factors too. In fact, most operations systems produce a mixture
4 Introduction
of goods and services. Most goods have some supporting service element
(for example, a maintenance contract with a new washing machine), called
a facilitating service; many services have supporting goods (for example,
a report provided by a management consultant), called a facilitating good.

Services are perishable

A service is not a physical thing that can be stored but rather is a process,
so often it must be consumed when it is produced or it will perish. The
service availability offered by an empty room in a hotel or by an empty seat
on an aircraft cannot be stored for use later. Thus, revenue lost from these
unused resources can never be recovered. This would not be a problem if
the demand (in terms of volume and timing) for a service could be accu-
rately determined and service capacity provided to match this. However,
this is unlikely to be the case, and unlike most goods, which can be stored
if demand is lower than capacity – to be used when demand is greater than
capacity – services should usually attempt to match supply with the pattern
of demand.

Services may involve the customer

Many services are produced and consumed simultaneously, which means
the service provider and customer interact during the service delivery pro-
cess. The amount of interaction is termed ‘the degree of customer contact’.
In fact, the customer is unlikely to be a passive receiver of the service but
will generally be involved to a greater or lesser extent in the actual delivery
of the service itself. For instance, a supermarket requires the customer to
choose and transport the goods around the store and queue at an appropri-
ate checkout till. However, it should not be assumed that all services are
consumed at the point of production (for example, financial services) and
that employees in a service operation have to deal directly with a customer.
For the supermarket example, the checkout till is an example of high cus-
tomer contact, but stores’ personnel may not have to deal directly with the
customer at all. A distinction in services is denoted by back-office tasks,
which add value to the inputs of the service operation, and front-office tasks,
which deal with the customer as both an input and an output of the operation
(Figure 1.2).
Different organizations will have a different balance between front-office
and back-office operations. Some traditional back-office-focused organiza-
tions, such as manufacturers, are increasing the role of service experience
and thus their front-office operations. This is because they judge that the
ability to differentiate the service aspect of their offering may provide a
 Introduction 5

Low Customer Contact High Customer Contact

BACK OFFICE FRONT OFFICE CUSTOMERS

Figure 1.2 Front office and back office in operations management

longer-term source of competitive advantage than they can achieve by dif-

ferentiating the goods themselves. Some other organizations, however, are
moving in the opposite direction by recognizing that the tangible aspect of
the service package delivered by back-office operations is adding customer
value. For example, budget airlines have eliminated many front-line service
aspects of the flight experience and focused on the transportation of cus-
tomer process itself.

Servitization
In general, manufacturers offer services to some extent (for example, a
maintenance contract offered with equipment) but often compete on a strat-
egy based on their products in terms of product innovation and product
cost reduction. Servitization represents a process that enables manufactur-
ing companies to move to a service-led competitive strategy. This entails
viewing the manufacturer as a service provider and enhancing the tradi-
tional manufacturing strategy built around product-based innovation with
one that aims to improve their customer processes. Advanced services are
a special case of servitization, which involves the manufacturer offering
contracts to customers that encompass payment based on the performance of
a product over an extended period of time. Advanced services are delivered
by product-service systems (PSS) (Baines and Lightfoot, 2013), in which the
manufacturer provides a capability to undertake a process for the customer.
This capability can entail choosing suitable equipment and consumables,
monitoring performance and undertaking maintenance and disposal. The
manufacturer receives payment for the capability that is used by the customer.

Operations management and environmental sustainability

Operations managers need to consider how their actions affect the world’s
natural environment. These issues can range from conserving water supplies;
6 Introduction
polluting the land, sea and air; and limiting carbon emissions that lead to
global warming. Thus, operations should design and manage the transfor-
mation process to minimize energy use in both the process and through the
lifecycle of the product or service itself. Transportation methods employed
should also seek to reduce the carbon footprint through less journey time or
more environmentally friendly transportation methods.

Reference
Baines, T. and Lightfoot, H. (2013) Made to Serve: How manufacturers can compete
through servitization and product-service systems, John Wiley & Sons Ltd.
2 Operations strategy

Operations management can provide the basis for a firm’s competitive

strategy. The purpose of an operations strategy is to interpret the overall
business strategy, which will be concerned with goals such as growth and
profitability, into goals that direct how operations will be managed. These
goals may be defined by the five operations performance objectives: qual-
ity, speed, dependability, flexibility and cost. This chapter will formulate a
strategy to achieve these goals, one that is concerned with matching internal
operations capability with external competitive market requirements.

The role of operations strategy

Hayes and Wheelwright (1988) assert that the success of organizations
depends on their overall operations capability and so provide a model that
enables managers to identify operations’ current strategic role and the
changes needed to increase competitiveness. The four-stage model traces
the contribution of the operations function from a largely reactive role in
stage 1 to a proactive element in competitive success in stage 4.

Stage 1: internal neutrality

Here the operations’ function has little to contribute to competitive success
and is seen as a barrier to better competitive performance by other func-
tions. The operations function is simply attempting to reach a minimum
acceptable standard required by the rest of the organization while avoiding
any major mistakes – hence the term ‘internal neutrality’. However, a major
mistake by operations could still entail serious consequences for the rest of
the organization (for example, product recall).

Stage 2: external neutrality

Here the operations’ function begins to focus on comparing its performance
with competitor organizations. Although it may not be innovative enough
8 Operations strategy
to be in the first division of companies in its market, by taking the best ideas
and attempting to match the performance of competitors, it is attempting to
be externally neutral.

Stage 3: internally supportive

Here the operations’ function is one of the best in its market area and aspires
to be the best in its market. The operations function will thus be organiz-
ing and developing the operations capabilities to meet the strategic require-
ments of the organization. Operations is taking a role in the implementation
of strategy and being internally supportive.

Stage 4: externally supportive

Here the operations’ function is becoming central to strategy making and
is providing the foundation for future competitive success. This may be
delivered by organizing resources in ways that are innovative and capable
of adapting as markets change. When operations is in the role of the long-
term driver of strategy, it is being externally supportive.
As the organization moves from stage 1 to stage 4, its role moves from
being reactive in response to strategic objectives passed down to it, to ensur-
ing resources are developed to support the strategy, to (in stage 4) providing
the business with its competitive advantage.

The performance objectives of operations management

The five performance objectives (Slack et al., 2016) allow the organization
to measure its operations’ performance in achieving its strategic goals:

1 Quality.
2 Speed.
3 Dependability.
4 Flexibility.
5 Cost.

Each of these objectives will be discussed according to how it is measured

and its significance to organizational competitiveness.

Quality
Quality covers both the quality of the design of the product or service itself
and the quality of the process that delivers the product or service. From
 Operations strategy 9
a customer perspective, quality characteristics include reliability, perfor-
mance and aesthetics. From an operations viewpoint, quality is related
to how closely the product or service meets the specification required by
the design, termed ‘the quality of conformance’. The advantages of good
quality on competitiveness include increased dependability, with fewer
problems due to poor quality; reduced costs, by avoiding expenditure on
defective products and services; and improved customer service, leading to
high customer satisfaction.

Speed
Speed is the time delay between a customer requesting a product or service
and their receiving that product or service. Although making a product in
advance by the use of a make-to-stock system may reduce the delivery time
as seen by the customer, it cannot be used for services. This approach also
risks the product becoming obsolete and ties up the cost of any stock in
working capital. An advantage of speed is that it can be used to both reduce
costs (by eliminating the costs associated with make-to-stock systems) and
reduce delivery time, leading to better customer service.

Dependability
Dependability can be measured by the percentage of customers that receive
a product or service within the delivery time promised. In some instances,
it may even be important to deliver not too quickly, but only at the time
required (for example, a consignment of wet concrete for construction).
Dependability leads to better customer service when the customer can trust
that the product or service will be delivered when expected. Dependability
can also lead to lower cost, in that progress checking and other activities
designed to ensure things happen on time can be reduced in the organization.

Flexibility
Flexibility is the ability of the organization to change what it does. Flexibil-
ity is needed so that the organization can adapt to changing customer needs
in terms of product range and varying demand and to cope with capacity
shortfalls due to equipment breakdown or component shortage. The follow-
ing types of flexibility can be identified:

• Product or service – to be able to introduce new product or services.

• Mix – to be able to change the proportion (mix) between the different
products or services offered.
10 Operations strategy
• Volume – to be able to decrease or increase overall product/service
output.
• Delivery – to be able to change the timing of a delivery.

Flexibility can be measured in terms of range (the amount of the change)

and response (the speed of the change). The range and response dimensions
are connected in the sense that the more something is changed (range), the
longer it will take (response). In general, the benefit of flexibility from the
customer’s point of view is that it means that the organisation is able to
adapt to customer needs.

Cost
Cost is considered to be the finances required to obtain the inputs (trans-
forming and transformed resources) and manage the transformation process
that produces finished goods and services. If an organization is competing
on price, then it must keep its cost base lower than the competition’s. Then
it will either make more profit than rivals if the price is equal or gain market
share if price is lower. Improvements in the other four performance objec-
tives can also lead to a reduction in cost.

Operations strategy formulation

The Hill method (Hill and Hill, 2018) proposes that the issue of the degree
of ‘fit’ between the proposed marketing strategy and the operation’s ability
to support it is resolved at the business level by meeting corporate (strate-
gic) objectives. Thus, Hill provides an iterative framework that links the
corporate objectives (which provide the organizational direction), the mar-
keting strategy (which defines how the organization will compete in its cho-
sen markets) and the operations strategy (which provides the capability to
compete in those markets).
The framework consists of five steps.

Step 1: corporate objectives

Corporate objectives provide a direction for the organization and perfor-
mance indicators, which allow progress in achieving those objectives to
be measured. The objectives depend on the needs of external and internal
stakeholders and thus include financial measures such as profit and growth
rates and employee practices such as skills development and appropriate
environmental policies.
 Operations strategy 11
Step 2: marketing strategy
A marketing strategy to meet the corporate objectives defined involves
identifying target markets and deciding how to compete in these mar-
kets. This requires using product/service characteristics such as range,
mix and volume that the operations activity are required to provide.
Other issues considered are the level of innovation and product devel-
opment and the choice of ‘leader’ or ‘follower’ strategies in the chosen
markets.

Step 3: how does one qualify and win orders in the marketplace?
This translates the marketing strategy into a range of competitive factors
(for example, price, quality, delivery speed) on which the product or ser-
vice wins orders. Customers will value a range of competitive factors for
any particular product/service; thus, it is necessary to identify the relative
importance of a range of factors. Hill distinguishes between the following
types of competitive factors that relate to securing customer orders in the
marketplace:

• Order-winning factors are factors that contribute to winning business

from customers. They are key reasons that customers purchase the
goods or services, and raising the performance of the order-winning
factor may secure more business.
• Qualifying factors are factors that must be considered to earn business
from customers. The performance of qualifying factors must be at a
certain level to gain business from customers, but performance above
this level will not necessarily gain further competitive advantage.

While it may be necessary to raise performance on some (qualifying) fac-

tors to a certain level in order to be considered by the customer, a further
rise in the level of performance may not achieve an increase in competi-
tiveness. Instead competitiveness may then depend on raising the level
of performance of different order-winning factors higher than those of
competitors. Because it is more difficult to raise performance to the best-
in-class than it is to be considered in the race, it is the order-winning
competitive factors that should be translated into the internal performance
objectives that the organization must excel at. For example, an order win-
ner of fast delivery should be translated into the performance objective
of speed, a wide product range translated to mix flexibility and low price
translated to cost.
12 Operations strategy
Steps 4 and 5: delivery system choice (structural decisions)
and infrastructure choice (infrastructural decisions)
Steps 4 and 5 of Hill’s method involve putting the processes and resources
in place that provide the required performance as defined by the perfor-
mance objectives. Hill categorizes operations decision areas into delivery
system choice, which is often referred to as structural decisions, and infra-
structure choice, commonly called infrastructural decisions.
Delivery system choice, also referred to as structural decisions, concerns
aspects of the organization’s physical resources, such as service delivery
systems and capacity provision. These elements may be expensive and dif-
ficult to change quickly and so provide the basic capability of the operations
system. Structural decisions include the choice of process type implemented
in manufacturing (project, jobbing, batch, line or continuous) or services
(professional, shop, mass) and the associated layout types. Further deci-
sions involve capacity issues, including the volume, timing and location of
capacity provision and the provision of process technology for materials,
information and customers.
Infrastructural decisions describe the systems, policies and practices
that determine how the structural elements covered in step 4 are managed.
Structural decisions determine the overall capability of the operations sys-
tem, but infrastructure elements determine how much of this capability is
realized. Infrastructural decisions include the management of the product
and service design process, the management of organizational processes, the
design of jobs, the management of capacity, the scheduling of operations,
inventory management, planning and control systems, such as just-in-time
(JIT) and enterprise resource planning (ERP); supply chain management;
and project management. Performance improvement and performance
measurement systems are also included under this heading.

References
Hayes, R.H., and Wheelwright, S.C. (1988) Restoring Our Competitive Edge: Com-
peting Through Manufacturing, John Wiley & Sons, Ltd.
Hill, A., and Hill, T. (2018) Operations Strategy: Design, Implementation and
Delivery, Red Globe Press.
Slack, N., Brandon-Jones, A., and Johnston, R. (2016) Operations Management, 8th
edn., Pearson Education Limited.
3 Process types

When designing the transformation process that delivers goods or services,

we need to consider the volume and variety of the product or service that the
organisation provides. Volume and variety are related, so we can generally
consider that companies serve their customers on a continuum from a com-
bination of low-volume/high-variety products and services to high-volume/
low-variety products and services. Along this continuum, we will define
general process configurations called process types for manufacturing and
services

Manufacturing process types

There are five categories of manufacturing process types, which are placed
along the volume/variety continuum, as in Figure 3.1, and they will now be
considered.

Project
These are used for low-volume, high-variety products and have the follow-
ing characteristics:

• They are one-off products to a customer specification.

• The location of the project is stationary, and transforming resources
move to the location of the project.
• They require the coordination of many individuals and activities.
• They demand a problem-solving approach, to ensure that they are com-
pleted on time.
• They require a comparatively long duration to manufacture.
• Resources such as staff and equipment are often dedicated to a project
during its duration.
14 Process types

PROJECT

JOBBING

BATCH

MASS

CONTINUOUS

HIGH VARIETY LOW

LOW VOLUME HIGH

Figure 3.1 Manufacturing process types

Examples of using a project process include building construction, movie

film production and custom-built furniture.

Jobbing
These are used for low-volume, high-variety products and have the follow-
ing characteristics:

• They are used to make a one-off (or low-volume) product to a customer

specification.
• The product moves to the location of transforming resources.
• Resources such as staff and equipment are shared between many
products.
• They can use skilled labour in order to cope with the need for custom-
ization (variety).
 Process types 15
Examples of the use of a jobbing process include custom tailors and a
return-and-repair shop.

Batch
These are used for medium-volume, medium-variety products and have the
following characteristics:

• They cover a wide range of volume and variety combinations.

• A batch is a group of products that are processed together. The batch
(group) size can range from two to hundreds of products.
• These products move to the location of transforming resources.
• The setting up of machinery occurs between batches.
• They sometimes use specialized labour and equipment dedicated to
certain batches.
• Queues of work may dramatically increase the time that the product
takes to move through the process.

Examples of the use of a batch process include vehicle component assem-

bly, clothing manufacture and bakeries.

Mass
These are used for high-volume, low-variety products and have the follow-
ing characteristics:

• Although there may be variants in the product design, the production

process will essentially be the same for all the products.
• High volumes mean that it is cost-effective to use specialized labour
and equipment.
• The movement of the product may be automated using a conveyor
system.
• The production process is broken down into a number of small, simple
tasks.
• To ensure a smooth flow of product, the process times per unit is equal-
ized at each production stage.
• The setting up of equipment is minimized and the use of equipment is
high.

Examples of the use of a mass process include vehicle manufacturing and

the assembly of consumer durables such as televisions and computers.
16 Process types
Continuous
These are used for high-volume, low-variety products and have the follow-
ing characteristics:

• The products produced by a continuous operation are usually a con-

tinuous flow, such as oil, gas and electricity.
• They use a large amount of specialized and dedicated equipment.
• They are often in constant operation, 24 hours a day.
• The role of labour in the operation of the processes is mainly one of
monitoring and controlling the process equipment, with little contact
with the product.

Examples of a continuous process include an oil refinery, electricity produc-

tion and steelmaking.
A key issue in manufacturing is that process type decisions can take a
relatively large amount of time and money to implement, whereas market
needs in a competitive environment can change rapidly. The project and
jobbing process types imply a wide variety of outputs, which will require
meeting market requirements for design and innovation. The batch process
type covers a wide range of volume and variety outputs, so to ensure stra-
tegic focus, the organisation needs to distinguish between batch towards
the jobbing end of the continuum and batch towards the mass end of the
volume/variety continuum. Mass and continuous process types imply sell-
ing a narrow range of standard products in high volumes.

Service process types

There are three categories of service process types (Figure 3.2) that will
now be considered.

Professional service
These are low-volume, high-variety services and have the following
characteristics:

• They have high levels of customization in that each service delivery

will be tailored to meet individual customer needs.
• They have high levels of customer contact and a relatively high propor-
tion of staff supplying the service in relation to customers.
• They emphasize delivering a process rather than a tangible product
associated with a process.
 Process types 17

PROFESSIONAL SERVICES

SERVICE SHOPS

MASS SERVICES

HIGH VARIETY LOW

LOW VOLUME HIGH

Figure 3.2 Service process types

Examples of a professional service include management consultancy, doc-

tors and health and safety inspectors.

Service shop
These are mid-volume, mid-variety services and have the following
characteristics:

• They have a mix of staff and equipment used to deliver the service.
• They emphasize both the service delivery process itself and any tan-
gible items that are associated with the service.

Examples of service shops include banks, restaurants and travel agencies.

18 Process types
Mass service
These are high-volume, low-variety services and have the following
characteristics:

• They offer little customization for the service to individual customer

needs.
• They offer limited contact between the customer and people providing
the service.
• Equipment will be used to improve the efficiency of the service deliv-
ery process.
• They emphasize the tangible item associated with the service delivery.

Examples of mass service providers are supermarkets, rail services and

airports.
As in manufacturing, in services a key issue in process type choice is that
process decisions can take a relatively large amount of time and money to
implement, whereas market needs in a competitive environment can change
rapidly. The professional process type implies a wide variety of outputs,
which will require meeting market requirements for design and innovation.
The service process type covers a middle ground of volume and variety,
so it has a limited amount of customisation during service delivery. Mass
services process types imply selling a narrow range of standard services.

Matching process type to volume and variety

For a certain volume and variety combination, an organization needs to
make a choice regarding which process type to use. In Figure 3.3, the exam-
ple volume and variety position shown by the vertical dashed line intersects
with the diagonal ‘line of fit’ for the process types, which indicates the use
of a batch process type in this case.
Thus, if a jobbing process type was used in the volume and variety posi-
tion shown in Figure 3.3, then operations would have too much flexibility
for the amount of variety required and thus higher costs than another pro-
ducer supplying the same market using a batch process type. Likewise, if a
mass process type were used in this position, then the operation would have
too little flexibility for the amount of variety required. And thus, they would
have higher costs than another producer supplying the same market using a
batch process type. This is due to the high changeover costs that they would
incur in moving from one product to another to meet the required variety of
outputs required by the market. This concept can also be related to matching
the volume and variety of service processes by using Figure 3.2.
 PROJECT

JOBBING

BATCH

MASS

CONTINUOUS

HIGH VARIETY LOW

LOW VOLUME HIGH

Figure 3.3 Matching process type to volume and variety

4 Process layout types

The process layout concerns determining the physical location of activi-

ties in the transformation process to ensure an efficient flow of custom-
ers, materials and information through the operations system. Physical
layout may not be important for information activities but is relevant in
manufacturing facilities and services such as administrative activities for
the design of office layouts that can facilitate teamwork among groups of
people.

Process layout types

There are four categories of process layout types: fixed position, func-
tional, cell and line, which are placed along the volume/variety contin-
uum. Although the main layout types can be adapted to meet the needs
of a particular manufacturing or service system, it may be the case that
a mix of layout types is required in a single operation. For example,
hospitals are basically a functional layout with people with similar needs
(for example, intensive care) grouped together. However, the layout also
shows characteristics of a fixed-position layout in that staff, medicines
and equipment are brought to the location of the customer. Layout type
choice is strategic because it can represent a large amount of capital
investment in equipment and workforce and so sets a constraint around
which the company can compete. The layout type choice is linked to the
process type choice, but as can be seen from Figure 4.1, there may be
more than one layout type which corresponds with a particular process
type. In this case, the choice will depend on the characteristics of the
layout type that are particularly relevant for the product or service to be
delivered. The layout types and their associated process types are shown
in Figure 4.1 and will now be considered.
 Process layout types 21

CONTINUOUS

MASS

MANUFACTURING
PROCESS TYPES BATCH

JOBBING

PROJECT

FIXED FUNCTIONAL LINE

LAYOUT TYPES CELL
POSITION (PROCESS) (PRODUCT)

PROFESSIONAL SERVICES

SERVICE SHOPS

SERVICE PROCESS MASS SERVICES

TYPES

Figure 4.1 Process layout types and their relationship to process types

Fixed-position layout
The fixed-position layout is used for low-volume, high-variety products and
services and has the following characteristics:

• It is used when the product or service does not move, so the process
takes place at the location of product creation or service delivery.
• All resources for producing the product or service, such as staff, must
move to the location of the product or service.
• It emphasizes the scheduling and coordination of resources to ensure
that they are available in the required amounts at the required time. For
example, in a restaurant, the order needs to be taken and food delivered
to the table at the appropriate time.
• Process types associated with a fixed-position layout are the project pro-
cess type in manufacturing and the professional service type in services.

Examples of fixed-position layouts include construction sites such as for

buildings or for large ships, aircraft manufacture and full-service restaurants.
22 Process layout types
Functional layout
The functional layout is used for mid-volume, mid-variety products and
services and has the following characteristics:

• A functional layout is also called a process layout.

• It is one in which resources that have similar functions or processes are
grouped together.
• It is used when there is a large variety among the products or services
being delivered and when it may not be feasible to dedicate facilities to
each individual product or service.
• It allows the products or customers to move to each group of resources
in turn, on the basis of their individual requirements.
• In service systems, they allow a wide variety of routes through the pro-
cess that may be chosen by customers depending on their needs.
• It allows the product or service range to be extended, and as long as no
new resources are required, it may be accommodated within the current
layout.
• The process types associated with a functional layout are the project,
jobbing and batch process types in manufacturing and professional
services and service shops in services.

Examples of functional layouts include supermarkets, hospitals, department

stores and component manufacturers.

Cell layout
The cell layout is used for mid-volume, mid-variety products and services
and has the following characteristics:

• This layout attempts to combine the efficiency of a line layout with the
flexibility of a functional layout.
• It is created from putting together resources that service a subset (called
a family) of the total range of products or services.
• The routing of products and services is simplified by processing in a
single cell, reducing transportation time between locations.
• The procedure used to group products or services to create a family is
called group technology.
• It offers the opportunity for automation due to the proximity of the
process stages.
• It can lead to extra expenditure due to the extra resources required
when implementing cells.
 Process layout types 23
• The process types associated with a cell layout are jobbing; batch and
mass process types in manufacturing and professional services; service
shops; and mass services in services.

Examples of cell layouts include custom manufacture, a maternity unit in a

hospital and a cafeteria with several serving areas. In services, a cell layout
could involve an insurance company organized by types of claims (such as
car, home or travel).

Group technology
The process of grouping products or services to create a family is called
group technology. Group technology has three aspects:

1 Grouping parts or customers into families. This aims to reduce the change-
over time between batches, allowing smaller batch sizes and thus improv-
ing flexibility. Parts or customers can be grouped together according to
factors such as processing similarity.
2 Grouping physical facilities into cells. This aims to reduce transpor-
tation time between processes. Material and customer movement is
restricted to within the cell, and throughput times are therefore reduced.
Cells can be U-shaped to allow workers to work at more than one pro-
cess while minimizing movement.
3 Creating groups of multi-skilled workers. This enables increased auton-
omy and flexibility on the part of operators, which can lead to easier
changeovers from one part to another and which increases job enrich-
ment for members of the group. This in turn can improve motivation
and have a beneficial effect on quality.

Line layout
This is used for high-volume, low-variety products and services and has the
following characteristics:

• A line layout is also called a product layout.

• It arranges the resources required for a product or service around the
needs of that product or service.
• In manufacturing applications, such as assembly lines with a high vol-
ume of a standard product, the products will move in a flow from one
processing station to the next.
• In services, the requirements of a specific group of customers are
identified and resources set up sequentially so that the customers flow
24 Process layout types
through the system, moving from one stage to another until the service
has been completed.
• Stages in the assembly line or flow line must be balanced. This means
that the time spent by components or customers should be approxi-
mately the same for each stage; otherwise, queues will form at the slow-
est stage.
• It is an efficient delivery system in that the use of dedicated equipment
in a balanced line will allow a fast throughput time.
• If any stage of the line fails, then in effect, the output from the whole
line is lost, so it lacks a robustness to a loss of resources (for example,
equipment failure or staff illness).
• The process types associated with a line layout are mass and continu-
ous process types in manufacturing and mass services in services.

Examples of line layouts include car assembly, self-service cafes, car valet-
ing, golf courses and assembly lines.
5 Facility design
Supply, capacity and location

Facility design is taken here to refer to decisions regarding how capacity

will be supplied by the organization to meet market demand. There are
three main issues involved in decisions regarding this area. Supply network
design concerns how the organization’s facilities be configured; long-term
capacity-planning concerns how much capacity should be supplied; and
facility location concerns where the capacity will be located.

Supply network design

A generic supply network is shown in Figure 5.1, which can be defined
as the configuration of the organization’s relationship with its suppliers
and the choice about what activities the organization should undertake
internally and what should be subcontracted to other agencies. Note that
although the flow of material is shown from left to right (downstream),
there will be a flow of information in the opposite direction (upstream)
between organizations in the supply network. Managing this flow of infor-
mation upstream is a major element of supply network management. The
terms ‘supply network’ and ‘supply chain’ are often used interchangeably,
but here the supply chain is taken to mean one of a series of linkages within
the supply network.
Supply networks can improve delivery and cost performance relative to
fixed supply facilities in that the network can pool demand and increase
volume to reduce costs and choose different facilities to provide products
for a given customer under different conditions. A network should lead
to a more robust system that avoids capacity bottlenecks by using close
coordination facilitated by the use of communications technology. The
configuration of the supply network will become more complex as we
move from a home operations configuration through to a global operated
organization.
26 Facility design

UPSTREAM (SUPPLY SIDE)

COMPANY
A

COMPANY
B

Supply Chain

Supply Network

SECOND-TIER FIRST-TIER FIRST-TIER SECOND-TIER

SUPPLIERS SUPPLIERS CUSTOMERS SUPPLIERS

Figure 5.1 A supply network

1 Home operations
In this configuration, all supplies of goods and services are made from
within the home country, and demand from other countries is made by
direct export. This strategy enables control of operations in a familiar
environment and can provide economies of scale and scope advantages
by focusing output in one location. The disadvantages of this approach
include the difficulty in meeting variations in customer needs in different
overseas markets, the difficulty in providing prompt and reliable delivery
over extended distances and the loss of markets where face-to-face ser-
vices are required.

2 Multi-domestic operations
This approach configures operations facilities in each country where the
organization operates. This provides a relatively straightforward opera-
tions control and allows products and services to be tailored to meet local
demands. The disadvantages of this approach include the cost of establish-
ing multiple operations and the potential loss of economies of scale and
scope in operating in this way.
 Facility design 27
3 Regional operations
In this configuration, operations is divided into regions (such as Europe),
with each region being served by a self-contained operations facility con-
figuration. This is an attempt both to enable a degree of customization of
product and service to meet local needs and to obtain economies of scale
and scope across the region.

4 Global operations
In global organizations the aim is to create a network of operations that will
sell the same products in several countries, increase overall sales thereby
reducing the cost per unit of development, coordinate the work of subsidiar-
ies to provide a product/service to the global customer and shift production
in response to exchange-rate fluctuations.

Long-term capacity planning

The long-term capacity plan is a key determinant of the competitiveness of
an organization. Capacity must be available at the time needed and in the
current format to ensure that targets are met. There will also be constraints
on overall capacity caused by the scarcity of certain types of capacity (such
as employee skills). Thus, the availability of different types of capacity
must be considered in order to avoid bottlenecks. This section will consider
long-term capacity-planning issues in terms of capacity volume and capac-
ity timing.

Capacity volume
In determining the optimum capacity level for a facility, the concepts of
economies of scale and economies of scope are considered.
Economies of scale relate to the capital costs of building a new facility
and the fixed costs of operating a facility. As a facility is expanded and
fixed costs remain the same, the average cost of producing each unit will
fall until the best operating level of the facility is reached and the lowest
average unit cost met. Past a certain point, however, diseconomies of scale
occur and average unit costs rise. This is due to the required capacity output
of the facility being higher than it has been designed for, and operating at
this level can cause a loss of efficiency from factors such as the complexity
of combining many products and services; the extensive use of (relatively
expensive) shift working and overtime; and decreased staff morale due to
poor working conditions.
28 Facility design
Economies of scope are created by the ability to produce many products in
one highly flexible production facility more cheaply than in separate facili-
ties. In terms of service operations, this means serving many customer groups
from one facility. An example is outsourced call centre operations, which use
specialist firms to serve many clients by using Internet technology.

Capacity timing
An organization can adopt three main approaches to ensuring the correct
amount of capacity is available at the right time to meet future plans: lead
capacity, match capacity and lag capacity.
A lead capacity policy, also called an aggressive expansion approach,
aims to obtain extra capacity above forecast demand and so try to ensure
that capacity is sufficient if demand increases above what was forecast. This
has the advantage of helping to maintain high levels of customer service
and responding quickly to increases in customer demand but has the disad-
vantage of the cost of maintaining the excess capacity for all the different
types of capacity (people, equipment, locations) required over time. The
amount of excess capacity, which can be calculated as the percentage of
capacity that is not used on average, is called the capacity cushion.
A match capacity policy simply means obtaining sufficient capacity to
match forecast demand. The advantage of this option is that it avoids the
costs of a capacity cushion and instead uses strategies such as outsourcing,
which can quickly fill capacity shortfalls. The disadvantage is the difficulty
of forecasting future demand accurately enough in order that capacity can
be obtained at the right time to meet that demand. Long project lead times
for investments in capacity, such as infrastructure projects means demand
forecasts, have to project further into the future and so are prone to greater
error.
A lag capacity strategy, also termed a ‘wait-and-see approach’, is to add
capacity only when extra demand is present that would use the additional
resources. This has the advantage of delaying investments until it is certain
that they are needed and ensures a high use of the capacity acquired. How-
ever, this option may mean customers are lost as they move to competitor
products and services before the additional capacity is in place. This strat-
egy may also incur a loss of flexibility as a consequence of the continual
high use of resources.

Facility location
The facility location is strategic as it can have a large impact on the invest-
ment in the operation’s resources and also on the operation’s market
 Facility design 29
performance. A wrong location can lead to an inability to configure suitable
resources for a resource-based strategy and could also mean competitive
factors cannot be met. Services are generally classified as back office and
front office, where back-office services do not require customer contact and
thus provide more flexibility in the location decision. Front-office services,
however, require customer contact, but when making the location decision,
it is useful to distinguish them by the nature of the movement of user (cus-
tomer) and provider of the service.
Separated services provide a service directly to a customer so can be clas-
sified as front-office but do not actually require either the user or provider
to physically come together to enable the service to take place. Call centres
have been established internationally that provide services to customers at
a distance.
Demander-located services require the service provider to move to the
location of the customer. An example is management consultancy, where it
would usually be expected that the service provider would be present at least
in part at the premises of the client. On the other hand, provider-located ser-
vices require the user to move to the location of the service provider, which
they may have to do to access specialist resources and staff – such as at a
hospital or as a feature of a service, as in a hotel.
Peripatetic services involve both customer and provider moving to the
location of the service encounter. Trade shows and conferences fall under
this category.

Supply-side and demand-side influences on facility location

The location decision must consider factors that vary in such a way as to
influence cost as location varies (supply-side factors) and factors that vary
in such a way as to influence customer service as location varies (demand-
side factors). In service organizations, a need for customer contact may
mean that demand-side influences will dominate, whereas in a manufac-
turing, company labour and distribution costs may mean that supply-side
influences dominate.
Supply-side influences include distribution and transportation costs,
which can be considerable, especially for a manufacturing organization that
deals in tangible products. The sheer volume of the raw material involved
in operations such as steel production means that a location decision will
tend to favour areas near to raw materials. A manufacturer and seller of
custom-built furniture, however, will need to be near potential customers.
For service companies, the need to be in a market-oriented location means
that the cost of transportation of goods will not be a major factor in the loca-
tion decision. However, many service organizations need to distribute stock
30 Facility design
from warehouses whose location should be considered carefully. Distribu-
tion across country borders means that a whole series of additional costs
and delays must be taken into account, including import duties and delays
in moving freight between different transportation methods. A site near to
an airport or a rail link to an airport may be an important factor if deliv-
ery speed is important. Labour costs have generally become less important
as the proportion of direct labour cost in high-volume manufacturing has
fallen. What is becoming more important is the skills and flexibility of the
labour force to adapt to new working methods and to engage in continuous
improvement efforts. The wage rate of labour can be a factor in location
decisions, especially when the service can be provided easily in alternative
locations. Both the cost of the land and the cost of purchasing materials and
then building a facility are directly related to the location decision. These
costs should be considered together since low-cost land may require sub-
stantial preparation to make it suitable for building development. Finally,
there are a number of factors that are not financial but may have an effect
on the location decision. These include the potential for objections to devel-
opment on environmental grounds, local regulations regarding business
developments and the necessary quality of life in the area needed to attract
skilled employees.
Demand-side influences include the need for a pool of skilled labour is
becoming increasingly important. Location image may also be important,
with retail outlets in particular wishing to locate in an area that ‘fits’ with the
image they are trying to project. Shopping districts will often be associated
with a particular type of retail outlet, such as designer clothing. Finally, for
many service organizations in particular, the location of the facility must
be convenient for the potential customer. This includes restaurants, where
customers may be prepared to travel a short distance, and hospitals, where
the speed of response is vital to the service. The physical link between cus-
tomer and service provider can be in either direction. For example, house-
hold goods such as gas ovens and central heating boilers will be serviced by
staff at the customer’s home.
6 Process technology

Process technology is an important aspect of operations in that it has led to

a large growth in productivity in both manufacturing, where the emphasis
is on technology for material and information transformation, and services,
where the emphasis is on technology for information and customer trans-
formations. Process technology can be used to enhance performance along
performance objectives such as improving delivery speed and increasing
quality.

Process technology for materials

This section will describe some of the software systems and hardware tech-
nologies that have had a widespread impact on manufacturing firms.

Software systems
Computer-aided design (CAD) is one of the most widespread technologies,
used in even relatively small firms. A CAD system allows the designer to
create drawings on a computer screen to assist in the visual design of a
product or service. The drawings can be viewed from any angle, and draw-
ings can be zoomed in to allow users to inspect a design in detail. Drawings
are held in a database for future use and dissemination between design-
ers and engineers all across the company. Computer-aided process plan-
ning (CAPP) extends CAD by transmitting a process plan of how parts
will be manufactured to the machine tool – for example, deciding on how
individual pieces are to be cut from a sheet of metal. CAPP systems can
also sequence parts through a number of process steps. Computer-aided
engineering (CAE) takes the drawings in a CAD system and subjects the
designs to simulated tests. For example, the behaviour of an engineering
design for elements of a bridge can be observed under various amounts of
stress. This allows various design options to be tested quickly and cheaply.
32 Process technology
Hardware technologies
Computer numerically controlled (CNC) machines are machine tools that
can be controlled by computer. Automated material handling systems
(AMH) are designed to improve efficiency in the movement, storage and
retrieval of materials. Types of systems include automated guided vehicle
(AGV) systems that transport material on driverless vehicles to various loca-
tions in the plant. Automated storage and retrieval systems (AS/RS) handle
the storage and retrieval of materials by using computers to direct automatic
loaders to pick and place items in a storage facility. Flexible manufactur-
ing cell (FMC) systems integrate individual items of automation described
earlier to form an automated manufacturing system. Flexible manufacturing
systems (FMS) extend the facilities of an FMC by incorporating automatic
parts loading and unloading facilities and an AGV system for parts move-
ment. When these technologies are integrated by using a computer network
and database system, the resulting automated system is called computer-
integrated manufacture (CIM). CIM is a fully integrated system: the areas
of design, testing, fabrication, assembly, inspection and material handling
are automated and integrated by using technology. Autonomous robots can
learn, adapt, and evolve by using capabilities like machine learning and
computer vision. For example, robots equipped with gyroscopes and accel-
erometers, along with an on-board camera and laser scanner can tell how
and where they are moving, and they ‘know’ what tasks they are capable
of covering. The robots can then autonomously evaluate a task, divide it
between themselves and collaborate to complete it. For example, when an
individual robot reaches the end of its battery charge, it will transmit its
position to a fully charged unit that can take over while it recharges.

Process technology for information

Three types of information system considered here are e-business, e-commerce,
m-business, the IoT and Industry 4.0.

E-business
E-business can be seen as the transformation of business processes through
the use of Internet technologies. E-business opportunities can be classified
by whether an organization is using the Internet to transact with consumers,
called business-to-consumer (B2C) or other businesses, called business-to-
business (B2B). B2B transactions predominate over the Internet in terms
of value if not frequency. The benefits of e-business for operations relate
to areas such as supply chain integration using B2B and B2C interactions
 Process technology 33
as well as the increased efficiency and effectiveness of internal business
processes using employee-to-employee (E2E) interactions.

E-commerce
E-commerce can be considered to be all electronically mediated transac-
tions between an organization and any third party that it deals with. By
this definition, non-financial transactions such as customer requests for fur-
ther information would also be considered to be part of e-commerce. Buy-
side e-commerce refers to transactions to procure resources needed by an
organization from its suppliers. Sell-side e-commerce refers to transactions
involved in selling products to an organization’s customers.

M-business
M-business can be defined as the integration of Internet and wireless com-
munications technology. It is a result of mobile communications facilitated
by broadband (high-bandwidth) Internet connections and wireless technol-
ogy (for example, mobile phones using radio waves). One m-business tech-
nology is radio frequency identification (RFID) systems, which consist of
a tag that can be attached to an item. The tag contains a microchip, which
contains information about the item, and its location is transmitted upon
request by using radio signals to an RFID reader. The RFID readers then
transmit this information, using a wired or wireless connection, to a com-
puter network. The system uses a short-range radio system for receiving the
information from the tag but does not require a direct line of sight that, for
example, a barcode system requires.

Internet of Things (IoT)

The IoT can refer to the use of the Internet as a network to enable connec-
tion and communication between objects with embedded sensors. A pri-
mary driver of the IoT is the broad deployment of sensors that are smaller,
cheaper and more powerful than they used to be. There are many applica-
tions of the IoT, including in manufacturing the use for real-time monitoring
of production processes to allow early correction of errors and increased
efficiency – for example, to improve visibility in the manufacturing supply
chain. Other applications include the use of data streamed from delivery
vehicles to schedule maintenance activities outside of operating hours and
customer tracking devices that can be used to present targeted promotions
to customers as they move through a store.
34 Process technology
Industry 4.0
Industry 4.0 is based on the idea of a fully integrated manufacturing indus-
try. The term is also referred to as the Fourth Industrial Revolution, enabled
by digital transformation and the integration of IT and automation systems
in manufacturing. A major element of Industry 4.0 is cyber-physical sys-
tems (CPS) that allow the physical components in an industrial process,
such as machines, workers and robots, to be integrated into the virtual net-
work of the IoT. The goal is to have embedded computers and networks
monitor and control the physical processes and enable information to be
shared at the different stages of creating and manufacturing a product. This
will enable the establishment of a self-adapting production system based
on transparency of information and predictive power. Further key elements
to Industry 4.0 are thus the infrastructure to store and manage the big data
generated by CPS and the use of analytics to provide the predictive analy-
sis required.

Process technology for customers

One approach to improving service delivery is to use process technology
in the service delivery process itself. In an active customer-technology
interaction such as an automated teller machine (ATM) at a bank, the
technology can enable customers to avail themselves of the service at a
time of their choosing and to make choices regarding that service. From
a service provider viewpoint, this has the advantage of reducing staffing
requirements and empowering customers by giving them a greater sense
of control over the type of service they require. However, customers have
different preferences, and many facilities may well need both customer-
driven and traditional people-based service delivery systems such as a
call centre or physical outlet. Process technology also exists for passive
customer-technology interactions such as transportation systems – for
example, moving walkways for directing people at an airport or an under-
ground tube system in a city. Because of the lack of interaction between
the customer and technology, customers will need clear instructions on
how to use the technology, to avoid confusion. In a supported customer-
technology interaction, there is a human server who acts as an interme-
diary between the customer and the technology itself. This means that
advice and guidance can be given to the customer by the server in making
their choices. Some organizations encourage their customers to use active
rather than supported technology, to reduce staffing costs. For example,
many airlines charge customers extra if they wish to check in at the airport
rather than undertake the task online.
 Process technology 35
Choosing process technology
In terms of operations management, investing in process technology is a
strategic decision in that it helps the organization meet the requirements
of the market in which it is competing. In particular, IT investments can
be sees as a bridge between the external business environment and inter-
nal business processes. In general, investments in processing technology
should be used to enhance performance along the key performance objec-
tives identified in the strategy process, such as improving delivery speed
and increasing quality. It is also important that the form of the technology
investment match the volume/variety requirements of the task and provide
the appropriate trade-off between flexibility and cost. To assist the process
technology decision, we consider three characteristics of process technol-
ogy that vary with volume and variety, namely scale, automation and inte-
gration (Slack et al., 2016).

Scale of the technology

The scale refers to the capacity of individual units of process technology. In
general terms, we have a choice about whether we make up our capacity with
a few high-volume units or many low-volume units. Large-scale units of tech-
nology will generally have a high capital cost but a low operating-unit cost
and thus help achieve economies of scale. Small-scale units of technology
can provide more flexibility by enabling capacity to be provided by a number
of small units in different configurations rather than by just one large unit.
These systems are also more robust against disruption than large-scale units
are because output is spread over a number of units. The investment required
for each additional small-scale unit is also smaller than that of larger units,
with a faster payback period, encouraging investment in the latest technology.

Degree of automation of the technology

The degree of automation refers to the extent to which the technology oper-
ates without human intervention. There is a continuum from low automation
(high degree of human intervention – e.g. driving a car) to high automation
(occasional intervention – e.g. monitoring a chemical plant), and the level
of automation depends on the level of complexity and intuition required.
The advantages of automation are that it permits repetitive tasks to be exe-
cuted with precision, speed and power and can lower direct labour costs.
The disadvantages of automation include the possible loss of flexibility and
creativity due to the lack of human intervention and potential high support
costs, such as the labour costs of support engineers.
36 Process technology

Small Scale Large Scale

Low Automaon High Automaon
Stand-Alone Integrated

HIGH VARIETY LOW

LOW VOLUME HIGH

Figure 6.1 The relationship between process technology and volume/variety

Degree of integrating of the technology

The degree integrating the technology refers to the extent to which indi-
vidual units of technology are connected together. Process technologies are
increasingly connected together – for example, material processing systems
such as FMC, FMS and CIM and information processing systems through
the use of Internet-based systems. The advantages of integration are that it
reduces fragmentation of previously separated processes and can lead to
improved synchronization and thus reduced work in progress (WIP) and
costs. The disadvantage of integration is high capital costs and the increased
exposure to the risk of failure.
In making a choice regarding process technology in general, investments
in large-scale, highly automated and integrated technology are appropriate
for a high-volume/low-variety mix where the emphasis is on low cost rather
than flexibility. Investments in small-scale, low-automation (people-based)
and stand-alone technologies are appropriate for a low-volume/high-variety
mix where the emphasis is on flexibility rather than low cost (Figure 6.1).

Reference
Slack, N., Brandon-Jones, A., and Johnston, R. (2016) Operations Management, 8th
edn., Pearson Education Limited.
7 Product and service design

The ability to quickly develop new products and services can provide a
source of competitive advantage in offering something unique to the market
that can then lead to increased market share and/or increased profitabil-
ity. Innovations may come from either a technology-push approach aligned
with a resource-based operations strategy or a market-pull approach associ-
ated with a market-based operations strategy. The product life cycle model
puts the design process into a strategic context by highlighting how differ-
ent phases over the life of a product or service can impact both the product
design and also process design requirements. In general, the model pre-
dicts an emphasis on innovation and customization in product design in the
early introductory phase of a product, giving way to standardization and an
emphasis on efficient process design at the mature phase of the life cycle.

The design process

The steps involved in the design process are now described.

Idea generation
The source of new ideas for products and services can come from either
seeking to exploit developments in technology or seeking to fulfil mar-
ket demand primarily from suggestions from customers and competitors.
Customers are an important source of information regarding new ideas in
product and service development. Customer views can be collected using
data-collection methods such as questionnaires and focus group interviews.
Competitors can provide a good source of ideas, and it is important that the
organization analyses any new products or services as they are introduced
to the market and makes an appropriate response. Reverse engineering is a
systematic approach to dismantling and inspecting a competitor’s product to
look for aspects of design that could be incorporated into the organization’s
38 Product and service design
own product. This is especially prevalent when the product is a complex
assembly, such as a car, where design choices are myriad.

Feasibility study
The marketing function will take the ideas created in the idea generation
stage and form a series of alternative concepts on which a feasibility study
is undertaken. The concept refers to the combination of physical products
and services, referred to as the package, which delivers a set of expected
benefits to the customer. Once a concept has been formulated, it must then
be submitted to and pass three tests:

1 Market analysis: will it sell in sufficient numbers?

2 Economic analysis: can we make a profit on projected sales?
3 Technical analysis: have we the technical capability to introduce the
concept to the market?

Note that the concept should pass all three tests. So although our concept may
be popular with customers, unless we can make a profit on the projected sales
volume, the concept is unlikely to be pursued. The market analysis should
identify whether sufficient demand for the proposed product or service exists
and assess its fit with the existing marketing strategy. To perform an eco-
nomic analysis, an accurate estimate of demand is required on the basis of a
predicted price range for the product or service, one that is compatible with
its position in the market. Then estimates of costs on such factors as staffing,
materials and equipment must be obtained. Techniques such as a cost–benefit
analysis, decision theory and accounting measures (such as net present value
(NPV) and internal rate of return (IRR)) may be used to calculate the profit-
ability of a product. The technical analysis involves determining whether the
technical capability to manufacture the product or deliver the service exists in
the organisation proposing to introduce it. This covers such issues as ensur-
ing materials are available to make the product to the specification required,
ensuring the appropriate machinery and skills are available to work with these
materials and securing the staff skills necessary to deliver a service.

Preliminary design
The specification of the concept – what the product or service should do
to satisfy customer needs – is translated into a technical specification of
the components of the package (the product and service components that
satisfy the customer needs defined in the concept) and the process by which
the package is created. The specification of the components of the package
 Product and service design 39
requires a product and service structure that describes the relationship
between the components and a bill of materials (BOM) or list of component
quantities derived from the product structure.

Final design
The final design stage involves refining the preliminary design by using a
prototype until a viable final design can be made. The final design will be
assessed according to three main facets: functional design, form design and
production design.

Functional design
Functional design entails ensuring that the design meets the performance
characteristics that are specified in the product concept. Two aspects of
functional design are reliability and maintainability. Reliability measures
the probability that a product or service will perform its intended function
for a specified period of time under normal conditions of use. Strategies
for improving product or service reliability include simplified design (for
example, fewer parts in a product), improving reliability in individual ele-
ments of the product or service and adopting backup product or service ele-
ments. Maintainability is the ability of the customer to maintain a product or
the need for trained personnel to undertake maintenance or repair activities.
Maintainability is connected to issues such as the cost of the product (it may
be cheaper to throw away rather than to repair the product) and its reliability
(high reliability will reduce the importance of maintainability). Maintain-
ability can be improved by modular design to enable whole modules to be
replaced rather than the lengthy investigation of faults. Maintenance sched-
ules should also be specified to help prevent problems from occurring.

Form design
Form design refers to product aesthetics such as look and feel. This is par-
ticularly important for consumer durables, but even industrial appliances
should at least project an image of quality. In services, the design of the sup-
porting facility, such as the room decor, lighting and music in a restaurant,
provide an important element of the service design.

Production design
Production design involves ensuring that the design takes into consideration
the ease and cost of manufacture of a product. Good design will take into
40 Product and service design
consideration the present manufacturing capabilities from material supplies,
equipment and personnel skills available. The cost of production can be
reduced by simplification (reducing the number of components, subassem-
blies and options in a product, thus reducing the amount of manufacturing
processes required), standardization (enabling the use of the same compo-
nents for different products and modules) and modularization (combining
standardized building blocks in different ways to create a range of products).

Mass customisation
Mass customization attempts to combine high-variety, high-volume out-
put to provide the customer with customized products at a relatively low
price. Therefore, mass customization aims to mass-produce a basic family
of products or services that can still be customized to the needs of individual
customers. One way of achieving mass customization is to incorporate the
ideas related to production design of simplification, standardization and
modularization. Vonderembse and White (2004) describe three levels of
customization:

1 Customer-contact customization involves the product or service being

tailored to individual needs. For example, a haircut or bicycle can be
designed and delivered to meet the specification provided by an indi-
vidual customer.
2 Adaptive customization involves a standard product or service that can
be customized to meet individual needs. For example, a car can be
customized by the customer by ordering from a list of options, such as
metallic paint and air conditioning. Here customization starts at the
production rather than design stage.
3 Presentation customization involves standard products being presented
differently to different customers. This can be achieved through dif-
ferences in elements such as packaging, delivery channel, terms and
conditions of purchase and stated use. Here the level of customization
occurs after the product has been produced.

Service design
The design process outlined in the previous section of this chapter is rel-
evant both to products and to services. This section outlines issues relevant
to the design of services in particular. In addition, to the intangible nature of
service design, the nature of the service can be affected by the presence of
the customer in the service delivery process, and most services are accom-
panied by some sort of tangible element. This combination of elements is
 Product and service design 41
termed ‘the service package’ (Fitzsimmons and Fitzsimmons, 2011) and is
defined as a bundle of goods and services with information that is provided
in some environment. The service package consists of the following five
features, using a hotel business as an example and laying out criteria of
how each of these features could be evaluated as appropriate for the service
package offered:

1 A supporting facility is the physical resources that must be in place

before a service can be offered (e.g. hotel building). Criteria for evalu-
ation include the location, interior decoration, supporting equipment,
architectural appropriateness and facility layout.
2 Facilitating goods are the material purchased or consumed by the buyer
or the items provided by the customer (e.g. towels, soap etc.). Criteria
for evaluation include consistency, quantity and selection.
3 Information is the data that are available from the customer or provider to
enable efficient and customized service (e.g. room reservation informa-
tion). Criteria for evaluation include accuracy, timeliness and usefulness.
4 Explicit services are the benefits that are readily observable by the
senses and consist of the essential or intrinsic features of the service
(e.g. a comfortable bed in a clean room). Criteria for evaluation include
personnel training, comprehensiveness, consistency and availability.
5 Implicit services are the psychological benefits that the customer may
sense only vaguely or the extrinsic features of the service (e.g. friendly
and helpful service at reception). Criteria for evaluation include atti-
tude of service, atmosphere, waiting time, status, sense of well-being,
privacy and security and convenience.

The idea of the service package shows that although service design is often
primarily related to the design of the process of delivering the service, it
can be seen that the service package also requires the design of physical
aspects such as the supporting facility and facilitating goods. However, ser-
vice design must take into account how the individual customer may react
to the service as it is delivered. This is not easy to account for, because all
customers are different and have different expectations of what the service
should provide. This requires close cooperation between operations and
marketing to identify a target customer market and ensure that the service
design is meeting their needs.

3D printing
Three-dimensional (3D) printing or additive manufacturing takes a
computer-based 3D model and then builds a physical representation of that
42 Product and service design
model by rendering it sequentially as a number of layers. The technique
has its roots in prototyping but is now used in final design and for man-
ufacturing final products. 3D printing produces objects by adding mate-
rial rather than mechanically removing material from a solid block. The
3D-printing process involves making a product from sequential layers of
fine powder or liquid by using materials such as metals, plastics and com-
posite materials. 3D printing is especially attractive for producing low vol-
umes of products and is gaining importance for producing prototypes and
small production runs. Further advantages of 3D printing include its greater
scope for complex designs, a more rapid market launch and waste reduction
for a more efficient manufacturing process. Disadvantages include the high
cost of high-volume output, the limited range of printable materials and
limitations on the size of the components that can be printed.

References
Fitzsimmons, J.A. and Fitzsimmons, M.J. (2011) Service Management: Operations,
Strategy, and Information Technology, 7th edn., McGraw-Hill.
Vonderembse, M.A. and White, G.P. (2004) Core Concepts of Operations Manage-
ment, John Wiley & Sons.
8 Process design

Although organisations are often structured around functional areas such

as marketing and finance, the value that the customer obtains from a prod-
uct or service, in terms of operations, is a result of a set of (transformation)
processes. Thus, well-designed processes that meet the needs of the cus-
tomer are essential if an organization is to be competitive. The design of
processes may be determined by customer requirements or benchmarking
competitors or may be directly related to meeting strategic objectives such
as order-winning competitive factors. The design of processes is complex,
so the steps in a structured approach to process design are covered as is
the use of tools to assist process design activities such as process mapping,
service blueprints and business process simulation. The task of designing
processes should be undertaken as follows:

1 Identify opportunities for process improvement.

2 Document the process design.
3 Redesign the process.

1 Identify opportunities for process improvement

The main generic processes in an organization can be described as sup-
plier relationship, new product development, order fulfilment and cus-
tomer relationship. These represent the core processes involved in adding
value to the organization’s customers, thus providing a general guide to
where improvement efforts should be focused. These processes will in
most organizations be too large and complex to evaluate in a single ini-
tiative, and thus it is necessary to scope the project to address a particu-
lar area of concern. These areas can be derived from customer feedback,
employee ideas generated from suggestion schemes and benchmarking
against competitors.
44 Process design
2 Document the process design
Identifying activities in a current process design involves a data-collection
exercise that uses methods such as an examination of current documenta-
tion, interviews and observation. To provide a framework for the design and
improvement of service processes, the documentation techniques of process
mapping and service blueprinting can be used.

Process mapping
Documenting the process can be undertaken by constructing a process map,
also called a flow chart. This is a useful way of understanding any business
process and showing the interrelationships between activities in a process.
This can help in identifying and fixing problems with the process, assisting
the development of new processes and comparing the design of similar pro-
cesses. For larger projects, it may be necessary to represent a given process
at several levels of detail. Thus, a single activity may be shown as a series of
sub-activities on a separate diagram. Figure 8.1 shows the representations
used in a simple process-mapping diagram.

PROCESS/ACTIVITY

DECISION POINT

START/
END
POINT

DIRECTION OF FLOW

Figure 8.1 Symbols used in a process map

 Customer SIT AT TABLE REVIEW MENU PLACE ORDER EAT MEAL REQUEST BILL MAKE PAYMENT LEAVE

Line of Interacon

Waing Staff PROVIDE MENU

TAKE ORDER TO
SERVE MEAL TAKE BILL ORDER PRESENT BILL
(onstage) KITCHEN

Line of Visibility

Waing Staff GIVE ORDER TO

COLLECT MEAL PREPARE BILL
CHEF
(backstage)

Line of Internal Interacon

Chef INFORM WAITING

PREPARE MEAL
STAFF

Figure 8.2 Service blueprint for a restaurant

46 Process design
Service blueprinting
Process maps are widely used in manufacturing to design the flow of a
number of linked processes that produce an output. In services, however,
process maps may be less relevant when a service consists of a number
of sub-processes that are not linked and the service ‘output’ is a number of
customer-employee interactions. In this case, the process design may first
focus on the design of the customer-employee interactions and then iden-
tify external performance measures such as customer satisfaction. To assist
in the analysis of customer-employee interactions, process maps can be
extended to show how a business interacts with customers. A service blue-
print is a flow chart that structures the process activities on either side of
a customer line of visibility. The activities above the line are visible to the
customer, and those below the line are operations that the customer does
not see. Activities above the line of visibility are subdivided into two fields,
separated by the line of interaction, which divides activities undertaken by
the customer and the service provider. Below the line of visibility, a line of
internal interaction separates the activities of front-line personnel who set
up actions before providing a service (not in view of the customer) and sup-
port personnel who contribute materials or services required to provide the
service. Finally, the line of implementation separates support activities from
management activities such as planning, controlling and decision-making.
Figure 8.2 shows an example of a service blueprint for a restaurant.
The objective of the service blueprint is that it not only charts the service
process flow as does a process map but also shows the structure of the ser-
vice organization on the vertical axis, showing relationships between, for
example, internal customers, support staff and front-line providers. In par-
ticular, the diagram aims to highlight the interactions between the customer
and process where customer services can be affected. The diagrams can also
be used as a design tool to determine staffing levels, job descriptions and
the selection of equipment and as a control tool to identify gaps in service
provision by analysing fail points. Fail points are potential service system
shortfalls between what the service delivers and what the targeted custom-
ers have been led to expect.

3 Redesign the process

There are many ways that a process can be redesigned to meet particular
objectives, so it is necessary to generate a range of innovative solutions for
evaluation. The following are three approaches to generating new ideas:

1 Brainstorming offers the greatest scope for radical improvements to the

process design but represents a risk in the implementation of a totally
 Process design 47
new approach. A deep understanding of the process is required so that
the design will be feasible.
2 Modifying existing designs is less risky than a blue-skies approach but
may mean that the opportunity for a radical improvement in process
design is missed.
3 Using an established ‘benchmark’ design applies the idea of identify-
ing the best-in-class performer for the particular process in question
and adopting that design. Disadvantages to this approach may be that
the process design of the best-in-class performer may not be available
or the context of the best-in-class performer may not match the context
for the new design.

The process map or service blueprint provides an overall view of the current
or expected process design, and this should be used so that an overall view
is taken when process design options are generated. This helps to ensure that
design solutions proposed in a specific area do not have a detrimental effect
in other areas of the process and thus affect overall process performance.
The design of service processes in particular is a key factor in meeting the
needs of the customer. In services, the process incorporates employees, cus-
tomers and facilitating goods in a dynamic event that may be undertaken in
a different manner each time, according to the demands of the individual
customer. The interaction between the customer and service provider can
be analysed using the service blueprint diagrams described in this chapter.
It will be necessary to reduce the number of design alternatives generated,
and this can be achieved by a rating scheme that scores each design solu-
tion against key performance dimensions, such as response time and cost of
operation. The outcome of this analysis will be a reduced number of design
solutions, which can then be subjected to more detailed analysis using tools
such as business process simulation.

Business process simulation

Business process simulation (BPS) allows the performance of the organi-
zation to be observed quickly and under a number of different scenarios.
The simulation method refers to both the process of building a model and
the conducting of experiments on that model. BPS is usually implemented
by using discrete-event simulation systems that move through time in (dis-
crete) steps (Greasley, 2019).

Reference
Greasley, A. (2019) Simulating Business Processes for Descriptive, Predictive and
Prescriptive Analytics, De Gruyter.
9 Job design

A key aspect of operations is the management of the organisation’s human

resources. Most people in an organisation will be involved in undertaking
operations activities and the operations function should contribute to the
human resource strategy of the company. There are many aspects to managing
people in the organisation including the design of project structures covered
in chapter 16. This chapter is focussed on the issue of job design as it relates
to human resources. This is particularly relevant to services where it is likely
that the customer may be involved in the actual delivery of the service. This
means service employees and customers frequently work together, and thus the
behaviour of employees is likely to have a major effect on the customer’s
perceived level of service quality. The implication is that employees that are
not motivated will be dissatisfied and that this will lead to a poor perception of
service quality by customers. Technology is often used as a way of ‘controlling’
employee behaviour in these circumstances, but in services, in particular, it is
difficult to completely replace the element of human interaction.

The job characteristics model

The Hackman and Oldham (1980) job characteristics model can provide
suggestions on how to structure jobs to include more motivators. The model
links job characteristics to the desired psychological state of the individual
and outcomes in terms of motivation and job performance (Figure 9.1). The
model takes into account individual differences and provides a structure
for analysing motivational problems at work and to predict the effects of
change on people’s jobs and to help plan new work systems. The model
proposes five desirable characteristics of a job:

1 Skill variety (SV) – the extent to which a job makes use of different
skills and abilities.
2 Task identity (TI) – the extent to which a job involves completing a
whole identifiable piece of work rather than simply a part.
 Job design 49

PERSONAL AND WORK

JOB CHARACTERISTICS DESIRABLE MENTAL STATE OUTCOMES

SKILL VARIETY (SV)

TASK IDENTITY (TI) MEANINGFUL WORK

TASK SIGNIFICANCE HIGHER

(TS) MOTIVATION AND
QUALITY OF WORK
PERFORMANCE

RESPONSIBILITY FOR
AUTONOMY (AU)
WORK OUTCOMES

KNOWLEDGE OF THE
FEEDBACK (FB)
RESULTS OF WORK

Figure 9.1 The job characteristics model

3 Task significance (TS) – the extent to which a job affects other people,
both inside and outside the organization.
4 Autonomy (AU) – the extent to which the job allows the job holder to
exercise choice and discretion in their work.
5 Feedback (FB) – the extent to which the job itself (as opposed to other
people) provides the job holder with information on their performance.

The model proposes that the presence of these characteristics will lead to
desirable mental states in terms of meaningful work (SV, TI, TS), respon-
sibility for outcomes of work (AU) and knowledge of the results of work
(FB). These mental states will in turn lead to higher motivation and quality
of work performance. The effects predicted by the model are moderated by
factors such as the importance that an individual attaches to challenge and
personal development.
The five core job characteristics can be combined to provide a motivating
potential score (MPS) by using the following formula:

ª (SV  TI  TS) º
MPS « » u AU u FB
¬ 3 ¼
50 Job design
The formula shows that the addition of SV, TI and TS means that a low
score on one of these variables can be compensated by a high score on
another. The formula also shows that the combined effect of these three
variables (which are divided by 3) is only equal to the other two job charac-
teristics (autonomy and feedback) on their own.

Job design approaches

The following are examples of approaches to job design that have been used
in an attempt to bring these desirable job characteristics to people’s work, to
lead to an improved mental state and thus increased performance.

Job rotation
Job rotation involves a worker changing job roles with another worker on a
periodic basis. If successfully implemented this can help increase task iden-
tity, skill variety and autonomy through involvement in a wider range of
work tasks, with discretion about when these mixes of tasks can be under-
taken. However, this method does not actually improve the design of jobs
and it can mean that people gravitate to jobs that suit them and are not inter-
ested in initiating rotation with colleagues. At worst it can mean rotation
between various boring jobs with no acquisition of new skills.

Job enlargement
Job enlargement involves the horizontal integration of tasks to expand the
range of tasks involved in a particular job. If successfully implemented, this
can increase task identity, task significance and skill variety by involving
the worker in the whole work task either individually or in a group.

Job enrichment
Job enrichment involves the vertical integration of tasks and the integra-
tion of responsibility and decision-making. If successfully implemented,
this can increase all five of the desirable job characteristics by involving
the worker in a wider range of tasks and providing responsibility for the
successful execution of these tasks. This technique requires feedback so
that the success of the work can be judged. The managerial and staff respon-
sibilities potentially given to an employee through enrichment can be seen
as a form of empowerment. This should in turn lead to improved productiv-
ity and product quality. Although job enrichment may affect supervisory
levels of management, by replacing a supervisor with a team leader, for
 Job design 51
example, the power structure used to justify management decisions for per-
sonal objectives remains intact.

Learning curves
Organizations have often used learning curves to predict the improvement
in productivity that can occur as experience in a process is gained. Thus,
learning curves can give an organization a method of measuring continuous
improvement activities. If a firm can estimate the rate at which an opera-
tion time will decrease, then it can predict the impact on cost and increase
in effective capacity over time. The learning curve is based on the concept
that when productivity doubles, the decrease in time per unit is the rate
of the learning curve. Thus, if the learning curve is at a rate of 85%, the
second unit takes 85% of the time of the first unit, the fourth unit takes
85% of the second unit, the eighth unit takes 85% of the fourth and so on.
Learning curves are usually applied to individual operators, but the con-
cept can also be applied in a more aggregate sense, called an experience
curve or improvement curve, and applied to such areas as manufacturing
system performance or cost estimating. Industrial sectors can also be shown
to have different rates of learning. However, improvements along a learning
curve do not just happen, and the theory is most applicable to new product
or process development, where scope for improvement is greatest or busi-
nesses that include complex repetitive operations where the work pace is
determined mostly by people, not machines. Examples of industries that
use learning curves include construction, defence, aerospace and electron-
ics. The learning curve effect in simple routine processes such as mass pro-
duction may show improvement only for a short time, so their use is more
limited. Using learning curves comes with step changes that can slow or
accelerate the rate of learning, such as organizational change, changes in
technology or quality improvement programmes. Learning effects also take
place as the result of action. To ensure learning occurs, the organization
must invest in factors such as research and development, advanced technol-
ogy, people and continuous improvement efforts.

Reference
Hackman, J.R., and Oldham, G.R. (1980) Work Redesign, Prentice Hall.
10 Operations planning and
control

Operations planning and control is about matching the capacity of the

organization with customer demand. The two areas are now considered
separately.

Operations planning
Operations planning is concerned with taking actions, such as ensuring
resources are in place, in anticipation of future events. The nature of the
planning task is determined by how accurately future events can be predicted.
The predictability of demand for goods and services can range from a situation
of what is essentially dependent demand (demand can be predicted) to a high
level of unpredictability (independent demand). In a dependent, demand-
type situation, it is not necessary to activate a planning system and acquire
resources until a delivery date for an order is received. Both transforming
resources and transformed resources may be acquired at the appropriate time
for delivery. This is called a resource-to-order planning policy and is asso-
ciated with construction and project-based operations. In an independent
demand situation, when demand is relatively predictable, the transforming
resources, such as staff and machinery, may be in place on a permanent basis.
However, the transformed resources – the raw material that is used to con-
struct the product – may be acquired on the receipt of a customer’s order. This
is called a make-to-order planning policy. Despite the risk of stockouts (being
out of stock), many manufacturers and retailers use this strategy because
it decreases the amount of inventory through the supply chain. Finally, if
demand is unpredictable, the organization will use a make-to-stock planning
policy, which produces to a forecast of demand for the product. This approach
may be used by retailers who need the products on display for people to buy.
Whereas the customer will ‘see’ only the delivery time from stock in a
make-to-stock system, in a make-to-order system, the delivery cycle will
 Operations planning and control 53

PURCHASE MAKE DELIVER

D (demand me)
RESOURCE TO ORDER
P (throughput me)

D (demand me)
MAKE TO ORDER
P (throughput me)

MAKE TO STOCK

Figure 10.1 Planning policies for demand types

include the purchase, make and delivery stages. This effect is examined by
using P:D ratios. The P:D ratio compares the demand time D (from cus-
tomer request to receipt of goods/services) to the total throughput time P of
the purchase, make and delivery stages. The purchase stage involves acquir-
ing the necessary resources from internal and external suppliers; the make
stage includes the processing of resources through the operations system;
and the deliver stage involves packing and distributing the finished good to
the customer. The relationship between the planning and control systems
and the P:D ratio is shown in Figure 10.1.
The P:D ratio makes the implications for the delivery time to the customer
explicit. In a resource-to-order system, the purchase, make and deliver
stages all affect delivery performance. In a make-to-order system transform-
ing resources are in place but the customer has to wait for the product to
be made and delivered. In a make-to-stock system, however, the customer
‘sees’ only the delivery time. Although delivery performance is improved
in a make-to-stock system, the item is being produced to a forecast demand,
which is subject to error.

Operations control
Although operations planning will attempt to anticipate events, there may
be a mismatch between current actions and what is actually required due
54 Operations planning and control
to unforeseen events or behaviours. An example would be an unforeseen
change in customer demand for the mix of goods and services offered.
Operations control is concerned with ensuring that the current behaviour
of the operations system conforms to the required behaviour. This section
examines the activities associated with operations control tasks. These gen-
erally consist of loading (determining the current capacity and volumes),
sequencing (deciding on the order of execution of work) and scheduling
(allocating start and finish times for a customer order).

Loading
Loading involves determining the available capacity for each stage in a pro-
cess and allocating a work task to that stage. The calculation of available
capacity must take account of both planned factors such as machine main-
tenance and unplanned factors such as machine breakdowns and worker
absenteeism. These issues are dealt with in more detail in Chapter 11. There
are two principal approaches to loading: finite and infinite. Finite load-
ing allocates work up to an agreed fixed (finite) upper limit. This may be
because the upper limit of capacity is fixed, such as that for aircraft seats.
The upper limit can be fixed through a policy, such as using an appointment
system. Finally, there may be a policy of limiting the availability of the
product or service to the market, such as a limited edition of an expensive
watch may enhance demand. Infinite loading does not place a limit on the
work loaded onto a stage. This may be because it is not possible to limit
demand. For example, emergency hospital treatment should not be refused.
In manufacturing or services, if demand exceeds capacity, a queue will
form. This may be acceptable in some instances, such as shopping outlets,
when the customer understands the cost of always providing instant service
is too high.

Sequencing
Sequencing (also known as dispatching) is the sequential assignment of
tasks or jobs to individual processes. To attempt to control the progress of
a job through a process, a job priority system is used. The priority of jobs
queuing at a process determines the order in which they are processed. The
difficulty lies in determining an appropriate priority rule to obtain the best
performance. Priority rules include the following:

• DD (due date) – job with the nearest customer delivery due date to the
current date.
• FCFS (first come, first served) – job arriving first at a process.
 Operations planning and control 55
• SPT (shortest process time) – job with shortest process time.
• LPT (longest process time) – job with longest process time.

All the rules have different advantages and disadvantages. The DD rule
tends to minimize the lateness of individual jobs, but it may lead to other
jobs being delayed. The FCFS rule is easy to apply and is used for ease when
no particular sequencing activities are necessary when the workload on the
system is low. The SPT rule ensures that jobs with the shortest process time
progress rapidly; thus, the number of jobs processed should be high. This
rule will generally give the best performance in a congested system. However,
a disadvantage of the SPT rule is that when the demand on the process is
high, this may mean a job with a relatively long process time may have an
unacceptably long wait and is always at the end of the queue. The LPT rule
may be used when larger jobs can be completed in-house and smaller jobs
can be subcontracted when their due date is near.
Rules can also use a combination of factors to determine the sequence,
such as the critical ratio (CR), which is the ratio of the time left until the
job’s due date to the expected elapsed time for the job to be processed
through the remaining processes to its completion. If the ratio is less than 1,
the job is behind schedule and should receive priority.

Critical ratio (CR) = (due date – current date) ÷ days required to

complete job

Scheduling
Scheduling is the allocation of a start time and a finish time to each order
while taking into account the loading and sequencing policies employed.
The scheduling process is usually driven by the need to manage a num-
ber of jobs or customers in the system and ensure they are completed or
receive their order by a target due date. This often necessitates reschedul-
ing orders, called expediting, in order to ensure targets are actually met. In
theory, expediting should not be necessary if planning and control activities
have been undertaken correctly. However, in reality, due to the complexity
of the task and unexpected events (for example, poor quality material in the
process that leads to rework or machine breakdown events), expediting on
a day-to-day basis may be needed.

Optimized production technology

Optimized production technology (OPT) is an operations control sys-
tem that is based on the identification of bottlenecks in the production
56 Operations planning and control
process. A bottleneck is a resource whose capacity is less than or equal
to the demand placed on it. This approach attempts to avoid much of the
complexity of scheduling, by focusing on bottlenecks. The idea is that sys-
tem output is determined by bottlenecks so it is essential to schedule non-
bottleneck resources to ensure maximum use of the bottleneck resources
themselves.
11 Capacity management

In this chapter, medium-term capacity issues are considered. These are

concerned mainly with ensuring that sufficient capacity of the right type is
available at the right time, to meet demand for the planning period. Setting
capacity to meet the demands of the organization is termed ‘capacity plan-
ning and control’. The capacity planning and control activity should mea-
sure demand, measure capacity and reconcile capacity and demand.

Measuring demand
What makes demand particularly difficult to measure is the fact that it fluc-
tuates in response to a number of influences. These include competitors
introducing products or services into the marketplace that perform better
on performance objectives such as higher quality, lower price or shorter
delivery times. Also, changes in consumer tastes can affect demand as can
changes to the economy, such as a recession.
The medium term is considered to be approximately 2 to 18 months,
depending on the pace of change in the industry in which the organisation
is competing. The planning process can be described as working in cycles,
each cycle confirming detailed plans for the next time period and sketching
more tentative plans for the following period. At the next planning meeting,
these tentative plans are considered in more detail, and the cycle repeats.
This process means that the organization can build on previous plans instead
of attempting to devise new plans at each planning cycle. This reduces plan-
ning time and leads to more continuity in decision-making.

Measuring capacity
Measuring capacity may seem straightforward at first, especially when
compared to the uncertainty inherent in estimating demand. However,
58 Capacity management
capacity is not fixed but is a variable that depends on a number of
factors:

• Capacity takes many different forms, such as storage space, availability

of employee skills, equipment numbers and transportation facilities.
• Any of these types of capacity may be the limiting factor or bottleneck
on the capacity of a process. The actual bottleneck, and thus capacity,
may also change over time.
• Working practices such as hours worked and holiday entitlement can
also affect capacity calculations and may change over time. For exam-
ple, a change in company policy may decrease the hours a week that
employees can work and thus reduce capacity.
• The amount of capacity required to deliver a particular process at a
particular level may change over time, due to the experience gained
and improvements made to process design.
• The capacity available in multiple locations may not be simply summed
as transportation time, and costs may make available capacity in a par-
ticular location unsuitable.
• Capacity is based on time, so underused capacity due to a drop in
demand cannot be used later, when demand increases. Thus, the actual
capacity available will be less the more that demand fluctuates. Process
time fluctuations will also affect capacity.

Measuring capacity in services is a particular challenge. Generally, services

need to be more custom-designed and involve more personal contact to meet
specific customer needs. Customer involvement tends to provide an oppor-
tunity for special requests and instructions to be issued by the customer, and
they tend to disrupt routine procedures and thus efficiency. Capacity may
be lost in providing conversation to the customer in addition to delivering
the actual service. Quality is closely related to the customer’s perception of
satisfactory service. Operations employees employed where high levels of
customer contact occur must be skilled in interpreting what the customer
really wants. Thus, the level of customer-client contact can have a direct
effect on the efficiency and thus capacity availability that an operation can
achieve. Two further issues to consider when measuring capacity are prod-
uct mix and the definitions of design and effective capacity.

Product mix
Only when a narrow product (or service) range is involved can capacity be
measured reasonably accurately and in this case be quoted in terms of out-
put volume. With a changing product mix, therefore, it may be more useful
 Capacity management 59
to measure capacity in terms of input measures, which provide some indi-
cation of the potential output. Also, for planning purposes, when demand
is stated in output terms, input measures need to be converted to an esti-
mated output measure. For example, in hospitals that undertake a range of
activities, capacity is often measured in terms of beds available, an input
measure. An output measure, such as number of patients treated per week,
highly depends on the mix of activities that the hospital performs. Estimates
of capacity based on output can also be misleading because part of this out-
put may be accounted for by either inventory (for example, patients) part
way through the process or the use of additional resources (for example,
overtime, equipment rental, contracting out) that could not normally be
treated as part of the organization’s capacity.

Design, effective and actual capacity

The design capacity of an operation represents the theoretical output of a
process as it was designed. However, this level of capacity is rarely met, due
to occurrences that prevent the operation producing its full output. These
occurrences are called planned factors and unplanned factors. Planned fac-
tors are activities whose timing can be determined in advance. They include
such items as maintenance, training and machine setup time. During these
activities, the output from the operation is lost. In services, training person-
nel may take place during the part of the year when seasonal demand is low.
The capacity remaining after a loss of output due to planned factors
is called the effective capacity of the process. However, this will also
be above the level of capacity that is available due to unplanned occur-
rences such as machine breakdowns and worker absenteeism. These are
more difficult to deal with than planned factors are, because by definition,
their timing cannot be predicted. To minimize these disturbances, action
such as preventive maintenance should be taken. This involves undertak-
ing planned maintenance activities, if possible, when demand is low. These
activities can include replacing equipment parts before they fail, to reduce
unplanned breakdowns. Worker absenteeism could be reduced by improv-
ing motivation.
After taking both planned and unplanned factors into account, there
remains the capacity available for processing, called the actual capacity of
the operation.

Reconciling capacity and demand

Methods for reconciling capacity and demand can be classified into three
‘pure’ strategies: level capacity, chase demand and demand management.
60 Capacity management
Due to the complexity of capacity management and the need to optimize
a range of performance objectives, it is usually necessary to combine the
three pure strategies described and form a mixed capacity-planning strategy.

Level capacity
The level capacity strategy sets the processing capacity at a uniform level
throughout the planning period, regardless of fluctuations in forecast
demand. This means output is set at a fixed rate, usually to meet average
demand. Inventory is used to absorb variations in demand. During periods
of low demand, any overproduction can be transferred to finished goods
inventory in anticipation of sales at a later time period (Figure 11.1). The
disadvantage of this strategy is the cost of holding inventory and the cost of
perishable items that may have to be discarded. To avoid producing obso-
lete items, firms try to create inventory for products that are relatively cer-
tain to be sold. This strategy is also of limited value for perishable goods.
For a service organization, output cannot be stored as inventory, so a
level capacity plan involves running at a uniformly high level of capacity
(Figure 11.2). The drawback of the approach is the cost of maintaining this
high level of capacity, although it could be useful when the cost of lost sales
is particularly high. To overcome this problem, the concept of partitioning
demand is used, which involves keeping capacity in the customer-contact
area consistently high, so that customers are not kept waiting, and keeping
capacity in the noncontact areas at a more uniform level. Another strategy is
for services to ‘store’ their output by performing part of their work in antici-
pation of demand. An example is purchasing and displaying goods before
actual customer demand occurs.
VOLUME

INVENTORY

CAPACITY
DEMAND

TIME

Figure 11.1 Level capacity plan in manufacturing

 Capacity management 61
VOLUME

CAPACITY
DEMAND

TIME

Figure 11.2 Level capacity plan in services

Chase demand
The chase demand strategy seeks to match output to the demand pattern
over time. Capacity is altered by such policies as changing the amount of
part-time staff, changing the amount of staff availability through overtime
work, changing equipment levels and subcontracting. The strategy is costly
in terms of activities such as overtime payments and changing staffing
levels. The costs may be particularly high in industries in which skills are
scarce. Disadvantages of subcontracting include a reduced profit margin
lost to the subcontractor, loss of control, potentially longer lead times and
the risk that the subcontractor may decide to enter the same market. For
these reasons, a pure chase demand strategy is more usually adopted by
service operations that cannot store their output and so make a level capac-
ity plan less attractive. A graphical representation of a chase demand plan is
shown in Figure 11.3.
In services, when the operation cannot usually match the demand rate
with its capacity level, its objective becomes one of developing a capacity
profile that matches its demand profile to the extent that this is feasible and
economically viable. The following are some of the strategies for achieving
this:

• Staggered work-shift schedules: scheduling the availability of capacity

to cover demand involves constructing work shifts so that the number
of operators available at any one time matches the demand profile – for
example, in a fast-food restaurant.
62 Capacity management

VOLUME

CAPACITY
DEMAND

TIME

Figure 11.3 Chase demand plan

• Part-time staff: more flexibility to schedule and smooth the work demand
is often available for those parts of a service where the customer is not
present and the service is provided by working with some surrogate for
the customer. A strategy of using part-time staff needs to trade off the cost
of not doing some work against the extra cost of employing the staff.
• Subcontractors: if there is not enough capacity, additional capacity can
be obtained from outside sources – for example, surgeries employing
contract doctor services to cover weekends.
• Multi-skilled floating staff: having multi-skilled staff increases flex-
ibility in capacity decisions. For example, in the case of a hospital, it
might be desirable to have some floating capacity that can be shifted
from one department to another if the number of patients or the amount
of nursing attention required in each department varies.
• Customer self-service: with this option, the service capacity arrives
when the demand does. Customers at supermarkets and many depart-
ment stores select most of their own merchandise.

Demand management
While the level capacity and chase demand strategies aim to adjust capac-
ity to match demand, the demand management strategy attempts to adjust
demand to meet available capacity. There are many ways this can be done,
but most involve altering the marketing mix (for example, price or promo-
tion) and require coordination with the marketing function. A graphical rep-
resentation of a demand management plan is shown in Figure 11.4.
 Capacity management 63
VOLUME

CAPACITY
DEMAND

TIME

Figure 11.4 Demand management plan

The following are some of the demand management strategies:

• Varying the price: during periods of low demand price discounts can be
used to stimulate the demand level; conversely, when demand is higher
than the capacity limit, price could be increased.
• Advertising: advertising and other marketing activities can be used to
increase sales during low demand periods.
• Offering alternative products: this involves using existing processes to
make or sell alternative products during low demand periods. An exam-
ple is the way many garden centres use their premises to sell Christmas
decorations during the winter months when gardening activity is low.
• Maintaining a fixed schedule: some services can schedule the times
during which the service is available, such as airlines and rail services.
Demand occurs as people purchase tickets to use some of the previ-
ously scheduled transportation capacity.
• Using an appointment system: the pattern of demand variations over
the longer term can also have a significant influence on the planning of
efficient service operations. The ideal would be to achieve uniform use
of service capacity, but this is unlikely unless an appointment-only pol-
icy is in operation. Some services are provided by appointment, such as
a dentistry or veterinary surgery. Using an appointment system permits
demand to be moved into available time. The delay between a request
for an appointment and the time of the appointment may depend on the
backlog or queue of waiting work.
64 Capacity management
• Delaying delivery: delaying jobs until capacity is available serves to
make the workload more uniform, such as the work of a bank teller. In
addition, routine work may be set aside to make capacity available for
rush jobs.
• Providing economic incentives for off-peak demand: some operations
have a high capital investment in the capacity that they have to provide
their services. Thus the unit cost of capacity that is used at peak demand
periods is high. These operations try to keep demand as uniform as
possible by using economic inducements such as off-peak electricity
and off-peak telephone calls.

Evaluating alternatives and making a choice

Capacity planning involves evaluating the capacity requirements and
determining the best way to meet these by using a feasible and low-cost
capacity-planning approach. The term ‘aggregate planning’ is sometimes
used to describe the process of aggregating (grouping) capacity require-
ments over a medium-term planning horizon to provide the best way to
meet these requirements. To choose a capacity plan that meets the afore-
mentioned criteria, it is necessary to try to predict the consequences of that
plan. One way of doing this that is particularly relevant to service opera-
tions is queuing theory.

Queuing theory
In service situations, the output of the operation cannot be stored. Waiting
time can be eliminated when customers are asked to arrive at fixed intervals
(an appointment system) and when service times are fixed. Thus, waiting
time in queues are caused by fluctuations in arrival rates and variability in
service times. Queuing theory can be used to explore the trade-off between
the amount of capacity and the customer arrival rate. Too much capacity
and costs will be excessive, but too little capacity will cause a long wait for
the customer and reduce service quality, leading to a loss of business. In a
service context, queuing theory can provide a useful guide in determining
an expected waiting time for an arriving customer and the average number
of customers who will be waiting for service. This permits an estimate of
the amount of capacity that will be needed to keep waiting time to a reason-
able level, taking into account the expected rate and variability of demand.
Examples of queuing situations include customers at a bank, aeroplanes
circling and waiting to land, patients waiting to see a doctor and parts wait-
ing to be processed at a machining centre. Uncertainty in arrival and service
times means that even although on average there may be adequate capacity
 Capacity management 65
to meet demand, queuing may still occur when a number of successive arriv-
als or long service times occur. Conversely, idle time will occur when arrival
rates or service time decreases. Although this behaviour means that full uti-
lization will not be feasible for this type of system, queuing theory does allow
for an analysis of how much capacity is needed to keep average or maximum
queue length or waiting times to an acceptable level. This acceptable level,
or service-quality level, depends on the type of operation involved.
Queue systems can be classified into a single-channel queuing system
consisting of a single queue of customers who wait until a service facility
is available and a multiple-channel queuing system that have parallel server
facilities. Although a single queue system is increasingly popular and may
be seen by customers as fairer in that it enforces the FCFS rule, its operation
may not always be practical: imagine a single line of customers with trolleys/
carts in a supermarket. Other disadvantages of a single queue system are that
the length of the single queue may seem to imply a longer wait for customers
than many short queues, and a single-channel queue system assumes that all
the servers can meet the needs of all the customers.

Forecasting demand
Accurate forecasts are an important factor in enabling organizations to
deliver goods and services to the customer when required and thus achieve
a quality service. Forecasting is important in relation to anticipating chang-
ing customer requirements and meeting them with new product and ser-
vice designs. To produce accurate forecasts, an organization must collect
up-to-date data on relevant information such as prices and sales volumes
and choose an appropriate forecasting technique. The accuracy of a fore-
cast also depends on the time horizon over which the forecast is derived.
Forecasts for short time horizons tend to be more accurate than those for
longer-term forecasts, so one way of improving accuracy is to shorten the
lead time necessary for the organization to respond to a forecast. This might
mean improving operations in terms of the flexibility performance objec-
tive. Organizations must develop forecasts on the level of demand that they
should be prepared to meet. The forecast provides a basis for coordinating
plans for activities in various parts of the organization, such as employ-
ing the right amount of personnel, purchasing the right amount of material
and financing, which can help estimate the capital required for the busi-
ness. Forecasts can be developed through either a qualitative approach or
a quantitative approach. Qualitative forecasting methods take a subjective
approach, are based on estimates and opinions and include techniques such
as market surveys, the Delphi method and expert judgement. Quantitative
forecasting methods use a mathematical expression or model to show the
66 Capacity management
relationship between demand and some independent variable or variables.
The model that is appropriate for forecasting depends on the demand pat-
tern to be projected and the forecaster’s objectives for the model. Quantita-
tive forecasting techniques include time series analysis, moving averages,
exponential smoothing, time series decomposition, and causal models such
as regression analysis.
12 Inventory management

Inventory is present in all service and manufacturing processes. In manu-

facturing, inventory consists of the components that make up the product
being manufactured. In services, inventory may be used as part of the ser-
vice delivery system (for example, disposable implements for a hospital
operation), or it may be part of the tangible component of the service itself
(for example, the brochure for a car insurance policy). Inventory is impor-
tant because although it is necessary for customer service it can also be a
major cost to the organization. Although inventory management is often
seen as an operational issue, it is important at a strategic level in that it may
account for a far larger proportion of expenditure than may be allocated to
other areas, such as labour costs. Furthermore, in strategic terms, inventory
is now seen as a tool in meeting operations performance objectives such
as cost, in addition to its role in lean operations in meeting speed and flex-
ibility objectives.

Types of inventory
All organizations will carry some inventory or stock of goods at any one
time. This can range from items such as stationery to machinery parts or raw
materials. Inventory can be classified by its position in the transformation
process as inputs in the form of raw materials, within the transformation
process termed ‘WIP’ or as outputs to the transformation process as finished
goods. Raw materials inventory may be supplied in batches to secure quan-
tity discounts and reduce material handling. However, smaller and more
frequent order quantities translate into less inventory and may be achieved
by negotiating smaller batches from suppliers. Variability in supplier lead
times may be reduced by specifying longer but more reliable lead times
from suppliers. WIP inventory may help uncouple production stages and
provide greater flexibility in production scheduling. It can be minimized
by eliminating obsolete stock, improving the operation’s processes and
68 Inventory management
reducing the number of products or services. Finished goods inventory may
be used to ensure that important inventory items are always available to
the customer or to avoid disruption caused by changing production output
levels. It can be minimized by improving forecasts of customer demand and
reducing fluctuations in demand caused by factors such as meeting end-of-
period sales targets.
Inventory can also be considered in terms of its role in the operations
process. For example, buffer or safety stock is used to compensate for the
uncertainties inherent in the timing or rate of supply and demand between
two operational stages and to compensate for uncertainties in supply between
operational stages in a process due to factors such as equipment break-
downs. Cycle inventory occurs when producing multiple products from one
process in batches, because there is a need to produce enough to keep a
supply while the other batches are being produced. Decoupling inventory
is used to separate the operation of different stages in a process. It enables
processes to run at their own speed and not match the rate of processing of
different stages in the process. Anticipation inventory involves producing
to stock to anticipate a predicted increase in demand. It may also be found
as a consequence of policies such as buying in bulk to take advantage of
price discounts. Finally, pipeline or movement inventory compensates for
the lack of stock while material is being transported between processes. For
example, the time delay in transportation from a warehouse to a retail outlet.

Inventory models
Inventory models are analytical equations that are used to assess when
inventory requires ordering and what quantity should be ordered at that point
in time. In a fixed order quantity inventory system, inventory is ordered in
response to some event, such as inventory falling to a particular level. The
timing of the inventory order can be calculated using a reorder point (ROP)
model. The quantity to order at this point in time may be calculated by
using the economic order quantity (EOQ) model. In a fixed order period
inventory system, inventory is ordered at a fixed point in time. A fixed order
inventory (FOI) model can be used to determine the quantity to order at this
point in time.

The reorder point model

The reorder point (ROP) model identifies the time to order when the stock
level drops to a predetermined amount. This amount will usually include
a quantity of stock to cover for the delay between order and delivery (the
delivery lead time) and an element of stock to reduce the risk of running out
 Inventory management 69
of stock when levels are low (the safety stock). To consider the probability
of a stockout (an out-of-stock scenario), the idea of a service level is used,
which is a measure of how sure the organization is that it can supply inven-
tory from stock. This can be expressed as the probability that the inventory
on hand during the lead time is sufficient to meet expected demand; for
example, a service level of 90% means that there is a 0.90 probability that
demand will be met during the lead time period and the probability that a
stockout will occur is 10%. The reorder problem is one of determining the
level of safety stock that balances the expected holding costs with the costs
of stockout.

The economic order quantity model

The EOQ model calculates the fixed inventory order volume required
while seeking to minimize the sum of the annual costs of holding inventory
and the annual costs of ordering inventory. The model makes a number of
assumptions, including that demand is stable or constant; that ordering costs
are fixed and identifiable; that the relationship between the cost of holding
inventory and number of items held is linear; that the item cost does not
vary with the order size; and that delivery lead times do not vary.

The fixed order interval inventory model

The FOI model can be used to calculate the amount to order given a fixed
interval between ordering. The calculation for the FOI model depends on
whether demand and delivery lead times are treated as fixed or variable. A
variation on the fixed order inventory system is when minimum and maximum
levels are set for the inventory.

Managing inventory – the ABC inventory

classification system
One way of deciding the importance of inventory items and thus an appro-
priate inventory management method for them is to use the ABC classifica-
tion system. Depending on the classification of the inventory, a fixed order
quantity or fixed order period inventory system can be chosen to manage
that system.
The ABC classification system sorts inventory items into groups accord-
ing to the amount of annual expenditure they incur, which depends on the
estimated number of items used annually multiplied by the unit cost. To
instigate an ABC system, a table is produced that lists the items in expen-
diture order (with largest expenditure at the top) and shows the percentage
70 Inventory management
of total expenditure and cumulative percentage of the total expenditure for
each item.
By reading the cumulative percentage figure, it is usually found, follow-
ing Pareto’s law, that 10% to 20% of the items account for 60% to 80%
of annual expenditure. These items are called A items and need to be con-
trolled closely to reduce overall expenditure. Forecasting techniques may
be used to improve the accuracy of demand forecasts for these items. Man-
aging these items may also require a more strategic approach, which may
translate into closer buyer-supplier relationships. A items may be managed
by using a fixed order quantity system with perpetual inventory checks or
a fixed order period system that uses a small time interval between review
periods. The B items account for the next 20% to 30% of items and usually
account for a similar percentage of total expenditure. These items require
fewer inventory-level reviews than A items do. A fixed order period sys-
tem with a minimum order level or a fixed order quantity system may be
appropriate. Finally, C items represent the remaining 50% to 70% of items
but only account for less than 25% of total expenditure. Here a fixed order
quantity system may be appropriate, or less rigorous inventory control meth-
ods can be used, since the cost of inventory tracking will outweigh the cost
of holding additional stock.
Overall expenditure may not be the only appropriate basis on which to
classify items. Other factors include the importance of a component part
on the overall product, the variability in delivery time, the loss of value
through deterioration and the disruption caused to the production process
if a stockout occurs.
13 Lean operations

Lean operations is defined in this chapter at one level as a philosophy and

at another level as a collection of techniques, and its strategic significance
can be considered at both of these levels. Implementing lean techniques
can lead to improvements in cost and quality by reducing variability and
waste. If lean is adopted as a philosophy, then it could provide a sustained
competitive advantage and be considered part of a resource-based opera-
tions strategy. This is because adopting lean as a philosophy that permeates
the organization, through the engagement of the workforce in continuous
improvement techniques, for example, represents a much more difficult aim
to achieve and so in turn creates a capability that is difficult to copy.

The philosophy of lean operations

Two key issues at the core of the lean philosophy are to eliminate waste and
to implement a continuous improvement programme.

Eliminate waste
Waste is considered in the widest sense as any activity that does not add
value to the operation. Bicheno (2004) states that although waste is strongly
linked to lean, waste elimination is a means to achieving the lean ideal; it is
not an end in itself; and waste prevention is at least as important as waste
elimination.
Customer service wastes generally can be categorized as follows (Bicheno,
2004):

• Delay: customers waiting for service, for delivery, in queues, for

response, not arriving as promised.
• Duplication: having to re-enter data, repeat details on forms and
answering queries from several sources within the same organization.
72 Lean operations
• Unnecessary movements: queuing several times, poor ergonomics in
the service encounter.
• Unclear communication: the waste of seeking clarification.
• Incorrect inventory: out-of-stock, unable to get exactly what is required,
substitute products or services.
• Relationship failures: opportunities lost to retain or win customers, failure
to establish rapport, ignoring customers, unfriendliness and rudeness.
• Mistakes: errors in the service transaction, product defects in the
product-service bundle, lost or damaged goods.

In a manufacturing context, the seven types of waste identified by Ohno

(1988) are as follows:

1 Overproduction is classified as the greatest source of waste and is an

outcome of producing more than is needed by the next process.
2 Waiting time is the time spent by labour or equipment waiting to add
value to a product. This may be disguised by undertaking unnecessary
operations – for example, generating WIP on a machine – which are not
immediately needed (the waste is converted from time to WIP).
3 Unnecessarily transporting WIP is another source of waste. Layout
changes can substantially reduce transportation time.
4 Unnecessary processes and operations do not add value to the product
but are simply there because of poor design or machine maintenance.
Improved design or preventive maintenance should eliminate these
processes.
5 Inventory of all types is considered as waste and should be eliminated.
6 Complex work movement is wasteful and should be simplified to reduce
waste caused by unnecessary motion of labour and equipment.
7 Defective goods incur costs. The total costs of poor quality can be high
and include scrap material, wasted labour time, time expediting orders
and a loss of goodwill through missed delivery dates.

The root cause of much waste is variability and too-high utilization, which
is expressed in Toyota’s 3Ms of mura (variability), muri (utilization) and
muda (waste) (Figure 13.1).
What the 3Ms’ relationship shows is that mura (variability) leads to
muri (higher utilization), which leads to muda (waste), which leads to
mura, and the cycle is repeated. This implies that mura or variability is
the root problem of waste in systems. For example, variability in demand
causes stress in staff at peak times, leading to mistakes, which leads
to higher utilization and deadlines being missed. However, muda can
result in mura, due to lead times being long and quality being uncertain.
 Lean operations 73

MURA
(variability)

MUDA MURI
(waste) (ulizaon)

Figure 13.1 Mura, muri and muda

Techniques to smooth flow and thus decrease variability include levelled

scheduling and pull production systems, covered later in this chapter.

Continuous improvement
Continuous improvement, or kaizen (the Japanese term), is a philosophy
stating that it is possible to get to the ideals of lean by a continuous stream
of improvements over time. Lean aims to create a new culture in which all
employees are encouraged to contribute to continuous improvement efforts
by generating ideas for improvements and perform a range of functions.

Lean techniques
From the variety of lean techniques available, the use of pull production
systems and levelled scheduling are considered here.

Push production and pull production systems

In a push production system, a schedule pushes work on to machines, work
that is then passed through to the next work centre (Figure 13.2).
74 Lean operations

BUFFER 1 BUFFER 2 BUFFER 3 BUFFER 4

STAGE 1 STAGE 2 STAGE 3 STAGE 4

M1/O1 M2/O2 M3/O3 M4/O4 M5/O5

Figure 13.2 Push production system

In Figure 13.2 materials (M1) and orders for production (O1) are pushed
on to production stage 1. Production stage 1 then produces material for pro-
duction stage 2, and the cycle repeats through the production stages. At each
production stage, a buffer stock (buffer 1, buffer 2, etc.) is kept to ensure
that if any production stage fails, then the subsequent production stage will
not be starved of material. For example, if there is a breakdown at stage 2 of
the production line, stage 3 will be fed from a buffer stock (buffer 3) until
the problem has been fixed. The higher the buffer stocks kept at each stage
of the line, the more disruption can occur without the production line being
halted by lack of material.
Pull systems are sometimes called lean synchronization, meaning the
customer gets what they want only when they want it, with minimal
waste. In a pull system (Figure 13.3), the process is triggered by an order
for the finished product at the end of the production line (O1). This then
triggers an order for components of that item (O2), which in turn triggers
an order for further subcomponents (O3). The process repeats until the
initial stage of production and the material flows through the system as in
the push approach. Using the pull system, the production system produces
output at each stage only in response to demand and eliminates the need
for buffer stock.
The aim of eliminating buffers between the production stages is to ensure
a responsive system. However, the pull system does not overcome the basic
characteristic of a line layout, namely that if one stage fails, then all subse-
quent stages will be starved of work and, in effect, output from the whole
production line will be lost. This would seem to be a powerful argument
for retaining buffers, but the JIT approach actually argues that the disrup-
tion that occurs due to the lack of buffer stock will motivate people to find
the root cause of problems. Over time, this will lead to a more reliable and
efficient system. Motivation will be generated by the highly visible nature
of any problem occurring (it will bring the whole factory to a halt) and by
the fact that the problem is now everyone’s problem and not just a local
difficulty of which no one else is aware. In moving from a push system to
a pull system, it is common practice to gradually reduce the buffer levels as
 Lean operations 75

O5 O4 O3 O2 O1
STAGE 1 STAGE 2 STAGE 3 STAGE 4
M1 M2 M3 M4 M5

Figure 13.3 Pull production system

the production system reliability is increased. Any attempt to move directly

to eliminate buffers is likely to cause severe disruption to a system formerly
reliant on this safety net.
The pull approach can also be applied to the relationship between cus-
tomers and suppliers in the supply chain. Thus, suppliers in a lean supply
chain are required to supply customers only in response to demand, and the
customer will not keep buffer stocks just in case the supplier fails to deliver
on time. This reduces inventory and increases responsiveness in the supply
chain but does require close cooperation between customer and supplier and
reliability in the supplier operations.

Kanban production system

One system for implementing a pull system is called a kanban production
system (kanban is Japanese for ‘card’ or ‘sign’). Each kanban provides
information on the part identification, quantity per container that the part
is transported in and the preceding and next work stations. Kanbans, in
themselves, do not provide the schedule for production, but without them,
production cannot take place, because they authorize the production and
movement of material through the pull system. Kanbans need not be a card
but should be something that can be used as a signal for production, such as
a marker or coloured square area. There are two types of kanban systems:
the single-card and two-card.
The single-card system uses only one type of kanban card, called the
conveyance kanban, which authorizes the movement of parts. The number
of containers at a work centre is limited by the number of kanbans. A signal
to replace inventory at the work centre can be sent only once the container
has been emptied. Toyota use a dual card system that, in addition to the con-
veyance kanban, uses a production kanban to authorize the production of
parts. This system permits greater control over production and inventory. If
the processes are tightly linked (one always follows the other), then a single
kanban can be used.
The system is implemented with a given number of cards in order to
establish a smooth flow. The number of cards is then decreased, in turn
decreasing inventory, and any problems that surface are tackled. Cards are
76 Lean operations
decreased, one at a time, to continue the continuous improvement process.
Importantly, successfully implementing a kanban system requires that a
stable and reliable production system be in place.

Heijunka (levelled scheduling)

The approach to scheduling which has been followed in traditional manu-
facturing systems is to make a large number of one product before switching
to another. Unfortunately, this approach will lead to high levels of finished
goods in inventory at certain times (for example the end of a production run),
with the possibility of not being able to satisfy customer demand at other
times (for example when long production runs of other goods are being
manufactured). This approach also causes variability in work processes that
can lead to waste. Heijunka, which means ‘level production’, attempts to
overcome this problem by dividing the day into equal parcels of time and
dividing up the work to fit into the parcels, thus creating a smooth flow of
materials and components throughout the day. The flow is controlled by
cards or other devices that authorize work to commence at the start of each
time parcel, called pitch increments.
Using a traditional approach, a day’s work of say 30 A products, 30
B products and 30 C products would be produced one after another – 30 A
then 30 B then 30 C to minimize changeover costs. A level schedule might
be AAABBBCCC repeated 10 times to smooth the flow. It is, however,
usual when implementing Heijunka to use mixed-model scheduling and
continually alternate between products giving ABCABCABC repeated 10
times. This creates a more even flow, and if a fault is found with any product
type, then at least relatively few have been made. When a level assembly
schedule has been achieved, the production of each item will closely match
demand. However, because the flow of component parts must be adjusted to
match the rate at which finished goods will be produced, it is necessary
to match the cycle time (the rate of production) at the work centres with the
demand rate.

References
Bicheno, J. (2004) The New Lean Toolbox: Towards Fast, Flexible Flow, Picsie
Books, Buckingham.
Ohno, T. (1988) Toyota Production System: Beyond Large-Scale Production, Pro-
ductivity Inc.
14 Enterprise resource planning

This chapter covers the use of information systems that provide assistance to
operations when planning to use resources in the transformation process. The
chapter covers enterprise resource planning (ERP), materials requirements
planning (MRP) and manufacturing resource planning (MRP II) systems.

Enterprise resource planning systems

Enterprise resource planning systems (often called enterprise systems) support
the business processes of an organization across functional boundaries in
that organization. They use Internet technology to integrate information
in the business and with external stakeholders such as customers, suppliers
and partners. The main elements of an ERP system are concerned with
internal production, distribution and financial processes but may also include
elements such as the following:

• Customer relationship management (CRM), which is concerned with

marketing and sales processes.
• Supply chain management (SCM), which is concerned with the flow of
materials, information and customers through the supply chain.
• Supplier relationship management (SRM), which is concerned with all
activities involved in obtaining items from a supplier, which include
procurement and inbound logistics such as transportation, goods-in and
warehousing before the item is used.

Other elements may include product lifecycle management (PLM), finan-

cial management and human capital management.

Materials requirements planning

MRP is an information system used to calculate the requirements for com-
ponent materials needed to produce end items. These components have what
78 Enterprise resource planning
is called dependent demand. A dependent demand item has a demand that
is relatively predictable because it depends on other factors. For example, a
fireplace mantel consists of two legs and one shelf. If daily demand for the
mantel, derived from the production schedule, is 50 mantels, then a daily
demand of 100 legs and 50 shelves can be predicted. Thus, a dependent
demand item can be classified as having a demand that can be calculated as
the quantity of the item needed to produce a scheduled quantity of an assem-
bly that uses that item. MRP systems manage dependent demand items by
calculating the quantity needed and the timing required (taking into account
purchasing and manufacturing lead times) of each item. The components
of an MRP system that use and process this information are shown in Fig-
ure 14.1, and each component of the MRP system is now described.

Master production schedule

An ideal master production schedule (MPS) is one that most efficiently uses
the organization’s capacity while being able to meet customer due dates. The
master schedule provides a plan for the quantity and timing of when orders are
required. The MRP system uses this information and, taking into account deliv-
ery, production and supply lead times, indicates when materials are needed to
achieve the master schedule. The MPS usually shows plans based on time
buckets of, for example, a day or a week. The length of the time bucket will
generally be longer (for instance a month) for planning purposes and become
shorter closer to the present time for detailed production planning tasks.

MASTER
PRODUCTION
SCHEDULE (MPS)

BILL OF MRP
MRP REPORTS
MATERIALS (BOM) CALCULATIONS

INVENTORY
STATUS FILE (ISF)

Figure 14.1 Components of an MRP System

 Enterprise resource planning 79
The MPS will usually contain a mix of both plans for customer ordered
items and plans to produce in order to forecast sales. The forecast is a best
estimate of what future demand will be, which may be derived from past
sales and contact with the customer. These forecasts should be replaced by
firm orders as the expected order date approaches. If actual orders exceed
the forecast, then either the order will be delivered to the customer late or
extra capacity must be obtained (for example, overtime, subcontracting) to
meet the customer delivery date.
The mix of forecast and firm orders that a business can work to depends
on the nature of the business. A resource-to-order company (such as a
construction firm) will allocate resources and materials to a firm order
only. Purchase-to-order organizations will not order materials until a firm
order has been made but will have labour and equipment permanently
available. A make-to-stock business, however, will work mainly to fore-
cast demand.

Bill of materials
The BOM identifies all the components required to produce a scheduled
quantity of an assembly and the structure of how these components fit
together to make that assembly. The BOM can be viewed as a product struc-
ture tree, similar to an organization chart (Figure 14.2). In this example,
the item description is followed by the number of items required, in square
brackets, and the item part number.
The final assembly of the product structure is denoted as level 0, while
the structure is ‘exploded’ to further levels, representing subassemblies
below this. These subassemblies are then broken down into further levels
until the individual order components have been reached. Individual order
components can be either a single component item or subassemblies pur-
chased from suppliers and thus treated as a single component. The MRP
system holds information on the number required of any item in the struc-
ture and the ‘parent’ item of which it is a component. Usually, the product
structure is stored in a series of single-level BOMs, each of which holds a
component part number and a list of the part numbers and quantities of the
next lower level. The computer will move through all component BOMs in
the product structure to derive a total number of components required for
the product. Note that the same component may appear in different parts
of the product structure if it is used more than once. What is needed is the
total number required for each component to make the final assembly. The
accuracy of the BOM is obviously vital in generating the correct schedule
of parts at the right time.
 KITCHEN CABINET
[1] LEVEL 0
(2705)

LEG [4] DRAWER [3]

LEVEL 1
(1018) (2978)

FOOT [1] TOP [1] BACK[1] SIDE [2] BASE [1]

LEVEL 2
(7219) (3319) (7583) (7723) (3867)

Figure 14.2 BOM product structure

 Enterprise resource planning 81
Inventory status file
The BOM indicates the quantity of components needed from the product
structure but this will not be directly translated into demand for components
because it is likely that some of the components will be currently held in
inventory. The inventory status file (ISF) provides information on the iden-
tification and quantity of items in stock. The MRP system will determine
whether a sufficient quantity of an item is in stock or whether an order must
be placed. The ISF will also contain the lead time, or time between order
and availability, for each component.
As with the BOM, the accuracy of the ISF is vital, and some organiza-
tions use perpetual physical inventory checking to ensure that inventory
records are accurate. This means a continuous check of inventory records
against actual stock, instead of the traditional year-end checks for accounting
purposes.

MRP Calculations
The time-phased inventory status record can be used to show the inventory
data requirements for each stock item and to follow the calculations necessary
by the MRP programme. A simplified status record is shown in Table 14.1.
In this case, weekly time buckets have been used, which is usual for
short-term plans. Longer time buckets may be used for long-term planning
purposes. The definition of each row is as follows:

• Gross requirements: this row simply states the estimated requirements,

in this case per week, for the item described. It is assumed that require-
ments occur during the time bucket (week) so that the scheduled
receipts at the beginning of the week will cover them.
• Scheduled receipts: this row indicates when the item becomes available
for use, from a previously released order. It is assumed that the item is
received at the start of the time bucket period.

Table 14.1 ISF showing net requirements

Item: subassembly 1 Week

0 1 2 3 4 5

Gross requirements 100 0 200 0 30

Scheduled receipts 200
Projected on Hand 100 0 0 0 0 –30
New requirements 30
Planned order release 30
82 Enterprise resource planning
• Projected on hand: numbers in this row show the number of units to
be available at the end of each time bucket, which are based on the
balance of requirements and receipts. The following is the formula for
projected on hand:

Projected on hand = inventory on hand + scheduled receipts – gross

requirements

• Net requirements: if the projected on hand is negative, it is called a net

requirement and means that there will not be enough of this compo-
nent to produce the quantities required to meet the master production
schedule. Thus, when a negative projected on hand is shown, this will
increase the net requirements row by a positive amount equal to the
negative on hand.
• Planned order release (POR): the POR row indicates when an order
should be released to ensure that the projected-on-hand figure does not
become negative (that there are enough items to satisfy the MPS). The
POR time must take into account the lead time between placing the
order and the component becoming available (in the case of Table 14.1,
the lead time is two weeks). Thus, the POR is offset by the required
time amount to ensure that enough items are available to cover net
requirements and sometimes to also cover net requirements in future
time buckets. The MRP programme needs to work through all the lev-
els of the assembly before calculating the net requirement for a time
bucket, because the same item may be needed at different levels of the
same assembly or in different assemblies.

MRP Reports
A number of reports can be generated by the MRP programme, and they include
information on the quantity of each item to order in the current and future time
period, which is an indication of which due dates cannot be met and which
shows when they can be met and shows changes to quantities of currently
ordered items. The system can also show the results of simulation of scenarios
for planning purposes. For instance, by entering a customer order into the mas-
ter schedule, the effect of this extra work on overall customer due-date perfor-
mance can be evaluated. If capacity restrictions mean that the order cannot be
completed by the required due date, a new due date can be suggested.

Manufacturing resource planning

MRP II extends the idea of MRP to other areas in the firm, such as mar-
keting and finance. Thus, central databases hold information on product
 Enterprise resource planning 83
structure (the BOM file) that can be updated due to design changes – by
engineering, for example. By incorporating financial elements into item
details, inventory cost information can be used by finance departments. At
a wider level, information provided by the MRP II system from simula-
tions of business plans can be used to estimate plant investment needs and
workforce requirements. This information can then be used to coordinate
efforts across departments, including marketing, finance, engineering and
manufacturing.
15 Supply chain management

The supply chain consists of the series of activities that moves materials
from suppliers to operations to customers. Each product or service will have
its own supply chain, which may involve many organizations in processing,
transportation, warehousing and retail. The set of all relationships between
a firm and its suppliers and customers for all of its supply chains is termed
‘the supply network’. Activities on the input side to the organization are
termed ‘upstream’ or ‘supply’ side and are divided into tiers of suppliers.
Upstream suppliers that directly supply the organization are termed ‘first
tier’; suppliers that supply first-tier organizations are termed ‘second tier’;
and so on. Examples of upstream suppliers include component and subas-
sembly suppliers. Activities on the output side are termed ‘downstream’ or
‘demand’ side and are divided into tiers of customers. Examples of down-
stream customers include wholesalers and retailers (see Chapter 5).

Supply chain design

One of the key issues in supply chain design is that organizations need to
cooperate with one another to achieve customer satisfaction. One of the rea-
sons for that cooperation is to limit variability, which occurs in these net-
works and affects performance. There are a number of factors that increase
variability in the supply chain. These include a time lag between ordering
materials and getting them delivered to the customer. The use of order batch-
ing (when orders are not placed until they have reached a predetermined
batch size) can also cause a mismatch between demand and order quantity.
Price fluctuations such as price cuts and quantity discounts also lead to more
demand variability in the supply chain as companies buy products before
they need them. These effects can be amplified across the supply chain by
a behaviour known as the bullwhip effect. The effect occurs when there is a
lack of synchronization in supply chain members, when even a slight change
in consumer sales will ripple backwards in the form of magnified oscillations
 Supply chain management 85
in demand upstream. A number of steps can be taken to deal with the issue of
variability in the supply chain. The traditional way to deal with uncertainty
in demand is to improve forecast quality, but this is difficult to do in volatile
markets, so there is an emphasis on reducing three critical lead times:

1 Time-to-market: how long does it take to recognize a market opportu-

nity and bring products/services to the market?
2 Time-to-serve: how long does it take to capture a customer’s order and
to deliver the product?
3 Time-to-react: how long does it take to adjust the output of the business
in response to volatile demand?

Another approach to reduce variability is to use smaller batch sizes in order

to smooth the demand pattern. Batch sizes are large often because of the
relatively high cost of each order. Technologies such as e-procurement and
electronic data interchange (EDI) can reduce the cost of placing an order
and so help eliminate the need for large batch orders. The use of a stable
pricing policy can also help limit demand fluctuations.

Agile and lean supply chains

Agile operations aim to respond quickly to market demand in order to retain
current markets and gain new market share. As a strategy, agile operations can
be seen to embrace uncertainty in markets and achieve competitive advan-
tage through the flexibility and speed of their responses to them. The focus
of agility has moved from an individual organization to supply chains, in
which several companies work together. An alternative model to the agile
supply chain is the concept of the lean supply chain. Lean supply chains
adopt the concept of lean operations across the supply chain. Lean supply
chains emphasize efficiency, which is achieved by policies such as minimiz-
ing inventory across the supply chain and continuous improvement across the
supply chain. It has also been proposed that the lean and agile supply chain
approaches can be combined by using the concept of leagility. Christopher
and Towill (2001) propose three ways of bringing lean and agile together:

Pareto rule (80/20 rule)

Of the volume in the supply chain, 80% is generated from 20% of the prod-
uct line, so lean is used for 20% of predictable high-volume product lines
to seek economies of scale and make to forecast. Use agile for the 80% of
less predictable product lines, and aim for quick response and make to order
(see Figure 15.1).
86 Supply chain management
Postponement
This involves using a decoupling point, which holds ‘strategic’ inventory in
modular form until precise customer requirements are known. Companies
can use lean methods up to the decoupling point and then agile methods
beyond it (Figure 15.2). The concept can also be used with an information
decoupling point. This represents the furthest point upstream at which ‘real’
demand information flows (i.e. information not distorted by policies such as
reorder points). The point at which strategic inventory is held is also called

80

AGILE
DEMAND (%) (MAKE TO DEMAND)
LEAN
(MAKE TO
FORECAST)

20 PRODUCTS (%)

Figure 15.1 Combining lean and agile by using the pareto rule

STRATEGIC INVENTORY

LEAN AGILE

MAKE TO FORECAST MAKE TO DEMAND

PUSH-PULL BOUNDARY

Figure 15.2 Combining lean and agile by using postponement

 Supply chain management 87

DEMAND

SURGE
MAKE TO DEMAND

BASE
MAKE TO FORECAST

TIME

Figure 15.3 Combining lean and agile by separating base and surge demand

the push-pull boundary as production is pushed up to the boundary point on

the basis of forecast demand and then inventory is pulled from the bound-
ary point on the basis of actual demand. A number of factors are consid-
ered when choosing the position in the supply chain at which the push-pull
boundary should occur. These include the need to position the boundary
before the proliferation of product or service designs and the need to ensure
that the lead time after the boundary is relatively short in order to ensure fast
responses to customer orders.

Base and surge

Base demand can be forecast on the basis of history and so can be met by
using lean to maximize efficiency. Surge demand is met by more flexible
(agile) processes (Figure 15.3). One strategy is to source base demand in
low-cost countries and meet surge demand in local markets (albeit at higher
cost but more effective overall). This strategy is used in the fashion industry
by such companies as Zara and Benetton.

Supply chain integration

Organizations in a supply chain can have varying degrees of cooperation
and integration. In order of increasing ownership, the options are a market
88 Supply chain management
relationship, strategic partnerships and alliances, virtual organization and
vertical integration. At the level of an individual product or service, the
amount of integration in the supply chain can be characterized as an analy-
sis of the costs and risks in either making a component in-house or buying it
from a supplier, termed a ‘make-or-buy decision’. However, this approach
does not take into account what may be critical strategic issues involved in
deciding what it should do itself and what can be done by others. At a stra-
tegic level, supply chain integration decisions should be related to how the
organization competes in the marketplace. For example, if speed of delivery
is an order winner, then it may be necessary to make certain components
in-house to ensure a fast and reliable supply. The different degrees of inte-
gration in the supply chain are now discussed.

Market relationships
Cooperation can simply mean the act of conducting a transaction between
two organizations. Here each purchase is treated as a separate transaction
and the market relationship between the buyer and seller lasts as long as this
transaction takes. This approach does have a number of advantages in that
it permits flexibility, given that suppliers can be changed or discontinued
if demand drops or a supplier introduces a new product. Other advantages
include the use of competition between suppliers to improve performance
in aspects such as price, delivery and quality. However, there can be disad-
vantages in this arrangement in that either side can end the relationship at
any time. A supplier withdrawal requires the often-lengthy task of finding
a new supplier. From a supplier perspective, the withdrawal of a buyer may
cause a sudden drop in demand on the operations facility, leading to disrup-
tion and idle resources.

Strategic partnerships and alliances

When an organization and supplier are trading successfully, they can decide
to form a strategic alliance or strategic partnership. This involves a long-
term relationship in which organizations work together and share informa-
tion regarding aspects such as planning systems and developing products
and processes. There may also be agreement on such aspects as product
costs and product margins. The idea of a partnership or alliance is to com-
bine the advantages of a marketplace relationship, and this combination
encourages flexibility and innovation, with the advantages of vertical inte-
gration, which allows close coordination and control of such aspects as
quality. From a supplier viewpoint, a long-term strategic partnership may
give them the confidence to invest in resources and focus on a product line
 Supply chain management 89
to serve a particular customer. Some factors may mitigate the formation of
a partnership. For instance, for low-value items, the use of a partnership
may not be worthwhile. Also, a company may not want to share sensitive
information or lose control of a particular product or process.

The virtual organization

The form of an organization’s relationship within its supply chain is increas-
ingly being affected by developments in e-business systems. E-business
involves electronically mediated information exchanges, both within an
organization and between organizations. The implications of e-business
developments are that it becomes easier to outsource more and more supply
chain activities to third parties and that the boundaries between and within
organizations become blurred. This development is known as virtualization,
and companies that follow this route are known as virtual organizations.
The objective is that the absence of any rigid boundary or hierarchy within
the organization should lead to a more responsive and flexible company
with greater market orientation.

Vertical integration
Complete integration is achieved by an organization when it takes owner-
ship of other organizations in the supply chain. The amount of ownership of
the supply chain by an organization is termed its ‘level of vertical integra-
tion’. When an organization owns upstream or supply-side elements of the
supply chain, it is termed ‘backward vertical integration’. The ownership
of downstream or demand-side elements in the supply chain is termed ‘for-
ward vertical integration’. When a company owns elements of a different
supply chain, such as a holding company that has interests in organizations
operating in various markets, the term used is ‘horizontal integration’.

Activities in the supply chain

In this section, supply chain activities are presented regarding the areas of
procurement, which is the operations interface with upstream activities, and
physical distribution management, which deals with downstream activities
such as warehousing and transportation.

Procurement
The role of procurement is to acquire all the materials needed by an orga-
nization in the form of purchases, rentals, contracts and other acquisition
90 Supply chain management
methods. The procurement process also includes activities such as selecting
suppliers, approving orders and receiving goods from suppliers. The term
‘purchasing’ usually refers to the actual act of buying the raw materials,
parts, equipment and all the other goods and services used in operations sys-
tems. However, the procurement process is often located in what is called
the purchasing department.
Procurement is an important aspect of the operations function because
the cost of materials can represent a substantial amount of the total cost of
a product or service. There has recently been an enhanced focus on the pro-
curement activity due to the increased use of process technology, in terms
of both materials and information processing. In terms of materials pro-
cessing, the use of process technology such as FMS has meant a reduction
in labour costs and thus a further increase in the relative cost of materials
associated with a manufactured product. This means that controlling the
material costs becomes a major focus in the control of overall manufactur-
ing costs for a product.
Before choosing a supplier, the organization must decide whether it is
feasible and desirable to produce the good or service in-house. Buyers in
purchasing departments, with assistance from operations, regularly perform
a make-or-buy analysis to determine the source of supply. Often goods can
be sourced internally at a lower cost, achieving higher quality or faster
delivery than that from a supplier. On the other hand, suppliers who focus
on delivering a good or service can specialize their expertise and resources
and thus provide better performance. Strategic issues may also need to be
considered when contemplating the outsourcing of supplies. For instance,
internal skills required to offer a distinctive competence may be lost if cer-
tain activities are outsourced. It may also mean that distinctive competen-
cies can be offered to competitors by the supplier. If a decision is made
to use an external supplier, the next decision relates to the choice of that
supplier. Criteria for choosing suppliers for quotation and approval include
price, quality and delivery performance.

Physical distribution management

Physical distribution management, sometimes called business logistics, refers
to the movement of materials from the operation to the customer. Four of
the main areas of physical distribution management are materials handling,
warehousing, packaging and transportation.
Materials handling relates to the movement of materials, either within
warehouses or between storage areas and transportation links. The aim
of materials handling is to move materials as efficiently as possible. The
types of materials handling systems available can be categorized as manual,
mechanized and automated. A manual handling system relies on people
 Supply chain management 91
to move material. This provides a flexible system, but it is feasible only
when materials are movable by relying on people, with little assistance. An
example is a supermarket where trolleys are used to assist with movement,
but the presence of customers and the nature of the items make the use
of mechanization or automation not feasible. Mechanized warehouses use
equipment such as forklift trucks, cranes and conveyor systems to provide a
more efficient handling system, which can also handle items too heavy for
people. Automated warehouses use technology such as AGVs and loading/
unloading machines to efficiently process high volumes of materials.
Not only are warehouses seen as long-term storage areas for goods, but
they also provide a useful staging post for activities such as sorting, consoli-
dating and packing goods for distribution along the supply chain.
Packaging provides a number of functions, including identifying the
product, giving protection during transportation and storage, making han-
dling easier and providing information to customers. The emphasis put on
each of these factors will depend on the nature of the product, with protec-
tion being a major factor for some products. In terms of packaging mate-
rials, we have a choice that includes cardboard, plastic, glass, wood and
metal. Which to choose among these depends on how each meets the func-
tional needs of the product and on their relative cost.
Finally, transportation is an important element of the supply chain and
can account for a substantial amount of the total costs of goods and services.
The amount of the cost depends largely on the distance between the com-
pany and its customers and on the selected method of transportation. There
are five main methods of transportation: rail, road, air, water and pipeline.

Last-mile delivery
What is termed ‘last-mile delivery’ to customers can account for approxi-
mately 40% of total supply chain costs and so represents an important area
of innovation. Companies wish to reduce these costs but have to meet cus-
tomer demands for fast deliveries provided at a low price or for free. Issues
in last-mile delivery include missed deliveries when the customer is not at
home to receive the parcel, which means wasted time for both the courier
and the customer. To address this issue, customer data is used to calculate
the chance of a customer being home at a certain time. Alternatively, the
use of GPS data can identify a customer’s location rather than assigning a
physical postcode address. Another strategy is to focus on important cus-
tomers and provide them with enhanced services such as expedited ship-
ping. Finally, reducing a courier’s route by just 1 mile a day could bring
large savings. Building a digital store of route directions and photos for
visual reference to supplement the physical address can reduce travel
times.
92 Supply chain management
Circular supply chains
The circular economy is a recent and important concept that involves
decoupling economic activity from the consumption of finite resources and
designing waste out of the system. The concept distinguishes between bio-
logical cycles, where biologically based materials such as food and wood
can be fed back into the system through processes like composting, and
technical cycles, which involve the restoration of products and materials
through strategies such as reuse, repair or (ultimately) recycling. These
concepts can be related to the supply chain in which circular supply chain
management (CSCM) relates to the biological (regenerative) and techni-
cal (restorative) cycles on the basis of circular thinking. In general, supply
chains can be classified into the following:

• Linear supply chains extract resources and dispose of packaging, prod-

ucts and associated waste at multiple stages of the supply chain.
• Closed-loop supply chains recover goods and packaging materials for
the original producer. Waste is still generated in closed-loop supply
chains, as it is rarely possible to reuse or recycle all unwanted items in
the same supply chain.
• Circular supply chains aim to eliminate waste generated, by aiming to
restore and regenerate resources in the industrial and natural ecosystem
in which the supply chain is embedded.

Reference
Christopher, M., and Towill, D. (2001) An integrated model for the design of agile
supply chains. International Journal of Physical Distribution and Logistics Man-
agement, 31(4), pp. 235–46.
16 Project management

Projects are unique, one-time operations designed to accomplish a specific

set of objectives in a limited time frame. Examples of projects include a
building construction or introducing a new service or product to the market.
In recent years, the ability to manage projects has become more important
for operations managers. Increased global competition has led to the use of
customized products serving niche markets. This expansion of product lines
has led to the need for more project management of product and process
development projects. Product life cycles have shortened, leading to the
need to pay back project costs over less time, meaning the project manage-
ment process must use fewer resources and minimize costs. Information-
intensive products such as software and pharmaceuticals are generally
costly to create but cheap to reproduce. The costs of these products are
dominated by product and process development rather than the variable
costs of production and distribution.

Project management in the organization

Throughout the project, it is necessary to manage the three performance
objectives of project management: time, cost and quality. The job of project
managers is difficult since they are under pressure to meet quality perfor-
mance measures under the constraints of a fixed timescale and fixed budget.
They often need to make a compromise between project outcomes and the
time and resources available. For example, if a customer wants a particular
new product feature, then the cost and duration will need to increase; other-
wise, other features will need to be omitted. Because of the unique nature of
projects and the potentially high number of interrelated tasks involved, an
effective way is needed to communicate project plans and progress across
the project team. There are three main ways of structuring the organization
of a project: project structure, functional structure and matrix structure. The
reasons for choosing a particular structure are now discussed.
94 Project management
The project structure
This consists of an organization that not only follows a team approach to proj-
ects but also has an organizational structure based on teams formed specifi-
cally for projects. The approach delivers a high focus on completing project
objectives but can involve duplicating resources across teams, an inhibition
of diffusion of learning across teams, a lack of hierarchical career structure
and less continuity in employment. Many professional service firms, such as
management consultancies, use this approach. With a functional structure, a
project is given to the most appropriate functional department. Thus, the orga-
nizational structure remains in the standard hierarchical form. The approach
ensures there is limited disruption to the normal organizational activities but
can lead to a lack of focus on project objectives. A lack of coordination can
result, especially if outside help is required. There can be a failure to meet
customer needs if other departmental activities are taking priority over project
work. With a matrix structure, project teams are overlaid on a functional struc-
ture in an effort to provide a balance between functional and project needs.
There are three different forms of matrix structures: the functional matrix, in
which a project manager reports to functional heads to coordinate staff across
departments; a balanced matrix, in which the project manager manages the
project jointly with functional heads; and a project matrix, in which func-
tional staff join a project team for a fixed period of time.

Project management activities

Projects require a clear definition and boundary to determine what should
be inside and what should be outside the scope of the project. Scoping
the project is crucial when outsourcing, because disputes can occur if the
project does not have a clear definition. Definition may be made through a
detailed evaluation at the start of the project or may evolve through a pro-
cess of interaction with the customer during development. After the project
definition phase has been completed, the project management process will
feature the following main elements: estimating, planning and control.

Project estimating
At the start of the project, a broad plan is drawn up that assumes unlimited
resources. Once project estimates have been made of the resources required
to undertake these activities, it is possible to compare overall project
requirements with available resources. If highly specialized resources are
required, then the project completion date may have to be set to ensure that
these resources are not overloaded. This is a resource-constrained project.
 Project management 95
Alternatively, there may be a need to complete a project in a specific time
frame (for example, a due date specified by customer). In this case, alterna-
tive resources may have to be used (for example, subcontractors) to ensure
that the project is completed on time. This is a time-constrained project.
The next step is to generate estimates for the time and resources required
to undertake each task defined in the project. This information can then
be used to plan what resources are required and what activities should be
undertaken over the life cycle of the project. Once the activities have been
identified and their resource requirements estimated, it is necessary to define
their relationship to one another. There are some activities that can begin
only once other activities have been completed. This is termed a ‘serial rela-
tionship’. Other activities may be totally independent, and thus, they have a
parallel relationship. For a reasonably sized project, there may be a range of
alternative plans that may meet the project objectives. Project management
software can be used to assist in choosing the most feasible schedule, by
recalculating resource requirements and timings for each operation.

Project planning
The purpose of the project planning stage is to ensure that the project objec-
tives of cost, time and quality are met. It does this by estimating both the
level and timing of resources needed over the project’s duration. These
steps may need to be undertaken repeatedly in a complex project due to
uncertainties and to accommodate changes as the project progresses. The
project management method uses a systems approach to deal with a com-
plex task in that the components of the project are broken down repeatedly
into smaller tasks until a manageable chunk is defined. Each task is given its
own cost, time and quality objectives. It is then essential that responsibility
is assigned to achieving these objectives for each particular task. This pro-
cedure should produce a work breakdown structure (WBS), which shows
the hierarchical relationship between the project tasks. A typical WBS will
have at the top level the project and at the bottom level the individual work
package. A work package is an individual work element that can be accu-
rately defined, budgeted, scheduled and controlled. Between the top and
bottom levels, various categories can be defined. These categories are usu-
ally organized in a product-oriented fashion but may be task oriented for
service operations such as design or management.

Project control
Project control involves monitoring the project objectives of cost, time
and quality as the project progresses. It is important to monitor and assess
96 Project management
performance as the project progresses so that the project does not deviate
from plans to a large extent. Milestones or time events are defined dur-
ing the project when performance against objectives can be measured. The
amount of control depends on the size of the project. Larger projects require
developing control activities from the project leader to team leaders. Com-
puter project management packages can be used to automate the collection
of project progress data and the production of progress reports.

Network analysis
Network analysis refers to the use of network-based techniques for ana-
lysing and managing projects. This section describes two network analysis
techniques of the critical path method (CPM) and the project evaluation and
review technique (PERT).

Critical path method

Critical path diagrams are used extensively to show the activities under-
taken during a project and the dependencies between these activities. There
are two methods of constructing critical path diagrams: activity on arrow
(AOA), where the arrows represent the activities, and activity on node (AON),
where the nodes represent the activities. For the AON notation, each activ-
ity task is represented by a node with the format in Figure 16.1.
Thus, a completed network will consist of a number of nodes connected
by lines, one for each task, between a start node and an end node. Once the
network diagram has been constructed, it is possible to follow a sequence of
activities, called a path, through the network, from start to end. The length
of time it takes to follow the path is the sum of all the durations of activi-
ties on that path. The path with the longest duration determines the project

Earliest Start Earliest Finish

Task Duraon
Time Time

TASK NAME

Latest Start Latest Finish

Slack Time
Time Time

Figure 16.1 CPM AON notation

 Project management 97
completion time. This is called the critical path, because any change in
duration in any activities on this path will cause the whole project duration
to become either shorter or longer.
Although network diagrams are ideal for showing the relationship
between project tasks, they do not provide a clear view of which tasks are
being undertaken over time and particularly how many tasks may be under-
taken in parallel at any one time. The Gantt chart provides an overview
for the project manager, to allow them to monitor project progress against
planned progress, so it provides a valuable information source for project
control.

Project evaluation and review technique

The PERT approach attempts to take into account the fact that most task
durations are not fixed but instead vary when they are executed. Thus, PERT
provides a way of incorporating risk into project schedules. It does this by
using a beta probability distribution to describe the variability inherent in
the processes. The probabilistic approach involves three time estimates for
each activity:

1 Optimistic time: the task duration under the most optimistic conditions.
2 Pessimistic time: the task duration under the most pessimistic conditions.
3 Most likely time: the most likely task duration.

To derive the average or expected time for a task duration, the following
equation is used:

Expected duration = [optimistic + (4 x most likely) + pessimistic]/6

Greater risk is reflected in the spread between optimistic and most likely
and in particular between most likely and pessimistic. For an activity with
no risk, the values of optimistic, most likely and pessimistic would be the
same.
17 Quality

Quality is one of the five performance objectives, and having a high-quality

product or service often represents an essential element when being con-
sidered by the customer. Quality is a particular challenge for service orga-
nizations in that both the tangible and intangible aspects of the service (for
example, the food and the service at a restaurant) must meet quality stan-
dards in order to earn repeat customers.

Defining quality
Quality can actually mean quite different things to different people. This
section starts by looking at different perspectives of what we mean by qual-
ity. Most definitions of quality, in the context of business, recognize the role
of the customer in judging the quality of a product or service, so we look at
the dimensions that customers may use in judging the quality of products
and services. Garvin (1988) provides a model that presents five perspec-
tives on a definition of quality:

1 Transcendent: this views quality as excellence or the best available. An

Aston Martin sports car or a seven-star hotel would wish to be seen in
this way. This view implies that customers will be able to recognize
excellence when they see it.
2 Product based: this views quality as a precise and measurable variable
that is made up of a number of characteristics. This implies quality can
be measured as a number of attributes making up a product or service.
Thus, the quality of a car could be measured by its acceleration, top
speed, engine size, etc. The assessment of product variables may vary
considerably among individuals.
3 User based: this views quality as the level of satisfaction held by an
individual customer. This implies that quality is a subjective concept
and will vary depending on the needs of individual customers – for
 Quality 99
example, a car with a wide range of options for engine sizes and acces-
sories that can be customized to an individual customer’s needs. Qual-
ity in this view is defined as how well the product performs its intended
function according to the customer.
4 Operations based: this views quality as conformance to internally
developed specifications in service operations or manufacturing. This
implies that quality will be defined in terms of productivity targets.
Thus, a car produced consistently over time with no defective compo-
nents and matching the design specification would be considered of
high quality.
5 Value based: this views quality in terms of best price for a given pur-
pose. This implies quality is viewed from a customer perspective in
terms of value for money. Thus, a quality product is seen to be as useful
as competing products but cheaper or offering greater satisfaction than
products sold at a comparable price.

These five perspectives demonstrate that there is no single ‘correct’ view of

how to define quality, and all of these perspectives may be relevant but have
their limitations if taken in isolation. Slack et al. (2016) attempt to reconcile
these different views with the following definition of quality: quality is con-
sistent conformance to customers’ expectations.
‘Consistent’ implies that conformance to specification is not an ad hoc
event; instead, the product or service delivery process has been designed so
that the product or service meets the specification by using a set of measur-
able characteristics (product-based view). ‘Conformance’ implies that there
is a need to meet a clear specification (operations-based view). ‘Customers’
expectations’ implies that the customer receives a product or service with
attributes that they can reasonably expect (user based) at a reasonable cost
(value based).

Measuring quality
For services, the assessment of quality is made during the service delivery
process. The nature of services in terms of their intangibility, the fact that
they often involve customer contact and the customized nature of profes-
sional services means that defining quality is difficult. One approach to the
definition of quality in services is given by Parasuraman et al. (1985) as five
principal dimensions that customers use to judge service quality:

1 Reliability is related to the ability to perform a service dependably and

accurately. Customers expect reliable service – that is, a service that is
delivered on time, in the same manner and without errors every time.
100 Quality
2 Responsiveness is related to the willingness to help customers and to
provide prompt service. Customers particularly dislike waiting for a
service, especially if there is no apparent reason for the wait. A quick
recovery after a service failure occurs is also important in achieving a
favourable customer experience.
3 Assurance is related to the abilities of employees delivering a service
to the customer. They should demonstrate competence, respect for the
customer and an ability to effectively communicate with the customer.
4 Empathy is also related to the abilities of employees; to their provid-
ing a caring, individualized service that requires their approachability
and sensitivity; and to their demonstrating an effort to understand the
customer’s needs.
5 Tangibles are related to the physical aspects of the service delivery
environment, such as the condition of the physical surroundings. Clean
and tidy physical surroundings provide the customer with evidence of
the care and attention to detail shown by the service provider.

The concept is that customers use these five dimensions to form their
judgements of service quality, which are based on a comparison between
expectations and perceptions of that service quality. These measurements are
gathered by using the survey research instrument SERVQUAL (Parasuraman
et al., 1988). The difference between the expected and perceived service level
is termed the ‘service quality gap’ and can be used to identify areas for
improvement in service-quality.

Improving quality
This section covers methods for organization-wide quality improvement.
The methods covered are the quality gaps model, total quality management
(TQM), six-sigma quality and statistical process control (SPC).

The quality gaps model

This section will cover the customer-oriented quality improvement tech-
nique of the quality gap approach. The approach was developed by Para-
suraman et al. (1985) to devise a way of improving quality by identifying
the gap between what customers expect from a service and what they per-
ceive they are actually getting. The difference between the two is termed the
‘quality gap’, and the size of this gap determines customer dissatisfaction.
Although the concept was originally devised for service operations, it can
be used to assess quality failures in manufactured products. There are five
possible quality gaps in the model (Figure 17.1).
 Quality 101

Operaon’s
concept of
product or service

Gap 2
Product or service
specificaon
Gap 1

Gap 3

Customer’s Communicated
experience of Gap 4 image of product
product or service or service
Gap 5

Customer’s
expectaons of
product or service

Figure 17.1 The quality gaps model

The gaps are described in turn:

Gap 1: operation’s concept of product or service – customer’s expec-

tations of product or service. This is when the operation’s concept
of the product or service does not meet customer expectations. For
example, a customer may expect a breakfast as part of their hotel room
booking, but it is not included in the specification. This gap can be
closed by operations gaining a close understanding of customer
expectations of the product or service.
Gap 2: operation’s concept of product or service – product or service
specification. This is when the operation’s concept of the product
or service is not followed by the product or service specification.
This could be due to a poorly detailed product specification or a
lack of detailed plans for undertaking the service delivery process.
For example, the concept of a luxury hotel could be undermined
by a poorly defined room-cleaning process. This gap can be closed
by ensuring the product or service specification is aligned with the
concept.
102 Quality
Gap 3: customer’s experience of product or service – product or service
specification. This is when there is a gap between the customer’s
experience of a product or service and the service specification. For
example, a customer requests a quiet room in a hotel and is given a
room with a connecting door to the adjacent room, which permits
noise to travel. This service failure could be due to poor staff training
in room allocation or a lack of resources – that is, room availability.
This gap can be closed by ensuring that the product or service speci-
fication is actually met.
Gap 4: customer’s experience of product or service – communicated
image of product or service. This is when there is a gap between
the customer’s experience of a product or service and claims made
in any promotional activity concerning that product or service. For
example, promotional material for a hotel shows pictures of fitness
equipment that is only available to hotel guests for a fee. This gap
can be closed by making sure promotional materials do not imply a
level of service that is not available.
Gap 5: customer’s experience of product or service – customer’s expec-
tations of product or service. This is when there is a gap between a
customer’s experience of a product or service and their expectation
of that product or service. This gap is a consequence of gaps 1 to 4
and can be closed by identifying and closing the other relevant gaps.
For example, a customer may be disappointed at the size of their
‘large’ hotel room. Their expectation of what constitutes a ‘large’
hotel room size could have been affected by their previous experi-
ence of similar hotels or the same chain of hotels (gap 1), incorrectly
specified room sizes when the hotel was designed (gap 2), incorrect
allocation of a family to a standard room (gap 3) or images on the
hotel website that give a false impression of room size (gap 4).

Total quality management

TQM is a philosophy and approach that aims to ensure that high quality, as
defined by the customer, is a primary concern throughout the organization
and that all parts of the organization work towards this goal. Total quality
management does not prescribe a number of steps that must be followed to
achieve high quality but rather should be considered a framework within
which organizations can work. The TQM process will depend on factors
such as customer needs, employee skills and the current state of quality
management in the organization.
TQM has evolved over a number of years from ideas presented by sev-
eral experts in the field, known as quality gurus. Oakland (2003) sees the
 Quality 103
approaches of the quality gurus as essentially complementary and has sug-
gested his own 11-step process. The main principles of TQM covered in
these plans can be summarized in the following three statements:

1 Customers define quality, and thus, their needs must be met. Earlier, it
was stated that the organization must consider quality from both the
producer and the customer points of view. Thus, the product design
must take into consideration the production process so that the design
specification can be met. A customer perspective is required so that
the implications for customers are considered at all stages in corporate
decision-making.
2 It is a principle of TQM that the responsibility for quality should rest
with the people undertaking the tasks that can either directly or indi-
rectly affect the quality of customer service. It requires not only a
commitment to avoid mistakes but actually a capability to improve
how they undertake their jobs. This requires management to adopt
an approach of empowerment. It also involves providing people with
training and the decision-making authority necessary so that they can
take responsibility for the work they are involved in and learn from
their experiences.
3 An attitude of continuous improvement must be developed and then
emphasized to instil a culture that recognizes how important quality is
to performance.

Six-sigma quality
Six sigma is a quality improvement initiative launched by Motorola in the
United States in the 1980s. The initiative was originally conceived by
Motorola to achieve quality levels that are within six-sigma control limits,
corresponding to a rate of 3.4 defective parts per million (PPM). However,
six sigma has developed beyond a defect-elimination programme to become
a company-wide initiative to reduce costs through process efficiency and
increase revenues through process effectiveness.
A five-step method of define, measure, analyse, improve and control
(DMAIC) is used for improving both process performance and process or prod-
uct design. The DMAIC method emphasizes using statistical tools to gather
data at each of the five stages: define, measure, analyse, improve and control.

1 Define: identify a potential area of improvement and define the project

scope and processes involved. Assign a project team.
2 Measure: decide which characteristics of the process require improve-
ment. Identify the critical input variables that can be controlled and that
104 Quality
affect the output. Define what constitutes unacceptable performance or
a defect. Collect sufficient data on process performance.
3 Analyse: use the data collected in the measure phase to document cur-
rent performance. Use control charts to judge whether the process is in
control. The process performance can be benchmarked against similar
internal or external processes.
4 Improve: eliminate the root causes of non-random variation to achieve
improvements in predictability, dispersion and centring. If no special
causes can be found, the improvement effort may need to focus on the
design of the product or process.
5 Control: verify and embed the change through the use of techniques
such as control charts. Share experiences to transfer knowledge between
process improvement teams.

To summarize, the six-sigma approach emphasizes a measurable improve-

ment in revenues through increasing effectiveness and efficiency. It uses the
DMAIC method to ensure that process improvement efforts are based on
factual data. It uses customer-focused improvements to ensure that change
increases revenue and uses training to ensure that the appropriate tools are
used for specific improvement projects.

Statistical process control

SPC is an operation-oriented technique for quality improvement. It involves
taking a sample that checks the quality of an item that is engaged in a pro-
cess. Thus, SPC should be seen as a quality check for a process rather than
as a product design. Statistical process control works by identifying the
nature of variations in a process, which are classified as being caused by
chance causes or assignable causes.
All processes have some inherent variability, due to factors such as ambi-
ent temperature, wear from moving parts or slight variations in the compo-
sition of the material that is being processed. The technique of SPC involves
calculating the limits of these chance-cause variations for a stable system,
so that any problems with the process can be identified quickly. The limits
of the chance causes of variations are called control limits and are shown on
a control chart, which also shows sample data of the measured characteristic
over time. There are control limits above and below the target value for the
measurement, termed the ‘upper control limit’ (UCL) and ‘lower control
limit’ (LCL) respectively. An example control chart is shown in Figure 17.2.
The behaviour of the process can thus be observed by studying the con-
trol chart. If the sample data plotted on the chart shows a random pattern in
 Quality 105

Value of Quality Characterisc from Sample

Upper Control Limit (UCL)

Centre Line (CL)

Lower Control Limit (LCL)

0 1 2 3 4 5 6 7 8 9 10

Sample Number

Figure 17.2 SPC chart

the UCL and LCL, then the process is in control. However, if a sample falls
outside the control limits or the plot shows a non-random pattern, then the
process is out of control.
If an out-of-control process is discovered, then it is assumed to have been
caused by an assignable cause of variation. This is a variation in the process
that is not due to random variation but instead can be attributed to some
change in the process, and it needs to be investigated and rectified. How-
ever, in some instances, the process could actually be working properly and
the results could have been caused by the UCL:

Type I error: an error is indicated from the sample output when none
actually occurs.
Type II error: an error is occurring but has not been indicated by the
sample output.

Thus, type I errors may lead to some costly but unnecessary investigation
and rectification work. They may even lead to an unnecessary recall of
‘faulty’ products. Type II errors will lead to defective products as a result
of an out-of-control process going unnoticed. Customer compensation and
a loss of sales may result if defective products reach the marketplace. The
sampling method should ensure that the probability of type I and type II
errors is kept as low as reasonably possible.
106 Quality
References
Garvin, D.A. (1988) Managing Quality, Free Press.
Oakland, J.S. (2003) TQM: Text with Cases, 3rd edn., Butterworth Heinemann.
Parasuraman, A., Zeithaml, V.A., and Berry, L.L. (1985) A conceptual model of
service quality and its implications for future research. Journal of Marketing,
49(4), pp. 41–50.
Parasuraman, A., Zeithaml, V.A., and Berry, L.L. (1988) SERVQUAL: a multiple
item scale for measuring customer perceptions of service quality. Journal of
Retailing, 64(1), pp. 12–40.
Slack, N., Brandon-Jones, A., and Johnston, R. (2016) Operations Management, 8th
edn., Pearson Education Limited.
18 Performance measurement
and improvement

In this chapter traditional measures of performance, such as productivity and

efficiency, are covered, and then measures associated with operations’ five
performance objectives are discussed. The next step is to compare each per-
formance measure against a performance standard in order to identify areas
for improvement. Once priorities for improvement have been identified, an
improvement programme can be implemented. In this chapter, the improve-
ment approaches of business process management (BPM), business process
re-engineering (BPR) and continuous improvement (CI) are discussed.

How do we measure performance?

Performance measurement involves both choosing the measures that will
be used to identify where improvements should take place and determin-
ing whether improvement has taken place after the change has been imple-
mented. Traditionally, performance measures in operations have focused
on indicators such as productivity, which divides the value of the output by
the value of the input resources consumed, and efficiency, which relates to
the use of a resource in terms of availability. Operations strategy considers
that the focus of improvement should be directed towards appropriate areas
of the operation where any increase in performance will help the organiza-
tion meet its strategic goals. In this text, the five performance objectives –
quality, speed, dependability, flexibility and cost – are used to measure
operations performance in relation to its strategy. It also shows that strate-
gies that rely on immediate cost-cutting (achieving economy by lowering
the costs of inputs into the operations transformation process) should be
replaced by strategies that aim to improve performance on the other perfor-
mance objectives, which will then lead to a reduction in cost.

The SCOR model

The supply chain operations reference (SCOR) model provides a framework
for measuring and evaluating the performance of supply chain processes.
108 Performance measurement and improvement
Measurements are made of five key processes that are undertaken along the
supply chain by all participating organizations. These processes are defined
as plan, source, make, deliver and return.

• ‘Plan’ means managing the customer-supplier links in the supply chain

to ensure that the supply chain strategy aligns requirements with the
resources available.
• ‘Source’ means managing procurement activities and ensuring that
suppliers are selected, deliveries scheduled and inventories managed.
• ‘Make’ means managing the transformation process that adds value to
products and services.
• ‘Deliver’ means managing order fulfilment and transporting goods to
the customer.
• ‘Return’ means managing customer returns and other post-delivery
customer support.

The SCOR model incorporates benchmarking activities to indicate where

performance should be improved and a SCOR roadmap to provide a frame-
work for implementation – that is, how performance should be improved.

Where should we improve performance?

To identify where performance improvement should take place, it is neces-
sary to compare the performance measure against a performance standard.
This standard can be internal to the organization, such as comparing against
previous performance or against targets for future performance. Internal
targets are often based on a comparison between past financial and sales
performance and targets for future performance. The advantage of these
measures is that they are widely used, are comparable across organizations
and use data that are readily available. However, they may be of limited
value in identifying why performance is above or below a target value.
External targets include comparisons with competitor performance, best
practice or best-in-class performance or market requirements. External per-
formance targets have the advantage of providing a comparison of perfor-
mance against competitors operating in similar competitive markets. This
approach is often called benchmarking and is described later in this chapter.
In terms of the measures associated with the five operations performance
objectives, two models can be used to identify where performance should
be improved. The Hill method (Hill and Hill, 2012) is based on market
requirements. The concepts of order winning and qualifying factors are
used to distinguish between those factors that directly contribute to win-
ning business and those that are necessary to qualify for the customer’s
 Performance measurement and improvement 109
consideration between a range of products/services (see Chapter 2). The
second model uses a combination of market and competitive factors and
two dimensions – importance and performance – to help operations managers
prioritize performance objectives (see Slack et al., 2016).

Benchmarking
‘Benchmarking’ can be defined as the continual measurement of an organi-
zation’s products and processes against a company recognized as a leader
in that industry. Analysing competitor products is an older technique,
which forms part of the product design process. Benchmarking was ini-
tially restricted to the comparison of direct competitors in the manufactur-
ing sector. Now it is practised in the service sector (for example, banks),
in all functional areas (for example, marketing) and in comparison with
a wide variety of competitors from which lessons can be learnt (not just
the best in class). Because of the widespread use of the technique and the
requests by many organizations to visit the same high-performance firms,
much benchmarking data is held in databases for general use. A num-
ber of models for implementing a benchmarking programme have been
developed. The following is a summary of the main activities involved in
benchmarking:

• Planning: understand the business’s processes; identify key processes;

and form benchmarking teams.
• Analysis: conduct research on possible competitors, and formulate ques-
tions to elicit the required information. Establish a relationship with a
partner organization, and collect and share information.
• Implementation: implement and monitor improvements suggested by
the analysis.

The relevant processes in the organization need to be benchmarked before

comparing them with those of a competitor. Processes are benchmarked in
terms of metrics (numeric measurements) and procedures (process flows).
For example, a payment process could be measured by the time taken from
receiving the request to delivering the payment. The technique would also
measure the type and amount of personnel involved in each step of the pro-
cess. Two problems with some benchmarking programmes have been the
focus on developing metrics and the lack of energy put into implementing
changes suggested by the benchmarking process. Other problems include
the difficulty in obtaining competitor information and the fact that if the
process is used simply to emulate a competitor, competitive advantage may
be short-lived as the competitor makes further improvements.
110 Performance measurement and improvement
How do we improve performance?
Three performance improvement approaches are covered here: BPM, BPR
and CI.

Business process management

BPM refers to the analysis and improvement of business processes. A pro-
cess is a set of activities designed to produce a desired output from a speci-
fied input. The process orientation matches the idea of the main objectives
of the operations function as the management of the transformation process
of inputs (resources) into outputs (goods and services), covered in Chapter
1. Although BPM is usually used in the broad sense, it is also used more
narrowly to refer to software technologies for automating the management
of specific processes. In its widest sense, however, BPM brings together
aspects such as the following:

• Process-mapping techniques, such as process mapping and service

blueprinting.
• Simulation modelling techniques, such as BPS.
• Implementation of information technologies, such as workflow systems.
• Improvement approaches, such as BPR.
• Assessment models, such as ISO9000.

Business process re-engineering

In the early to mid 1990s, organization-wide transformational change was
advocated under the label of BPR. It was popularized through the pro-
nouncements of Hammer and Champy (1993) and Davenport (1993). The
essence of BPR is the assertion that business processes, organizational
structures, team structures and employee responsibilities can be fundamen-
tally altered to improve business performance. A five-step approach to the
introduction of BPR was suggested by Davenport (1993).

1 Identify processes for innovation. The organization should select a

process or processes that are critical to the organization and provide a
potentially large increase in performance in return for the re-engineering
effort. The scope and number of process redesign projects must be com-
patible with the organization’s ability and experience to undertake them.
2 Identify change levers. The three main enablers or levers of change are
IT, information and organizational/human resources.
Much information is not manipulated by IT resources in the organi-
zation but may still be a powerful lever in making process innovation
possible. Examples include the visible display of information on the
 Performance measurement and improvement 111
shop floor in lean production organizations and the market informa-
tion used by executives in making strategic decisions. For example,
many process innovations will lead to increased worker empowerment,
which may require an adjustment in organizational culture to ensure
successful implementation. Successfully using teams is also essential
in implementing cross-functional processes.
3 Develop process vision. The process innovation effort must be consis-
tent with the organization’s strategy. A process vision consists of mea-
surable objectives and provides the link between strategy and action. A
shared vision is essential to ensuring true innovation, rather than stan-
dard improvement efforts such as simplification and rationalization. A
vision allows conventional wisdom about how processes are undertaken
to be questioned. Key activities in developing a process vision include
assessing an existing business strategy for process direction, consulting
with process customers, benchmarking process performance targets and
developing process performance objectives and attributes.
4 Understand existing processes. This step is necessary to enable those
involved in the innovation activities to develop a common understand-
ing of the existing processes, understand complexities, avoid dupli-
cating current problems and provide a benchmark against which to
measure improvement. Traditional process-oriented approaches such
as flow charting can be used for this task but do not contain the ele-
ments necessary to implement radical change.
5 Design and prototype the new processes. The design of new processes
requires a team with a mix of members who can deliver creative and
innovative process solutions and ensure that they are implemented. Key
activities in the design and prototype phase are brainstorming design
activities, assessing the feasibility of these alternatives, prototyping the
new process design, developing a migration strategy and implementing
the new organizational structure and systems. Business Process Simulation
(Chapter 8) can be a valuable tool in assessing a new process design.

Continuous improvement
CI programmes are associated with incremental changes in the organiza-
tion, and their cumulative effect is to deliver an increased rate of perfor-
mance improvement. CI is associated with the JIT and lean philosophy,
where it is referred to as ‘kaizen’, a Japanese term meaning a way of getting
to the ideals of JIT by a continuous stream of improvements over time.
CI is also associated with the concept of the learning organization, which
aims to create an environment that builds knowledge in the organization
and can use that to improve performance. The need for organizational learn-
ing has been identified as a consequence of the need for organizations to
112 Performance measurement and improvement
continually produce innovations in order to maintain a competitive edge.
The ability to generate a continuous stream of ideas for improvement and
then to implement them is seen as a sustainable competitive advantage for
organizations. To consider how an organization learns is really to consider
how people in that organization learn and how the results of that learning
are integrated into the practices, procedures and processes of the organi-
zation. The transfer of knowledge from an individual to an organizational
system means that the knowledge becomes independent of the individual
and is possessed by the organization and replicable by individuals in that
organization. The concept of knowledge management overlaps that of
organizational learning but may be distinguished from it by a greater focus
on the management of knowledge as a strategic asset and an emphasis on
encouraging the sharing of knowledge.
CI requires creating the right environment in which the importance of the
approach is recognized and rewarded. This means ensuring the involvement
of all the members of the organization and ensuring that these members have
the problem-solving skills necessary to achieve worthwhile improvements.
The issues of environment, involvement and problem-solving skills will now
be explored in relation to implementing CI. To create the right environment in
which improvement can take place, it is important to have a set of procedures
for the improvement process, which formalizes actions so that progress can be
monitored and measured. A procedure for an improvement study could follow
the steps of the plan-do-check-act (PDCA) cycle (Figure 18.1) as follows:

PLAN What changes are needed to gain continual improvement?

DO Analyse appropriate data. Carry out suggested changes to the
process.
CHECK Evaluate the results of the changes to the process.
ACT Make the changes permanent, or try another step (go to step 1).

PLAN DO

ACT CHECK

Figure 18.1 The PDCA cycle

 Performance measurement and improvement 113
The PDCA cycle was developed for improving production processes and
separates the process creation and execution phases (plan and do) from the
process checking and improvement (check and act) phases. Thus, a con-
tinuous feedback loop is created between process operation and process
improvement.

References
Davenport, T.H. (1993) Process Innovation: Re-engineering Work Through Infor-
mation Technology, Harvard Business School Press.
Hammer, M., and Champy, J. (1993) Re-engineering the Corporation: A Manifesto
for Business Revolution, Harper Business.
Hill, A. and Hill, T. (2018) Operations Strategy: Design, Implementation and Delivery,
Red Globe Press.
Slack, N., Brandon-Jones, A., and Johnston, R. (2016) Operations Management, 8th edn.,
Pearson Education Limited.
Index

3D printing 41–2 computer-aided engineering (CAE) 31

3Ms: muda (waste) 72–3; mura computer-aided process planning
(variability) 72–3; muri (utilization) (CAPP) 31
72–3 computer-integrated manufacture
(CIM) 32
ABC inventory classification system 69 computer numerically controlled
actual capacity 59 (CNC) 32
additive manufacturing 41–2 consumer services 3
agile supply chains 85–7 continuous improvement (CI) 30, 51, 71,
automated guided vehicle (AGV) 32, 91 73, 76, 85, 103, 111–12
automated material handling (AMH) 32 critical path method (CPM) 96
automated storage and retrieval systems critical ratio 55
(AS/RS) 32 cyber-physical systems (CPS) 34

Baines, T. 5 delivery system choice 12

benchmarking 43, 108, 109, 111 demand management 62–4
Berry, L.L. 100 dependent demand 52, 78
Bicheno, J. 71 design capacity 59
bill of materials (BOM) 39, 78–80,
81, 83 e-business 32, 89
Brandon-Jones, A. 8, 35, 99 e-commerce 33
business process management effective capacity 59
(BPM) 110 eliminate waste 71–2, 92
business process re-engineering employee-to-employee (E2E) 33
(BPR) 110 enterprise resource planning (ERP)
business process simulation (BPS) 77–82
47, 110 externally supportive 8
business-to-business (B2B) 32 external neutrality 7
business-to-consumer (B2C) 32
facility design 25
capacity: management 57; timing 27, 28; facility location 28–30
volume 27 feasibility study 38
chase demand 61–2 final design 39, 42
Christopher, M. 85 Fitzsimmons, J.A. 41
circular supply chains 92 Fitzsimmons, M.J. 41
computer-aided design (CAD) 31 flexible manufacturing cell (FMC) 32, 36
 Index 115
forecasting demand 65 leagility: base and surge 87; Pareto rule
form design 39 85; postponement 86–7
functional: design 39; layout type 20, 22 lean operations 71–6, 85
lean supply chains 85
Garvin, D.A. 98 lean techniques 73–6
global operations 27 learning curves 51
Greasley, A. 47 level capacity 60–1
group technology 23 Lightfoot, H. 5
loading 54
Hackman, J.R. 48 long-term capacity planning 27–8
Hayes, R.H. 7
Heijunka (levelled scheduling) 76 make-to-order 52
Hill, A. 10 make-to-stock 9, 52–3, 79
Hill, T. 10 manufacturing resource planning
Hill method 10–12, 108 (MRP II) 82–3
home operations 26 mass customisation 40
master production schedule (MPS) 78–9
idea generation 37 materials requirements planning (MRP)
independent demand 52 77–82
Industry 4.0 34 m-business 33
infrastructural decisions 12 measuring capacity 57–8
infrastructure choice 12 measuring demand 57
internally supportive 8 motivating potential score (MPS) 49
internal neutrality 7 multi-domestic operations 26
Internet of Things (IoT) 33, 34
inventory management 67–70 network analysis 96–7
inventory models: economic order
quantity (EOQ) 69; fixed order Oakland, J.S. 102
interval (FOI) 69; reorder point Ohno, T. 72
(ROP) 68–9 Oldham, G.R. 48
inventory status file (ISF) 81 operations control 53–4
inventory systems: fixed order period 68, operations planning 52–3
70; fixed order quantity 68, 70 optimized production technology
inventory types: finished goods 60, (OPT) 55–6
67–8, 76; raw materials 67, 90; WIP order-winning factors 11
36, 67, 72
Parasuraman, A. 100
job characteristics model 48–50 P:D ratios 53
job design 48–51 performance improvement 108–13
job enlargement 50 performance measurement 107–8
job enrichment 50–1 performance objectives: cost 10;
job rotation 50 dependability 9; flexibility 9–10;
Johnston, R. 8, 35, 99 quality 8–9; speed 9
physical distribution management 90–1
kanban production system 75–6 plan-do-check-act (PDCA) cycle 112–13
preliminary design 38–9
last-mile delivery 91–2 process design 43
layout types: cell 22–3; fixed-position process mapping 44, 110
21; functional (process) 22; line process technology: degree of automation
(product) 23 35; degree of integration 36; scale 35
116 Index
process types (manufacturing): batch service blueprinting 44, 45, 46
15; continuous 16; jobbing 14–15; service design 40–1
mass 15; project 13 servitization 5
process types (services): mass service 18; six-sigma quality 103–4
professional service 16–17; service Slack, N. 8, 35, 99
shop 17 statistical process control (SPC) 104–5
procurement 77, 89–90, 108 strategy formulation 10–12
producer services 3 structural decisions 12
product design 37–40, 103, 104, 109 supply chain design 84–5
production design 39–40 supply chain integration: market
product mix 58–9 relationships 88; strategic partnerships
project control 95–6 and alliances 88–9; vertical integration
project estimating 94–5 89; virtual organization 89
project evaluation and review technique supply chain management 84
(PERT) 97 supply network design 25–8
project management 93 supply-side factors 29–30
project planning 95 sustainability 5–6
project structure 94
pull production 74–5 total quality management (TQM)
push production 73–4 102–3
Towill, D. 85
qualifying factors 11, 108 transformation process 1–2
quality 98 transformed/transforming resources 1–2
quality gaps model 100–2
queuing theory 64–5 Vonderembse, M.A. 40

regional operations 27 Wheelwright, S.C. 7

resource-to-order 52, 53 White, G.P. 40
WIP 36, 67, 72
SCOR model 107–8
sequencing 54–5 Zeithaml, V.A. 100