Master of Business

Administration

STRATEGIES IN OPERATIONS
MANAGEMENT

Module Guide

Copyright © 2025
MANCOSA
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machines, without the written permission of the publisher. Please report all errors and omissions to the following email
address: modulefeedback@mancosa.co.za
 Master of Business Administration
STRATEGIES IN OPERATIONS MANAGEMENT

Preface.................................................................................................................................................................... 3

Unit 1: Introduction to Operations Management.................................................................................................... 12

Unit 2: Global Operations ...................................................................................................................................... 29

Unit 3: Productivity, Supply Chain Strategy and Competitiveness ........................................................................ 49

Unit 4: Process Selection and Process Measures ................................................................................................ 67

Unit 5: Process Improvement: Lean Operations and Just-In-Time Systems ......................................................... 87

Unit 6: Process Quality Management I: Total Quality Management ...................................................................... 99

Unit 7: Process Quality Management II: The Process Approach ........................................................................ 112

Unit 8 Forecasting Demand ................................................................................................................................ 121

Unit 9: Product Design ........................................................................................................................................ 135

Unit 10: Planning Facilities and Capacity ............................................................................................................ 144

Unit 11: Location Decisions................................................................................................................................. 156

Unit 12: Designing the Supply Chain .................................................................................................................. 166

Unit 13: Managing Inventory ............................................................................................................................... 174

Unit: 14 Aggregate Scheduling and Materials Requirements Planning (MRP II) ................................................ 187

Unit 15: Managing Projects ................................................................................................................................. 207

Unit 16: The Service Industry .............................................................................................................................. 219

Unit 17: The Impact of Environmental concerns on Operations Management .................................................... 240

Unit 18: The Importance of Marketing in Operations Management ..................................................................... 251

Answers to revision questions and activities ....................................................................................................... 264

References.......................................................................................................................................................... 289

Appendices ......................................................................................................................................................... 290

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Strategies in Operations Management

List of Contents

List of Tables

Table 1.1 Functions and Duties of Operations Managers. ................................................................................ 19

Table 2.1 Evolution of Operations Management ............................................................................................... 34

Table 3.1: Organisation’s Overall Strategy ....................................................................................................... 57

Table 3.2: Make or Buy Decisions .................................................................................................................... 59

Table 4.2: Comparison of Process Choice ....................................................................................................... 82

Table 4.3: Process Measures ........................................................................................................................... 83

Table 8.1: 3 Month Moving Avarage ............................................................................................................... 128

Table 10.1: A Comparison of Product and Process Layouts .......................................................................... 151

Table 12.1: Supply Chain Integration.............................................................................................................. 171

Table 13.1: ABC Analysis ............................................................................................................................... 179

Table 13.2: ABC Analysis ............................................................................................................................... 180

Table 16.1: Differences in Design for High Contact Service ........................................................................... 227

List of Figures and Illustrations

Figure 1.1: Operations as a Transformation Process ....................................................................................... 17

Figure 2.1 Operations as a Technical Core ...................................................................................................... 32

Figure 2.2: Three Pillars for Successful Change .............................................................................................. 38

Figure 2.3: Changes in the Business Environment: How They Shape a New Operations Agenda. ................. 42

Figure 3.1: Supply Chain Model........................................................................................................................ 56

Figure 4.1: Product –Process Matrix................................................................................................................. 72

Figure 4.2: Breakeven Analysis ........................................................................................................................ 75

Figure 4.3: Break Even Analysis ....................................................................................................................... 77

Figure 4.4: Example of a Flow Diagram............................................................................................................ 78

Figure 4.5: “Baseline” Time Function Map ........................................................................................................ 79

Figure 4.6: “Target” Time Function Map ........................................................................................................... 79

Figure 4.7: Example of a Service Blueprint....................................................................................................... 80

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 Strategies in Operations Management

Figure 6.1: Cause and Effect Diagram............................................................................................................ 106

Figure 6.2: Pareto Analysis ............................................................................................................................. 107

Figure 6.3: Control Chart ................................................................................................................................ 108

Figure 7.1: Process Depictions ....................................................................................................................... 116

Figure 8.1: Random and Irregular Forecasting ............................................................................................... 127

Figure 8.2: Time Predictions ........................................................................................................................... 129

Figure 9.1: Product Life Circle ........................................................................................................................ 140

Figure 10.1: People Square Subway Restaurant facility Layout ..................................................................... 154

Figure 13.1: ABC Analysis .............................................................................................................................. 178

Figure 13.2: EOQ............................................................................................................................................ 181

Figure 13.3: Reorder Point.............................................................................................................................. 184

Figure 14.1: Aggregate Scheduling ................................................................................................................ 190

Figure 14.2: Projecting Demand Requirements .............................................................................................. 194

Figure. 14.3. Master Production Schedule ...................................................................................................... 196

Figure 14.4. The Master Production Schedule in the MRP 1 Schematic ....................................................... 198

Figure 14.5: Bill of Materials ........................................................................................................................... 201

Figure 15.1: Work Breakdown Structure ......................................................................................................... 212

Figure 15.2: Gantt Chart ................................................................................................................................. 213

Figure 15.3: Activity on Arrow Network Diagram ............................................................................................ 215

Figure 16.2 Service Delivery Design............................................................................................................... 225

Figure 16.2: Service Blueprint......................................................................................................................... 228

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Strategies in Operations Management

Preface
A. Welcome
Dear Student
It is a great pleasure to welcome you to Strategies in Operations Management (SOM901). To make sure that
you share our passion about this area of study, we encourage you to read this overview thoroughly. Refer to it as
often as you need to since it will certainly be making studying this module a lot easier. The intention of this module
is to develop both your confidence and proficiency in this module.

The field of Operations Management is extremely dynamic and challenging. The learning content, activities and
self- study questions contained in this guide will therefore provide you with opportunities to explore the latest
developments in this field and help you to discover the field of Operations Management as it is practiced today.

This is a distance-learning module. Since you do not have a tutor standing next to you while you study, you need
to apply self-discipline. You will have the opportunity to collaborate with each other via social media tools. Your
study skills will include self-direction and responsibility. However, you will gain a lot from the experience! These
study skills will contribute to your life skills, which will help you to succeed in all areas of life.

This module should be studied using the prescribed and recommended text books including journal articles. You
should read the topic that you intend to study in the appropriate Chapter of your recommended book before reading
journal articles. Craft a reading strategy that encompasses note-taking. The module is divided into three parts,
each with a good number of chapters.

Objectives, found at the start of every unit, indicate the level descriptors for this module to which you need to pay
serious attention upon completing each chapter. Material should not be read all at once. Set aside a maximum of
two hours of reading, after which you should take a break and then carry on accordingly. All think point, self-
assessment activities, and case studies MUST be attended to before proceeding to the next chapter.

We hope you enjoy the module.

MANCOSA does not own or purport to own, unless explicitly stated otherwise, any intellectual property rights in or
to multimedia used or provided in this module guide. Such multimedia is copyrighted by the respective creators
thereto and used by MANCOSA for educational purposes only. Should you wish to use copyrighted material from
this guide for purposes of your own that extend beyond fair dealing/use, you must obtain permission from the
copyright owner.

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 Strategies in Operations Management

B. Module Overview
The module is a 15 credit module at NQF level 9.

Brief Overview of Relevant Theory

Each chapter contains a very brief overview of theory relevant to the particular operations management topic.
The purpose of the overview is to introduce you to some of the general and emerging market issues regarding
each operations management topic. Once you have read the overview, you need to further explore the
operations management topic by reading the prescribed textbooks and journal articles listed for each chapter.

This Study Guide is structured as follows:

Provides an overview of the Operations

Introduction to Strategies in Operations Management Study
Management Study Guide and how to
Guide
use it.

1. Introduction to Operations Management

2. Global Operations

3. Productivity, Supply Chain Strategy and Competitiveness

4. Process Selection and Process Measures

5. Process Improvement: Lean Operations and Just – In Time

System

6. Process Quality Management I: Table Quality Management This part of the Study Guide details
7. Process Quality Management II: The Process Approach what you are required to learn.

8. Forecasting Demand Each chapter details:

9. Product Design • Specific learning outcomes

10. Planning Facilities and Capacity • Prescribed and Recommended

11. Locations Decisions Reading(s)/Textbook(s)

12. Designing the Supply Chain • An overview of relevant theory

13. Managing Inventory Questions for reflection.

14. Aggregate Scheduling and Materials Requirements Planning

(MRPII)

15. Managing Projects

16. The Service Industry

17. The Impact of Environmental Concerns on Operational

Management

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18. The Importance of Marketing in Operations Management

Appendix A & B provide two case

Appendix A: Case Study 1
studies. You are required to prepare
and analyse these case studies in your
Study Groups, and present your
Appendix B: Case Study 2 findings at the Operations management
Workshop two and Operations
management Workshop three.

C. Exit Level Outcomes and Associated Assessment Criteria of the Programme

Exit Level Outcomes (ELOs) Associated Assessment Criteria (AACs)

• Evaluate and solve problems in which • Strategic thinking and problem-solving skills are
responses display that responsible selected and applied to facilitate decision making
decisions using strategic, critical and related to complex organisational situations
creative thinking is evident

• Display independent judgement and • Independent judgement and decision-making

decision- making capabilities in business, capabilities in business are applied and
including demonstrating insight into being demonstrated, including methods and framework for
entrepreneurial building entrepreneurial opportunities

• Identify, interpret and evaluate the • Environmental forces in organisations are identified
environmental forces in organisations and and evaluated to understand the inherent and
the inherent and potential capabilities of an potential capacities of an organisation
organisation

• Develop business policies and strategies • Strategic alignment between the business are
for organisations to meet stakeholder's developed for organisations to meet stakeholders'
requirements requirements

• Organise and mobilise the resources of the • Resources of the organisation are developed to
organisation to achieve strategic goals and organized and mobilised to ensure that strategic goals
targets and targets are achieved

• Develop an organisational reflective mind- • A reflective mind-set is developed to create

set that can create continuous learning and continuous learning and growth for oneself, and the
growth in oneself, the staff and the organisation
organisation

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 Strategies in Operations Management

• Use technology effectively and critically, • Effective and critical use of technology is examined to
showing ethical responsibility towards the demonstrate ethics involved in science and
environment and the health/well-being of technology issues and sensitivity towards the
others psychological, health and physical environment of
others are considered

• Develop conceptual and applied • Entrepreneurial and conceptual skills are developed
entrepreneurial skills by drawing on the knowledge, skills and attitudes
acquired to capitalise on opportunities identified

• Demonstrate the ability to apply conceptual • Conceptual and analytical frameworks are
and analytical frameworks within different appreciated to provide alternative perspectives within
organisational management conditions different organisational management conditions

• Utilise appropriate financial management • Financial management tools are assessed to ensure
tools as an aid for decision-making proper utilisation of the data that will aid in providing
purposes information to the management for decision making
purposes

• Display ethical behaviour in a corporate • Ethical behaviour is demonstrated to provide a basic

management context understanding on how to conduct oneself in the
corporate management environment

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D. Learning Outcomes and Associated Assessment Criteria of the Module

LEARNING OUTCOMES OF THE MODULE ASSOCIATED ASSESSMENT CRITERIA OF THE MODULE

• Examine the concept of operations • The scope and principles of operations management are
strategy and its numerous components detailed to afford the student an understanding of the
and assess how it relates to the overall nature and components of operations management
business strategy of the firm • Operations management is holistically unbundled to enable
the student to appreciate that operations management is
core to management

• Critically analyse the requirements for • Fundamental decision making process’ and requirements
decision making relating to each part of are critiqued to effectively formulate strategy that will
the operations management function enhance sustainability

• Design and implement effective • Effective managerial decisions and policies are applied
managerial decisions in order to ensure through sustainable business practice to ensure the
that effective and sustainable utilisation of effective utilization of resources
resources is achieved

• Contextually analyse and assess • Operations management decisions are critiqued within
operations management decisions and different contexts to enable application under a diverse
the influence they have on the overall range of business activities and objectives
strategic objectives of an organisation

• Construct a contextualised academic • The different asset requirements of the operations

discussion on the effective on how the management function is analyzed in terms of needs to
effective utilisation of resources is maximize the combination and use of limited resources.
achieved

• Formulate business decisions and • The methodology behind the development of effective and
practices taking into consideration profit sustainable business strategies are examined in order to
projections, impact on society and the provide appropriate responses to current business
environment challenges

E. Learning Outcomes of the Units

You will find the Unit Learning Outcomes on the introductory pages of each Unit in the Module Guide. The Unit
Learning Outcomes lists an overview of the areas you must demonstrate knowledge in and the practical skills you
must be able to achieve at the end of each Unit lesson in the Module Guide.

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 Strategies in Operations Management

F. How to Use this Module

This Module Guide was compiled to help you work through your units and textbook for this module, by breaking
your studies into manageable parts. The Module Guide gives you extra theory and explanations where necessary,
and so enables you to get the most from your module.

The purpose of the Module Guide is to allow you the opportunity to integrate the theoretical concepts from the
prescribed textbook and recommended readings. We suggest that you briefly skim read through the entire guide
to get an overview of its contents. At the beginning of each Unit, you will find a list of Learning Outcomes and
Associated Assessment Criteria. This outlines the main points that you should understand when you have
completed the Unit/s. Do not attempt to read and study everything at once. Each study session should be 90
minutes without a break

This module should be studied using the prescribed and recommended textbooks/readings and the relevant
sections of this Module Guide. You must read about the topic that you intend to study in the appropriate section
before you start reading the textbook in detail. Ensure that you make your own notes as you work through both the
textbook and this module. In the event that you do not have the prescribed and recommended reading(s)/
textbook(s), you must make use of any other source that deals with the sections in this module. If you want to do
further reading, and want to obtain publications that were used as source documents when we wrote this guide,
you should look at the reference list and the bibliography at the end of the Module Guide. In addition, at the end of
each Unit there may be link to the PowerPoint presentation and other useful reading.

Don’t try to complete the manual in a few long sessions. You will study more effectively if you divide your study
into two-hour sessions.

If you want to take a break it would be a good idea to stop at the end of a unit.
As you work through the manual you will come across Activities and Self-Assessment Exercises. These are
designed to help you study and prepare for the examinations.

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G. Notional Learning Hours

Learning time
Types of learning activities
%

Lectures/Workshops (face to face, limited or technologically mediated) 10

Tutorials: individual groups of 30 or less 0

Syndicate groups 0

Practical workplace experience (experiential learning/work-based learning etc.) 0

Independent self-study of standard texts and references (study guides, books, journal 40
articles)

Independent self-study of specially prepared materials (case studies, multi-media, etc.) 30

Other: Online 20

TOTAL 100

H. Prescribed and Recommended Textbook/Readings

The prescribed and recommended readings/textbooks presents a tremendous amount of material in a simple,
easy-to-learn format. You should read ahead during your course. Make a point of it to re-read the learning content
in your module textbook. This will increase your retention of important concepts and skills. You may wish to read
more widely than just the Module Guide and the prescribed and recommended textbooks/readings, the
Bibliography and Reference list provides you with additional reading.

The prescribed and recommended textbook(s)/reading(s) for this module are:

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and Supply Chain Management.
Thirteenth Edition. Cape Town: Pearson Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain Management. Tenth Edition. Singapore
Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and Practice for Strategic Impact. Cape
Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations, strategy, and Information
Technology. Ninth Edition International Edition: McGraw Hill.
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 Strategies in Operations Management

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology, Strategy. USA: Pearson Prentice
Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C., Harrison A., Johnson R. (2010)
Operations Management. SA: Pearson.

I. Special Features
In the Module Guide, you will find the following icons together with a description. These are designed to help you
study. It is imperative that you work through them as they also provide guidelines for examination purposes.

Special Feature Icon Explanation

The Learning Outcomes indicate aspects of the particular Unit you

LEARNING have to master.
OUTCOMES

The Associated Assessment Criteria is the evaluation of the students’

ASSOCIATED
understanding which are aligned to the outcomes. The Associated
ASSESSMENT
Assessment Criteria sets the standard for the successful demonstration
CRITERIA
of the understanding of a concept or skill.

A Think Point asks you to stop and think about an issue. Sometimes

THINK POINT you are asked to apply a concept to your own experience or to think of
an example.

You may come across Activities that ask you to carry out specific
tasks. In most cases, there are no right or wrong answers to these
ACTIVITY
activities. The purpose of the activities is to give you an opportunity to
apply what you have learned.

At this point, you should read the references supplied. If you are

READINGS unable to acquire the suggested readings, then you are welcome to
consult any current source that deals with the subject.

PRACTICAL Practical Application or Examples will be discussed to enhance

APPLICATION understanding of this Module.

OR EXAMPLES

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KNOWLEDGE You may come across Knowledge Check Questions at the end of each
CHECKS Unit in the form of Knowledge Check Questions (KCQ’s) that will test
QUESTIONS your knowledge. You should refer to the Module Guide or your
textbook(s) for the answers.

You may come across Revision Questions that test your understanding
REVISION
of what you have learned so far. These may be attempted with the aid
QUESTIONS
of your textbooks, journal articles and Module Guide.

Case Studies are included in different sections in this Module Guide.

CASE STUDY This activity provides students with the opportunity to apply theory to
practice.

You may come across links to Videos Activities as well as instructions

VIDEO ACTIVITY on activities to attend to after watching the video.

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 Strategies in Operations Management

Unit
1: Introduction to Operations Management

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Strategies in Operations Management

Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

1.1 What Is Operations • Introduce the purpose of operation management

Management?

1.2 Why Study Operations • Interrogate the purpose of operation management

Management?

1.3 The Transformation Process • Appraise the applicability of the transformation process to both
the service and manufacturing sectors

1.4 Functions and Duties of • Prioritise the functions and duties of the Operations Manager
Operations Managers

1.5 Operations Management is • Validate the statement that operations management is essential
Essential in all Types of in all industry types
Organisations

1.6 Is Operations Management • Debate the importance of operations management in smaller

Important in Smaller organisations
Organisations?

1.7 Operations Management in Not- • Argue the need for operations management in not-for-profit
for-Profit Organisations organisations

1.8 Summary • Summarise topic areas covered in unit

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 Strategies in Operations Management

Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson
Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations,

strategy, and Information Technology. Ninth Edition International Edition:
McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C., Harrison
A., Johnson R. (2010) Operations Management. SA: Pearson.

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Strategies in Operations Management

1.1 What Is Operations Management?

Operations management encapsulates the management of business processes that produce tangible goods or
intangible services. Terms such as “Just-in-time, six sigma quality and supply chain management” appear regularly
in the business press in publications such as Financial Times, The Economist and Business Week. This course
considers ways in which operations can be enhanced, including wider concerns that are characteristic of processes
for quality control. It focuses on quantitative techniques as well as implications for managers. It is designed to help
students become familiar with tools, analytical frameworks and general principles for managing business
processes and operations. Operations management is about how organisations produce goods and services. What
is worn, eaten, utilised, or even read comes from operations managers who organise its production. Therefore,
both goods and services are produced under the supervision of operation managers.

Video Activity 1.1

Watch the video at: https://www.youtube.com/watch?v=DEuzzLled6k

Lecture 1 Introduction to Operations Management, and justify the study of

operations management.

This module is therefore concerned with the tasks, issues and decisions of operations managers. Operations
managers have the responsibility of managing some, or all of the resources which compose the operations
function. Different terms are used to call these types of managers besides the term operations manager. Terms
such as ‘fleet manager,’ in a distribution company, the ‘administration manager’ in a hospital or even ‘store
manager’ in a supermarket may be used. Operations management can thus be defined as the activity of managing
the resources which produce and deliver products and service. The operations function is the function within an
organisation that produces some type of product and/or services (Heizer and Render, 2020; and Russel and Taylor,
2019).

1. Russel and Taylor (2019) states that operations management is often defined as a transformation
process.
2. Heizer and Render (2020) define operations management as the activities that create value in the form
of goods and services by transforming inputs into outputs.

Think Point 1.1

Analyse your business environment and construct your own contextualised

definition of operations management.

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1.2 Why Study Operations Management?

OM (operations management), according to Heizer and Render (2020), is studied for four major reasons:
1. OM is one of the three major functions of any organization, and it is integrally related to all the other business
functions. All organisations market (sell), finance (account), and produce (operate), and it is important to know
how the OM segment functions. Therefore, we study how people organise themselves for productive
enterprise.
2. To know how goods and services are produced. The production function is the segment of our society that
creates the products we use.
3. To understand what operations managers do. By understanding what these managers do, you can develop
the skills necessary to become such a manager. This will help you explore the numerous and lucrative career
opportunities in OM.
4. OM is studied because it is such a costly part of an organization. A large percentage of the revenue of most
firms is spent in the OM function. Indeed, OM provides a major opportunity for an organization to improve its
profitability and enhance its service to society.

Think Point 1.2

Critically analyse the value operations management can add to your company.

1.3 The Transformation Process

Operations management designs, operates and enhances productive systems used to get work done. As noted in
Chapter One, operations managers are found in every sector, banks, hospitals, factories, and government etc.
They design systems, ensure quality then produces goods and deliver services.

Operations are often defined as a transformation process. All operations produce products and services by
changing inputs into outputs using an ‘input-transformation-output’ process. Inputs are used to transform
something, or are transformed themselves into outputs of products and services. Figure 1.1 captures the essence
of what happens with this process. Operations try to ensure that the transformation is as efficient and effective as
possible. The role of operations is therefore to create value. The transformation itself can thus be seen as a series
of activities along a value chain extending from the supplier to the customer.

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Strategies in Operations Management

Video Activity 1.2

Watch the video at:
https://www.youtube.com/watch?v=dX7DlPrvihc Operations Processes:
Transformation | Business Studies, and Analyse the primary function of operations
management.

INPUT
OUTPUT
Material
Goods
Machines
Services
Labour TRANSFORMATION
Management PROCESS
Capital

Feedback

Requirements

Figure 1.1: Operations as a Transformation Process

Source: (Russel and Taylor, 2019)

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 Strategies in Operations Management

Think Point 1.3.

Analyse the inputs and outputs essential to the transformation process in your
organisation.

The input-transformation-output process is characteristic of a wide variety of operating systems. In an automobile

factory, sheet steel is formed into different shapes, painted and finished, then assembled with thousands of
component parts to produce a working automobile. In an aluminium factory, various grades of bauxite are mixed,
heated, and cast into ingots of different sizes.

In a hospital, patients are helped to become healthier individuals through special meals, medication, laboratory
work, and surgical procedures. Therefore, operations do take different forms. The transformation process can
take the following forms:
• Physical, as in manufacturing operations
• Locational, as in transportation or warehouse operations
• Exchange, as in retail operations
• Physiological, as in healthcare
• Psychological, as in communication

1.4 Functions and Duties of Operations Managers

All good managers perform the basic functions of the management process. The management process consists
of planning, staffing, leading, organising and controlling. Operations managers apply this generic management
process to the decisions they make in the OM function. Managers contribute to production and operations through
the decisions shown in the Table 1.1. To address each of these decisions requires planning, organising, staffing,
leading, and controlling (Heizer and Render, 2020).

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Strategies in Operations Management

Table 1.1 Functions and Duties of Operations Managers

Quality Management Who is responsible for quality?
How do we define the quality we want in our service or product?

Service and Product design What product or service should we offer?

How should we design these products or services?

Process and capacity design What equipment and technology is necessary for these processes?

Location Where should we put our facility?

Layout design How should we arrange our facility?

Human resources and job design How do we provide a reasonable work environment?

Supply chain management Should we make or buy a component?

How many suppliers should we have?

Inventory, MRP, JIT How much of inventory should we keep?

Intermediate, short-term and project Is subcontracting production a good idea?

scheduling
Maintenance Who is responsible for maintenance?

Returns How do we deal with returned goods?

Adapted: Heizer and Render (2020).

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 Strategies in Operations Management

Activity 1.1

1. Find a company from each member country of BRICS. Analyse the

operations management practices for each of these companies. In your
analysis pay attention to volume of demand that they have to cope with,
the variety of products or services, and variation in demand during the day,
week and year.

2. Think about the impact of volume, variety, variation and visibility on the
day-to-day management of each of the operations and consider how each
operation attempts to cope with its volume, variety, variation and visibility
of the preparation of its products and/or services.

1.5 Operations Management is Essential in all Types of Organisations

In the product operations management, it is easy to have a visual picture of the operations function in terms of
what it does even without having been there. The automobile assembly line or the Coca Cola production line is
frequently shown in advertisements. But it may not be the same to visualise the operations of an advertisement.
This therefore introduces us to the idea of ‘production’. Some organisations produce tangible things while others
produce intangible things. Simply put, some organisations produce goods (products) whereas others produce
services (performances, acts or deeds). The motive in both cases is to make a profit. Even organisations that are
“not-for-profit” use resources to produce services which serve society. Services are a predominant force in our
society.

The rapid and continuing growth in the service sector is providing marked opportunities for managers.
Understanding the concepts of successfully managing the service will provide a significant advantage to new
graduates who may be employed by a service-oriented firm. Good service does not happen as a result of one
extraordinary employee who goes out of the way to please a customer; good service should be properly planned
and managed. Service operations management concerns the design, planning, direction and control of all the
facilities, processes and required activities to transform labor, capital, materials, energy, and skills into performance
and delivery of service. Good service organisation performs the operations functions of planning, scheduling,
equipment operation, quality control, record keeping, and human resource management for maintaining efficient
usefulness. This takes place while ensuring that the quality of the service is both high and consistent (Heizer and
Render, 2020; Russel and Taylor, 2019).

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Strategies in Operations Management

Practical Application Or Examples

Read through the IKEA example to gain an understanding of how business

philosophy has been effectively translated into practical management of IKEA’s
operations.

Love it or hate it, IKEA is the most successful furniture retailer ever. With 276 stores
in 36 countries, it has managed to develop its own special way of selling furniture.
The Stores’ layout means customers often spend two hours in the store - far longer
than in rival furniture retailers. IKEA’s philosophy goes back to the original
business, started in the 1950’s in Sweden by Ingvar Kamprad. He built a showroom
on the outskirts of Stockholm where land was cheap and simply displayed
suppliers’ furniture as it would be in a domestic setting. Increasing sales soon
allowed IKEA to start ordering its own self-designed products from local
manufacturers. But it was innovation in its operations that drastically reduced its
selling costs. These included the idea of selling furniture as self-assembly flat packs
(which reduced production and transport costs) and its ‘showroom-warehouse’
concept which required customers to pick the furniture up themselves from the
warehouse (which reduces retailing costs). Both of these operating principles are
still the basis of IKEA’s retail operations processes today.

Stores are designed to facilitate the smooth flow of customers, from parking,
moving through the store itself, to ordering and picking up goods. At the entrance
to each store large notice-boards provide advice to shoppers. For young children,
there is a supervised children’s play area, a small cinema, and a parent and baby
room so parents can leave their children in the supervised play area for a time.
Parents are recalled via the loud speaker system if the child has any problems.
IKEA ‘allows customers to make up their minds in their own time’ but ‘information
points’ have staff who can help. All furniture carries a ticket with a code number
which indicates its location in the warehouse. (For larger items customers go to the
information desks for assistance). There is also an area where smaller items are
displayed, and can be picked directly. Customers then pass through the warehouse
where they pick up the items viewed in the showroom. Finally, customers pay at
the checkouts, where a ramped conveyor belt moves purchases up to the checkout
staff. The exit has service points and a loading area that allows customers to bring
their cars from the park and load their purchases.

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Love it or hate it, IKEA is the most successful furniture retailer ever. With 276 stores
in 36 countries, it has managed to develop its own special way of selling furniture.
The Stores’ layout means customers often spend two hours in the store - far longer
than in rival furniture retailers. IKEA’s philosophy goes back to the original
business, started in the 1950’s in Sweden by Ingvar Kamprad. He built a showroom
on the outskirts of Stockholm where land was cheap and simply displayed
suppliers’ furniture as it would be in a domestic setting. Increasing sales soon
allowed IKEA to start ordering its own self-designed products from local
manufacturers. But it was innovation in its operations that drastically reduced its
selling costs. These included the idea of selling furniture as self-assembly flat packs
(which reduced production and transport costs) and its ‘showroom-warehouse’
concept which required customers to pick the furniture up themselves from the
warehouse (which reduces retailing costs). Both of these operating principles are
still the basis of IKEA’s retail operations processes today.

Stores are designed to facilitate the smooth flow of customers, from parking,
moving through the store itself, to ordering and picking up goods. At the entrance
to each store large notice-boards provide advice to shoppers. For young children,
there is a supervised children’s play area, a small cinema, and a parent and baby
room so parents can leave their children in the supervised play area for a time.
Parents are recalled via the loud speaker system if the child has any problems.
IKEA ‘allows customers to make up their minds in their own time’ but ‘information
points’ have staff who can help. All furniture carries a ticket with a code number
which indicates its location in the warehouse. (For larger items customers go to the
information desks for assistance). There is also an area where smaller items are
displayed, and can be picked directly. Customers then pass through the warehouse
where they pick up the items viewed in the showroom. Finally, customers pay at
the checkouts, where a ramped conveyor belt moves purchases up to the checkout
staff. The exit has service points and a loading area that allows customers to bring
their cars from the park and load their purchases.

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Behind the public face of IKEA’s huge store is a complex worldwide network of suppliers, 1,300 direct suppliers,
about 10, 000 sub-suppliers, and warehouse and transport operations include 26 Distribution Centres. This supply
network is vitally important to IKEA. From purchasing raw materials, right through to finished products arriving in
its customers’ homes, IKEA relies on close partnerships with its suppliers to achieve both ongoing supply efficiency
and new product development. However, IKEA closely controls all supply and development activities from IKEA’s
home town of Almhult in Sweden.

But success brings its own problems and some customers became increasingly frustrated with overcrowding and
long waiting times. In response IKEA in the UK launched a £150 m programme to ‘design out’ the bottlenecks. The
changes included:
• Clearly marked in-store short cuts allowing customers who just want to visit one area, to avoid having to go
through all the preceding areas
• Express checkout tills for customers with a bag only rather than a trolley
• Extra ‘help staff’ at key points to help customers
• Redesign of the car parks, marking them easier to navigate
• Dropping the ban on taking trolleys out to the car parks for loading (originally implemented to stop vehicles
being damaged)
• A new warehouse system to stop popular product lines running out during the day
• More children’s play areas

IKEA spokesperson, Nicki Craddock, says: ‘We know people love our products but hate our shopping experience.
We are being told that by customers every day, so we can’t afford to take offence at being herded like sheep on
the long route around stores. Now if you know what you are looking for and just want to get in, grab it and get out,
you can.”
Source: Slack, Chambers and Johnson, 2019

Activity 1.2

1. Visit a large furniture shop in your country. Evaluate how it operates, for instance
where customers go, how staff interact with them, how the store has chosen to use
its space, what variety of products it offers and so on. Critically Analyse differences
between this store and IKEA.

2. What operations management challenges can you identify in the store?

Suggest innovative solutions you would recommend to resolve these challenges.

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1.6 Is Operations Management Important in Smaller Organisations?

Operations management is equally important in small organisations. Whether an organisation is small or large,
operations is essential as all companies need to produce and deliver their products or services efficiently and
effectively. Managing operations in a small-to-medium company poses the challenge of resources to be dedicated
to specialised tasks. As such people tend to do different jobs in small organisations. The advantage of this is that
responses to problems or issues can take place faster. The demerit is that roles tend to overlap leading to confusion
in decision-making. On the contrary large organisations do possess the resources to commit to specialised tasks.

Case Study: Acme Whistles

Acme Whistles can trace its history back to 1870 when Joseph Hudson decided he had
the answer to London Metropolitan Police’s request for something to replace the wooden
rattles that were used to sound the alarm. So the world’s first police whistle was born.
Soon Acme grew to be the premier supplier of whistles for police forces around the world.
‘In many ways’, says Simon Topman, owner and Managing Director of the company, ‘the
company is very much the same as it was in Joseph’s day’. The machinery is more
modern, of course, and we have a wider variety of products, but many of our products are
similar to their predecessors. For example, football referees seem to prefer the traditional
snail-shaped whistle, so although we have dramatically improved the performance of the
product, our customers want it to look the same. We have also maintained the same
manufacturing tradition from those early days. The original owner insisted on personally
blowing every single whistle before it left the factory. We still do the same, not by
personally blowing them, but by using an airline, so the same tradition of quality has
endured.

The company’s range of whistles has expanded to include sports whistles (they provide
the whistles for the Soccer World Cup), distress whistles, (silent) dog whistlers, novelty
whistles, instrumental whistles (used by all of the world’s top orchestras), and many more
types. “We are always trying to improve our products,” says Simon. “It’s a business of
constant innovation. Sometimes I think that after 130 years surely there is nothing more
to incorporate. Of course, managing the operations in a small company is very different
to working in a large one. Everyone has much broader jobs; we cannot afford the
overheads of having specialist people in specialized roles.”

Simon adds, “But this relative informality has a lot of advantages. It means that we can
maintain our philosophy of quality amongst everybody in the company, and it means that
we can react very quickly when the market demands it. Nor is the company’s small size

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any barrier to its ability to innovate. On the contrary’, says Simon, ‘there is something
about the culture of the company that is extremely important in fostering innovation.

Because we are small we know each other and we all want to contribute something to the
company. It is not uncommon for employees to figure out new ideas for different types of
whistles. If an idea looks promising, we will put a small and informal team together to look
at it further. It is not unusual for people who have been with us only for few months to start
wanting to make innovations. It’s as though something happens to them when they walk
through the door to their natural inventiveness.”

Source: Slack, Chambers, and Johnson, 2019

Revision Question 1.1

Evaluate distinctions between advantages of operations management in small and

large organisations.

1.7 Operations Management in Not-for-Profit Organisations

The relevance of operations management also extends to organisations whose purpose is not to make profits. For
example, managing operations in an animal welfare charity, public hospital or a research organisation is the same
as in commercial organisations. The decisions made how to produce products and services, invest in technology,
contract out some of their activities, establish performance measures, and improve their operations performance
and so forth are the same.

Knowledge Check Questions 1.1

1 Distinguish between operations management in the health sector and the

automobile industry.

2. Compare and contrast operations management in the public and private sectors.

3. Analyse the need, if any, for operations management within the not-for-profit
organisation sector.

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1.8 Summary
The introduction has set out the definition, general scope and importance of this area of study and practice. The
field of operations management relies on knowledge from most other functions (finance, marketing, supply chain
management, human resources) and the Board of Directors to formulate strategic direction in terms of operations
as will be discussed later on this module guide.

The operations manager has varied responsibilities that requires communication with the entire organisation to be
effective and efficient in making operations management decisions. Covid-19 has influenced many areas of
business operations and most operations managers have had to adapt very quickly in order to remain sustainable.

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Strategies in Operations Management

Answers to Activities
Video Activity 1.1
Student is required to provide justification in terms of the study of operations management. Student is required to
apply the knowledge from the Video.

Video Activity 1.2

Student is requied to analyse the primary function of operations management as per the vdeio. Student is required
to mention the transformation process.

Think Point 1.1.

Student is required to analyse a business environment in order to construt a definition of operations management.
The student needs to include the following key aspects when providng a definition:
1. Russel and Taylor (2019) states that operations management is often defined as a transformation
process.
2. Heizer and Render (2020) define operations management as the activities that create value in the form
of goods and services by transforming inputs into outputs.

Think Point 1.2

Student is required to provide an analysis of how operations management has provided value to the chosen
company.

Think Point 1.3.

Student is required to analyse the inputs and outputs essential to the transformation process within the chosen
organisation. The student is required to identidy xxamples of the below inputs and outputs:
Inputs
• Material
• Machines
• Labour
• Management
• Capital
Outputs
• Goods
• Services

Activity 1.1
1. Student is required to find a company within Brazil, Russia, India, China, and South Africa (BRICS) and
analyse the operations management within each company. The analysis needs to include and make

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mention of the volume of demand the company is managing, the variation in demand during the day,
week and year, and the variety of products or services offered.
2. Student is required to apply to each company.

Activity 1.2
1. Student is required to apply the operations management knowledge learnt throughout the unit to a
furniture store’s operatonal processes.
2. Student is required to identify challenges, and a solution to overcome the identified challenge. It is
essential the student applies the operations managmenet theory to the solutions identified.

Knowledge Check Questions 1.1

1. The health sector is far more regulated and requires extensive training and qualifications to render the service
whereas the automobile sector has fewer regulations and does not require academic knowledge to conduct
either their services or manufacturing processes.

2. Public management entails dealing with and/ or controlling the needs and interests of 'the whole', which is in
many cases the nation. Private management involves managing the narrower needs of an individual or group.
For example, the public sector provides potable water to communities whereas Chicken Licken provides food
products to specific individuals within the public.

3. The relevance of operations management also extends to organisations whose purpose is not to make profits.
For example, managing operations in an animal welfare charity, public hospital or a research organisation is the
same as in commercial organisations. The decisions made how to produce products and services, invest in
technology, contract out some of their activities, establish performance measures, and improve their operations
performance and so forth are the same.

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 Strategies in Operations Management

Unit
2: Global Operations

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

2.1 The Operation Function • Critique the operations management Function

2.2 The Evolution of • Discuss and analyse reasons why businesses operate globally
Operations and Supply
Management

2.3 The New Operations • Assess the major difference between the old and new operations
Agenda agenda

2.4 Globalisation • Determine the impact of globalisation on local business

2.5 Summary • Summarise topic areas covered in unit

Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson
Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management.

Operations, strategy, and Information Technology. Ninth Edition International
Edition: McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C., Harrison
A., Johnson R. (2010) Operations Management. SA: Pearson.

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2.1. The Operation Function

Activities in operations management include work organisation, selecting processes, arranging layouts, locating
facilities, designing jobs, measuring performance, controlling quality, scheduling work, managing inventory, and
planning production. Operations managers deal with people, technology and deadlines. Operations managers
need good technical, conceptual, and behavioural skills. Their activities are closely intertwined with those of other
functional areas of the organisation such as Finance/Accounting, Marketing, Human resources and suppliers.

Activity 2.1

What form of operations take place within your organisation?

Recommend what you would implement to improve this system.

Activity 2.2

How can you improve the interaction between the operations function,
marketing and the finance departments?

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Finance/Accounting

Production and inventory data, Budgets, Cost analysis,

Capital budgeting requests, Capital investments,
Capacity expansion and Stockholder requirements
technology plans

M
S Order materials,
a
Production & delivery
u Product/service, r
schedules, Quality availability, lead-time
p requirements, and k
estimates, status order,
p Design/performance e
Delivery schedules
l specs t
i I
e Operations n
r g
s

Sales forecasts,
Materials availability,
customer orders,
Quality data, Delivery
customer feedback,
schedules, Designs
promotions

Personnel needs, skills set, Hiring /firing, Training, Legal

Performance evaluations, job requirements, Union contract
designs, Work measurement negotiations
Human resources

Figure 2.1 Operations as a Technical Core

Source: (Russel and Taylor, 2019)

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2.2. The Evolution of Operations and Supply Chain Management

The widespread production of consumer goods and operations management did not start until the industrial
revolution in the 1700’s. Before that, skilled crafts-people and their apprentices fashioned goods for individual
customers from studios in their own homes. Every piece was unique, hand-fitted, and made entirely by one person,
a process known as craft production. Craft production still exists today.

The availability of coal, iron ore, and steam power set into motion a series of industrial inventions that revolutionised
the way work is performed. Great mechanically powered machines replaced labour as the primary factor of
production and brought workers to the central location to perform tasks under the direction of the ‘overseer’ in a
place called a “factory”.

This revolution first started with the textile mills, grain mills, metalworking and then machine-making facilities.
Around the same time Adam Smith (1776) proposed the division of labour, in which the production process was
broken down into a series of small tasks, each performed by a different worker. The specialisation of the workers
on limited, repetitive tasks allowed them to become very proficient at the tasks they performed.

Video Activity 2.1

Evolution of Production to Operations Management & Historic evolution of

Operations Management

https://www.youtube.com/watch?v=eDPtRoiJE2A

Watch the video at the link above in order to validate the importance of the
evolutionary history of operations management.

A number of people contributed to the revolution in different ways. This was followed by the introduction of
interchangeable parts, scientific management, mass production, the quality revolution, lean production and supply
chain management which was born to manage global supply chain. Refer to the table showing historical events in
operations management below (Russel and Taylor, 2019; Heizer and Render, 2020).

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Table 2.1 Evolution of Operations Management

Era Events/Concepts Dates Originator
Industrial Revolution Steam engine 1769 James Walt
Division of labour 1776 Adam Smith
Interchangeable parts 1790 Eli Whitney
Scientific Management Principles of scientific
management 1911 Frederick W Taylor
Time and motion studies Frank and Lilian Gilbreth
Active scheduling chart 1911 Henry Gantt
Moving assembly line 1912 Henry Ford
1913

Human Relations Hawthorn studies 1930 Elton Mayo

Motivation theories 1940s Abraham Maslow
1950s Frederick Herzberg
1960s Douglas McGregor
Operations Research Linear Programming 1947 George Dantzig
Digital computer 1951 Remington Rand
Simulation, waiting line
theory, decision theory,
PERT/CPM 1950s Operations research groups
MRP 1960s Joseph Orlicky, IBM, and
1970s others
EDI, CIM Auto industry, DARPA
Quality revolution JIT (Just-in-time) 1970s Taiichi Ohno (Toyota)
TQM (Total quality 1980s W. Edwards Deming,
management) Joseph Juran
Strategy and operations 1990s Wickham Skinner, Robert
Reengineering 1990s Hayes
Six Sigma Michael hammer, James
Champy
GE, Motorola
Internet Revolution Internet, WWW 1990s ARPNET, Tim Bernrs-Lee
ERP, supply chain 1990s SAP, Oracle, Dell
management 2000s Amazon, Yahoo, EBay,
E-commerce Google and others

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Globalisation World Trade Organisation 1990s GATT

European Union Europe
Global supply chains 2000s China, India
Outsourcing Emerging economies
Services science IBM
Sustainability Global warming Today Numerous companies,
Carbon footprint scientists, statesmen and
Green products World Economic Forum
Corporate social United Nations
responsibility (CSR)
UN Global Impact

Source: (Russel and Taylor 2019)

2.3. The New Operations Agenda

The business environment has a significant impact on what is expected from operations management. New
pressures have led to a need for new responses in operations management. It is these responses which have led
to the new agenda. This speaks to trends that have existed before but now have been accelerated.

Case Study: Operations Management In Practice At Jaguar

Introduction

In recent years, many UK manufacturing and service industries have transformed their
production methods and processes. Businesses that have been at the leading edge of change
have prospered, leaving their competitors behind. Key ingredients in this process of change
have been an emphasis on creating total quality systems that involve:

• Getting it right first time at every stage of production;

• Lean production to cut out waste and to simplify manufacturing systems;

• Creating environmental management systems that guarantee:

- The highest levels of environmental performance within an organisation

- Excellent relationships with the local community.

Today, the Halewood plant is dedicated to producing the new Jaguar X’ Type. This is a car for
the 21st century. It has been developed as a result of feedback from a massive global consumer
research programme. The programme has ensured that the car’s designers, engineers and

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marketers remain in tune with the needs and expectations of potential customers at every
stage in the car’s development. This case study examines ways in which Jaguar has
transformed its new assembly plant at Halewood to guarantee world class performance in its
production systems.

Developing the site

In January 1960, Ford bought the 1390 hectare Greenfield site in Halewood from Liverpool
Corporation and the British Transport Commission. The Halewood site quickly became
established as a leading car manufacturing plant and was associated particularly with Ford
Escort production. When Ford acquired Jaguar in the early 1990’s, Halewood also began to
produce body panels for Jaguar cars. In 1998, Halewood was announced as the production
site for the all new Jaguar X’ Type sports saloon. It would replace Ford Escort production,
which was to be phased out by 2000.

Halewood was chosen to produce the X’ Type because:

• Existing Jaguar plant in the Midlands lacked sufficient capacity.

• The ‘Britishness’ associated with Jaguar made overseas production.

However, it was clear that the Halewood plant would need to be dramatically updated and
upgraded if it was to become a world leader. So £300 million was set aside to modernize the
plant. Coupled with this was a programme for changing ways of working and also the culture
within the plant. Many Halewood employees had previously produced Ford Escorts using
traditional manufacturing techniques that did not encourage them to show initiative. They have
now learned new approaches that involve empowerment and flexibility; more responsibility has
been given to operatives at the sharp end of production.

Creating a highly efficient manufacturing site

Halewood’s refurbishment process involved replacing almost all of the production facilities so
as to:

• Deliver the exceptional quality levels required for a premium sports saloon;

• Create a highly efficient ‘lean manufacturing’ environment.

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Lean production involves standardizing work processes and processes to cut out duplication
and waste. The standard that is set is the best identified method of operation currently
available. This standard is continuously improved. Halewood has the capacity to produce at
least 100,000 vehicles a year. For the first time for Jaguar, the site also offers all major
production facilities on a single location. Press Shop, Body Construction, Paint Shop and the
Trim and Final lines are all adjacent to each other and laid out for a straightforward, sequential
production flow.

The plant’s productive efficiency has been further improved by developing a new Supplier Park
alongside. Totally new production lines have been installed in Body Construction and for the
Trim and Final area, with the latter abandoning floor conveyors in favour of overhead
conveyors as part of the overall drive for improved production quality. The Press Shop has
been fully refurbished. Two state-of-the-art computerized measuring machines have been
installed to ensure the dimensional accuracy of the metal stampings. In the Paint Shop, 70%
of the equipment has been replaced to deliver the renowned smooth and glossy finish of
Jaguar’s four-coat paint system used in existing Jaguar plant.

Months of planning were required to ensure that all the different building and installation
activities could be achieved simultaneously within the product development programme. While
the redesign of plant and processes at Halewood has been essential to creating World Class
Systems based on total quality and lean manufacturing, another key part of the change
process has been to alter the Halewood workforce’s working practices and ways of thinking.
The transformation of the working processes, environment and culture at Halewood started
two and a half years prior to phasing out the Escort. A key priority was to transform a ‘them
and us’ view of management held by many Halewood employees. The first stage in the
strategy for overhauling customs and practices was the production of the ‘Halewood Vision’.
This is a statement outlining the principals involved in creating a world-class manufacturing
facility. A new set of working relationships was agreed with employees and each employee
received a copy of what became known as the ‘green book’, which set out the operating
principles required to move the business forward.

Three pillars for successful change

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Centres of
Quality Culture
Excellence

3Figure 2.2: Three Pillars for Successful Change

In order to create the necessary improvements at Halewood, the management team focused
on three pillars seen as essential to support the required changes.

Production

The Quality pillar is based on transferring Jaguar’s already existing quality standards to the
Halewood plant. This involved creating consistency across the production process so that, for
example, every shift would be working the same way. At the same time, emphasis was given
to reducing time spent on activities that do not add value to the manufacturing process. Line
operators were given responsibility for identifying continuous improvements that could be
made. Operators were organized into smaller teams working with a group leader. These
groups have been given considerable responsibility for identifying a need for change and then
driving it through. By being given experience of production methods in Jaguar’s leading edge
plants in the Midlands, Halewood operators and group leaders learned more about the
changes required.

The Centres of Excellence pillar was seen as the key driving force in changing people’s
thinking. Bringing a large plant like Halewood to the required level of performance in a single
leap would have been too great a task, so the concept of ‘Centres of Excellence’ was born.
Under this, manufacturing improvement could be made first within smaller areas through close
co-operation and teamwork. As the established Centres of Excellence demonstrated progress,
the concept was rolled out across more and more areas, until all the Centres of Excellence
linked together and standards across the whole plant were transformed. Initially, just five
showcase Centres of Excellence were established in March 1999. Each participating

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workgroup took responsibility for generating improvements through a specified series of

actions, including:

• Standardized work processes;

• Improvements to component delivery at line-side;

• A ‘right first time’ approach;

• A ‘best-in-class’ vision for general housekeeping.

The most obvious difference that this created was better cleanliness and tidiness. Line-side
‘cardboard cities’ were cleared away, as new racking and packaging – some designed by the
operators themselves – were introduced to improve delivery to the production lines and to
ease component picking. Benches and lockers were relocated into purpose-built rest areas
and better floor surfaces were laid where necessary. In one of the initial centres of excellence,
the entire working area, including overhead conveyor systems, was completely rearranged to
a much more efficient layout designed by the chapter operators themselves, aided by
engineering colleagues.

Efficiency and quality

The improvements in efficiency and quality generated such enthusiasm that by the end of
1999, Centres of Excellence were established for 30% of the workforce. By the time Escort
production ended in July 2000, the concept had been extended throughout the plant. Centers
of excellence not only led to dramatic increases in productivity at Halewood, but also to
increased pride and commitment within the workforce.

The Culture change programme was the third pillar. This involved over-hauling existing
attitudes and ways of working to create an environment in which employees were encouraged
to take ownership so that they became involved in managing the process of continuous change
revolving around ‘lean production’. Implementing the Culture change programme involved
creating a series of workshops for managers, union representatives, supervisors and line
workers based on creating a new environment based on participation and empowerment.
These workshops communicated the concept of the ‘Halewood Difference’ programme, based
on supporting employee involvement in decision-making about production and production
processes.

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Fulfilling a role within the local community

As part of the drive to create world class performance Jaguar recognized the importance of
creating standards which best meet the needs of the wider community. This thinking is behind
Jaguar’s focus on meeting the requirements for a healthy environment. The new car is based
on company standards that prohibit the use of substances that have an adverse environmental
impact. In addition, the car’s design is such that it meets the stringent requirements of the
toughest exhaust and evaporative standards in the world. In preparing Halewood for the new
X’ type, Jaguar set out to make the production process cleaner and more environmentally
efficient than ever before. New initiatives included:

• Introducing new, cleaner Paint Shop facilities and water-borne processes

• Eliminating expendable component packaging

• Creating a new Supplier Park next to the plant.

At the same time, improvements have been made to Halewood’s working environment,
including better lighting, heating and ventilation. The plant’s energy consumption has also
been reduced. A materials usage strategy has been adopted at Halewood which aims to use
only 100% durable, reusable, returnable packaging within the manufacturing process.

Commitment to the community

Jaguar’s commitment to the community is also strongly in evidence at a local level. Jaguar is
developing relationships to integrate Halewood into the local community and the whole of
Merseyside. Community Relations is a key part of the organisation’s corporate philosophy.
This approach is exemplified in the process of re-skilling the Halewood workforce. As part of
the overall training programme, over 800 employees spent a week involved in local community
projects. These involved employees in:

• Helping elderly local residents in pruning and redesigning their gardens,

• Designing and creating a school garden area, and

• Helping to restore the grounds of a local church.

Jaguar employees are thus able to feel part of a caring organisation with a commitment to
setting world class standards that cover all areas of production. They also know that wider

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aspects of running a world class business include concern for the environment and the local
community.

Conclusion

Creating World Class Performance involves transforming the way in which a company
organizes itself and its relationships with employees and the wider community. The starting
point is to transform production processes to ensure total quality, lean manufacturing and
dedicated environmental systems. However, to create this transformation it is first necessary
to change people’s thinking about behaviours within the organisation.

Source: Read more:http://businesscasestudies.co.uk/jaguar/creating-world-class-

performance-in-a-jaguar-assembly-plant/creating-a-highly-efficient-manufacturing-
site.html#ixzz3fxq2FyIh. With reference to the historical development of operations
management, answer the following questions.

Questions

1. Examine the various operations issues and practices at Jaguar that tie in with the
historical perspective of operations management.

2. Examine current practices in operations management at your company.

3. Is your company moving towards world-class operations management? Discuss.

4. Assess the area(s) your company is operating in.

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Changing business Prompting operations

• Globalisation.
environment responses
• Increased cost-based • Increased pressures.
competition. • Information-based
• Higher quality expectation. technologies. Internet-based
• Demands for better service. integration of operations
• More choice and variety. activities.
• Rapidly developing • Supply chain relationship
technologies. management.
• Frequently new • Customer relationship
product/service introduction. management.
• Increased ethical sensitivity. • Flexible working patterns.
• Environmental impacts are • Mass customisation.
more transparent. • Fast time to market
• More legal regulation. methods.
• Greater security awareness. • Lean process design.
• Environmentally sensitive
design. Supplier
partnerships.
• Failure analysis.
• Business recovery planning.

Figure 2.3 : Changes in the Business Environment: How They Shape a New Operations Agenda
4

Source: Slack , Chamber and Johnson, (2019)

Think Point 2.1

Critically discuss the operational challenges that your organisation is

currently facing?

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2.4. Globalisation
Two thirds of today’s businesses operate globally through markets, global operations, global financing, and global
supply chains. It takes the form of selling in foreign markets, producing in foreign lands, purchasing from foreign
suppliers, or partnering with foreign firms. Organisations go “global” to take advantage of favourable costs, to gain
access to international markets, to be more responsive to changes in demand, to build reliable sources of supply,
and to keep abreast of the latest trends and technologies (Russel and Taylor, 2019). Heizer and Render, 2020,
discuss eight reasons why domestic businesses go “global”.

Video Activity 2.2

Video link 1: Globalization I - The Upside: Crash Course World History #41
https://www.youtube.com/watch?v=5SnR-e0S6Ic

Watch the video on the link above and Analyse the advantages of the eight
reasons for globalization listed below.

Eight reasons why domestic business go global

2.4.1 Reduction of Costs

International operations seek to take advantage of the tangible opportunities in reducing their costs. Foreign
countries have lower wage structures and lower direct and indirect labour cost. Less restrictive government
regulations on a wide variety of operations practices (e.g. environmental control, health, safety regulations etc.)
can reduce the costs of operations in a foreign country. Tax and tariff incentives are additional reasons used to
establish operations in a foreign country.

2.4.2 Reduce Risks

Globalisation has become easier and less hazardous for international operations because of international trade
operations. GATT, for example, seeks to reduce tariffs and promote conditions of fair competition and increased
investment opportunities by lowering barriers to create free flow of goods across international borders.

2.4.3 Improving the Supply Chain

The supply chain can be improved by locating facilities in countries where unique resources are available. These
resources may include expertise, labour or raw materials.

2.4.4 Provision of Superior Goods and Services

Improved understanding of local conditions and differences in culture permits firms to customize products and
services to meet unique needs. Closeness to foreign customers helps to improve response times to meet
customers’ changing product and service requirements. It also offers a better after-sales service.

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2.4.5 Establishing New Markets

As international operations require local interaction with foreign customers, suppliers and other competitors, they
are in a position to explore new and unique opportunities for new products or services. Knowledge of these markets
helps to increase sales and diversify their customer base. Global operations also add production flexibility so that
products and services can be switched between economies that are booming and those that are not.

Revision Questions 2.1

Analyse the impact that the Covid pandemic has had in terms of organisations
exploring new markets.

2.4.6 Improving Operations

Learning does not take place in isolation. The world is full of ideas and firms can learn from their customers by
allowing the free flow and exchange of ideas.

Practical Question 2.1

Justify the process of organisations benchmarking other firm’s operational

improvements.

2.4.7 Attracting and Retaining Talented Employees

A Global operation is in a position to identify, attract and retain talented employees from across the world. It needs
people in all functional areas and areas of expertise worldwide. Global firms can recruit and retain talented
employees because they provide greater growth opportunities and insulation against unemployment during times
of recession.

Think Point 2.2.

Analyse the impact of Microsoft having an international team of engineers on

MicroSoft’s success.

2.4.8 Product Design and Process Technology

A basic product or service is designed, wherever possible, to fit global tastes. If local variation is needed, it is
handled as an option rather than as a separate product. Process technology is also standardised globally
(Schroeder et al., 2011). Failing trade barriers and the internet paved way for globalisation. The World Trade
Organisation (WTO) has opened up the heavily protected industries of agriculture, textiles, and
telecommunications, and extended the scope of international trade rules to cover services and goods. The
European Union requires that strict quality standards be met before doing business with member countries.

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Strategic alliances, joint ventures, licencing arrangements, research consortia, suppliers’ partnerships, and direct
marketing agreements among global partners have proliferated (Russel and Taylor, 2019).

Practical Question 2.2

Criticise Apple’s decision to make standard iPhones for the international market.

Revision Questions 2.2

1. Analyse how changes in the external environment may affect the OM strategy
for a company. For example, what impact are the following factors likely to have
on OM strategy?

a. The occurrence of a major storm or hurricane.

b. Terrorist attacks of 9/11/01.

c. The much discussed decrease in the quality of American primary and

secondary school systems.

d. Trade Legislation such as WTO and NAFTA and changes in tariffs and
quotas.

e. The rapid rate at which the cost of health insurance is increasing.

f. The Internet.

2. Appraise ways in which the changes in the internal environment affect a

company’s OM. For example, what impact are the following factors likely to
have on OM strategy?

a. The increased use of Local and Wide Area Networks (LANs and WANs).

b. An increased emphasis on service.

c. The increased role of women in the workplace.

d. The seemingly increasing rate at which both internal and external

environments change.

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3. Operations managers are called upon to support the organisation's strategy.

Select three acceptable methods that the operations manager may employ to
achieve competitive advantage.

2.5. Summary
Operations can be viewed as a transformation process that turns inputs into outputs or greater value. Operations
management is the study of processes directly related to the creation and distribution of goods and services.
Increasingly these operations have been taking place outside of enterprise boundaries regarded as traditional.
This is the reason why managers need to understand that they need to manage operations not only for their firms
but on a global scale. Therefore, they ought to develop skills in coordinating operations across the global supply
chain (Russel and Taylor, 2019).

Think Point 2.3.

Evaluate the effectiveness of your organisation’s transformation process in

terms of cost effectiveness.

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Answers to Activities
Activity 2.1
Student is required to apply operations management to their organisation, and is required to recommend
improvements to the system.

Activity 2.2
Student is required to apply their knowledge.

Video Activity 2.1

Student is required to validate the importance of the evolutionary history of operations management.

Case Study:
• Student is required to examine the vaious operations issues and practices at Jaguar as per the case study
• Student is required to apply the current practices in operations management to their company
• Student is required to apply knowledge to their company
• Student is required to assess areas within their company

Think point 2.1

Student is required to discuss the operational challenges currently being faced by the chosen company

Video Activity 2.2

Student is required to analyse the advatages of the eight reasons for globalization listed below.
• Reduction of Costs
• Reduce Risks
• Improving the Supply Chain
• Provision of Superior Goods and Services
• Establishing New Markets
• Improving Operations
• Attracting and Retaining Talented Employees
• Product Design and Process Technology

Practical Question 2.1

Student is required to justify the process of organisations benchmarking other firm’s operational improvements.

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Think Point 2.2.

Student is required to analyse the impact of Microsoft having an international team of engineers on MicroSoft’s
success.

Practical Question 2.2

Student is required to criticise Apple’s decision to make standard iPhones for the international market. Student is
required to apply the knowledge learnt throughout the unit.

Think Point 2.3

Student is required to evaluate the effectiveness of the chosen organisation’s transformation process in terms of
cost effectiveness

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Unit
3: Productivity, Supply Chain
Strategy and Competitiveness

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

3.1 Introduction • Introduce topic areas for the unit

3.2 Productivity • Calculate and analyse productivity of organisations

3.3 Factors that Affect Productivity • Critically evaluate the Factors that Affect Production

3.4 Improving Productivity • Analyse the methods involved in Improving Productivity

3.5 Supply–Chain Management • Probe the elements of the Supply–Chain Management

3.6 Global Supply-Chain Issues • Conclude on the primary concerns affecting the Global Supply-
Chain

3.7 Purchasing • Analyse the Purchasing environment and the related functions.

3.8 Make-Or-Buy Decisions • Evaluate Make-Or-Buy Decisions using both qualitative and
quantitative techniques

3.9 Supply-Chain Strategies • Determine and apply appropriate Supply-Chain Strategies

3.10 Vender Selection • Use Vender Selection criteria to deduce the most suitable
vendors

3.11 Materials Management • Appraise the importance of Materials Management

3.12 Achieving Competitive Advantage • Analyse the methodologies used in Achieving Competitive
through Operations Advantage through Operations

3.13 Summary • Summarise topic areas covered in unit

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Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson
Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management.

Operations, strategy, and Information Technology. Ninth Edition International
Edition: McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C.,
Harrison A., Johnson R. (2010) Operations Management. SA:
Pearson.

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3.1. Introduction
Creation of goods and services requires changing resources into goods and services. This change ought to be
efficient in order to be more productive (Heizer and Render, 2020). The operations manager’s job is to increase
levels of efficiency and thus add more value to goods and services.

Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)

• Heizer, J & Render, B (2020). Operations Management. Sustainability and

Supply Chain Management. 13th Edition. Pearson Education, Cape Town.

Recommended Reading(s)/Textbook(s)

• Russel and Taylor (2019). Operations and Supply Chain Management. Eighth
edition. John Wiley & Sons Singapore Pte.Ltd.

• Journal Article: Criteria for supplier selection: A literature review

https://www.researchgate.net/publication/314117457_Criteria_for_supplier
_selection_A_literature_review

3.2. Productivity
The difference between production and productivity:
Production is the conversion of raw materials into finished goods that can be used by the customer, whereas
productivity is a ratio of Output.

Productivity of Land
By improving methods of planting, fertilisation and harvesting of crops, we can increase the harvest tonnage from
1 to 1.5 tons per hectare. We can then say that the productivity of the land will have increased by 50%.

Productivity of Materials
A team of skilled carpenters with accurate equipment uses 4 metres of timber to construct a dining room suite. A
second group of carpenters uses 4.5 metres of timber to produce the same dining room suite. Which group has
the higher material productivity?

Productivity of Machines
A forming press has a process time of 7 minutes and a load and unload time of 3 minutes. Therefore, for every
hour 6 units can be produced. If we had to improve the method of loading and unloading, we may be able to reduce
this time to 1 minute. We can now produce 7.5 units per hour. Our machine productivity has now increased by 25%
(7.5/6).

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Productivity of Labour
A bricklayer can lay 500 bricks per day. After improving the method, he can now lay 700 bricks per day. This is an
increase of 40%. (200/500) x 100 = 40%.

Think Point 3.1.

Analyse the importance of productivity measures as a tool that could be used for
improving the organisations profitability.

Example:
Bakers Bread produces 10 000 loaves of bread per day. The factory has 500 workers, each working
8 hours per day.
Remember our definition of productivity - Output
Input

Therefore, our output is bread which equals 10 000 loaves

And our input is man hours which is 500 worker’s x 8 hours per day = 4000 man hours.
So if you calculate 10 000
4 000
the answer is = 2.5

This means nothing at this stage, unless you have something to compare it with e.g.
Bakers Bread plans to produce 12 500 loaves of bread per day using 480 workers each working
8 hours per day.
Therefore: The Plan Productivity is 12 500
3 840
= 3.26

3.26-2.5
Actual versus plan = 2.5
x 100% = 30.4 % increase

Activity 3.1

Calculate the productivity using the information below.

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1996 1997 1998 1999

Fridges produced per annum 2 508 000 3 207 000 3 759 000 4 056 000

No. of workers 200 250 350 400

Hours per day 8 8 8 8

Working days per year 250 252 251 253

Firstly, let us plot our production figures on a graph.

• Analyse the graph and comment on our performance
• Now calculate the productivity
• Plot the productivity on a separate graph
• Now analyse the performance
• What can you conclude?

Solution:

Output 2 508 000 3 207 000 3 759 000 4 056 000

Input 400 000 504 000 702 800 809 600

Productivity 6.27 6.36 5.35 5.01

Activity 3.2

Calculate the productivity of your department

The next step is to now calculate the productivity of your own departments, plot the results and then comment on
the performance.
Remember by using productivity ratios, you will be able to identify problem areas and thereby take any action if
necessary.

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3.3. Factors that Affect Productivity

Several factors can affect productivity and these include: Methods; Capital; Quality; Technology and
Management.
You have to type a lengthy report. If you are a typist of average speed, you can possibly complete three pages
per hour. How then can you improve your productivity?
• Enrol on a short course to improve your typing skills
• Replace your typewriter with a compute
• Outsource the typing

A common mistake that people make is that they believe workers are the main determinant of productivity.
According to that theory, productivity gains are achieved by getting employees to work harder. However, many of
the productivity gains have come from technological improvements e.g. paint rollers, power lawn mowers, copying
machines, microwave ovens, washing machines, calculators, computers, email, and many other electric and
electronic items/goods.

3.4. Improving Productivity

There are a number of ways to improve productivity:
• Develop productivity measures for all operations; measurement is the first step in managing and
controlling an operation
• Consider the system as a whole in deciding which operations to concentrate on. Find bottleneck
operations in the system and try to improve them
• Develop methods for achieving productivity improvements such as getting ideas from the workers,
studying how other companies have improved productivity and re-examining the way work is done
• Establish reasonable goals for improvement
• Obtain support of top management
• Measure improvements and publicise them

Think Point 3.2.

Analyse the effectiveness of productivity measures as a means to enhancing

productivity.

3.5. Supply–Chain Management

Supply-chain management is the integration of the activities that procure materials, transform them into products
and deliver them to the customer via a distribution system.

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Supply-chain management includes:

• Transportation
• Credit and cash transfers
• Suppliers
• Distributors and banks
• Accounts payable and receivable
• Warehousing and inventory levels
• Order fulfilment
• Forecasting
• Production

As companies strive to improve their competitiveness, quality, cost reductions and speed to market, they place
added emphasis on supply-chain management. The key to effective supply-chain management is to make
suppliers partners.

The diagram below offers an example of a working model of a supply chain structure.

Figure 3.1: Supply Chain Model

5

Source: Heizer and Render (2020)

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Video Activity 3.1

What is Supply Chain Management? Definition and Introduction | AIMS UK
https://www.youtube.com/watch?v=lZPO5RclZEo

Watch the video to Analyse the importance of the supply chain in achieving an
organisation’s objectives

Table 3.1: Organisation’s Overall Strategy

LOW-COST STRATEGY RESPONSE STRATEGY DIFFERENTIATION
STRATEGY

Supplier’s goal Supply demand at lowest Respond quickly to changing Jointly develop
possible cost requirements products and options

Primary selection Select primarily for cost Select for capacity, speed and Select for product
criteria flexibility development skills

Process Maintain high utilisation Invest in excess capacity and Develop modular
characteristics flexible processes processes

Inventory Minimise inventory throughout Develop responsive systems Minimise inventory to

characteristics the chain with buffer stock avoid obsolescence

Lead time Shorten lead times Reduce production lead-time Reduce development
characteristics lead-time

Product design Maximise performance and Reduce set-up times Use modular design
characteristics minimise costs

Source: Heizer and Render (2020)

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3.6. Global Supply-Chain Issues

When companies enter the global market, expanding their supply chains becomes a strategic challenge.
Distribution systems in certain countries may be inferior or unreliable. Additionally, companies may be faced with
tariff quotas. Furthermore, market instabilities, such as the devaluation of the rand, are common in newly emerging
industrial economies.

Heizer and Render (2020) suggests that supply-chains in a global environment must be:
• Flexible enough to react to sudden changes in parts availability, distribution or shipping channels, import
duties and currency rates
• Able to use latest computer and transmission technologies to manage the shipment of parts
• Staffed with local specialists to handle duties, trade, freight, customs and political issues

Think Point 3.3

Critically discuss the choice of the supply-chain strategy you would use if your
company were to enter the global market

3.7. Purchasing
Purchasing can be defined as the acquisition of goods and services. For both goods and services, the cost of
purchases as a percent of sales is often substantial. Since such a huge portion of revenue is devoted to purchasing,
an effective purchasing strategy is vital. Purchasing provides a major opportunity to reduce costs and increase
profit margins. The objective of purchasing activity is:
• To help identify the products and services that can be obtained externally
• To develop, evaluate and determine the best supplier, price and delivery for those products and
services

3.8. Make-Or-Buy Decisions

This entails choosing between producing a component or service or purchasing it from an outside source. The
purchasing department’s role is to evaluate alternative suppliers and provide current, accurate and complete data
relevant to the buy alternative. Table 3.2 highlights considerations for the make-or buy decision.

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Table 3.2: Make or Buy Decisions

4

Reasons for Making Reasons for Buying

• Maintain core competence. • Frees management to deal with its primary

• Lower production cost. business.
• Unsuitable suppliers. • Lower acquisition costs.
• Assure adequate supply (quantity or • Preserve supplier commitment.
delivery). • Obtain technical or management ability.
• Utilise surplus labour or facilities. • Inadequate capacity.
• Obtain desired quality. • Reduce inventory costs.
• Remove supplier collusion. • Ensure alternative sources.
• Obtain unique item that would entail a • Inadequate managerial or technical
prohibitive commitment for a supplier. resources.
• Protect personnel from a layoff. • Reciprocity.
• Protect proprietary design or quality. • Item is protected by a patent or trade secret.
• Increase or maintain the size of the
company.

Source: Heizer and Render (2020)

Revision Questions 3.1

Your company, (a manufacturer of computer equipment),

requires a new photocopy machine. Assess whether it would be
cheaper to make or buy the photocopy machine.

3.9. Supply-Chain Strategies

Heizer and Render (2020) maintain the following strategies being used:
Many Suppliers
With the many-supplier strategy, the supplier responds to demands and specification of a ‘request for quotation’,
with the order usually going to the lowest bidder. This strategy plays one supplier against another. Suppliers tend
to compete aggressively with each other. This approach holds the supplier responsible for maintaining the
necessary technology, expertise, quality, cost and delivery schedules.

Few Suppliers
A strategy of few suppliers implies that rather than looking for short-term attributes, such as low cost, a buyer is
better off forming a long-term relationship with a few dedicated suppliers. Using few suppliers can create value by
allowing suppliers to have economies of scale. Few suppliers, each with large commitment to the buyer, may also
be more willing to participate in JIT systems, as well as provide innovations and technological expertise.
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Vertical Integration
This simply means developing the ability to produce goods or services previously purchased or actually buying out
(acquiring) a supplier or distributor. This strategy has the advantage of improving research and development,
quality and product flexibility.

Keiretsu Networks
Manufacturers sometimes offer financial support to their suppliers through loans. The supplier then becomes part
of the company coalition known as Keiretsu. Members of Keiretsu are assured long-term relationships and are
therefore to function as partners.

Virtual Companies
Virtual companies rely on a variety of supplier relationships to provide services on demand. These companies have
fluid; moving organisational boundaries that allow them to create unique enterprises in order to meet changing
market demands. These relationships may provide a variety of vendor services such as doing the payroll, recruiting
personnel, designing products, providing consulting services, manufacturing components, conducting tests or
distributing products.

3.10. Vender Selection

A firm that decides to buy components instead of making them must select suitable vendors. Vendor selection
considers numerous factors, such as:
• Inventory and transportation costs
• Availability of supply
• Delivery performance
• Quality and reputation of suppliers
• Financial strength of the supplier
• Manufacturing range
• Technical assistance
• After-sales service
• Labour/trade relations
• Packaging
• Warranties and guarantees

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3.11. Materials Management

The purpose of materials management is to obtain efficiency of operations through the integration of all material
purchases, movement and storage activities. If transportation and inventory costs are high, the emphasis should
be placed on materials management. Due to the high costs of moving materials, firms constantly evaluate their
means of distribution.

Companies usually move materials through the following channels:

Road
Trucks move a large amount of materials. Companies have put pressure on truckers to pick up and deliver on time,
with no damage to goods. Trucking firms are using computer technology to monitor driving, weather patterns,
loading and unloading methods, reducing fuel consumption and finding the most effective routes.

Rail
Containerisation has made inter-modal shipping of truck trailers on railroad flat cars a popular means of distribution.
With the growth of JIT, rail transportation has suffered a setback because small-batch manufacturers require
frequent, smaller shipments.

Airfreight
Seldom used because of the high cost. It is used mainly for national or international movement of lightweight items
such as medical and emergency supplies, flowers, documented. Airfreight offers speed and reliability.

Shipping
Shipping remains one of the oldest means of freight transportation. The usual cargo on ships are bulky products
such as iron-ore, grains, cement, coal, chemicals and petroleum products.

Pipelines
Pipelines are an important form of transporting crude oil, natural gas and other petroleum and chemical products.

Think Point 3.4

Critically comment on the method of transportation you are currently using. (Do
you think this is the best mode of transport? Suggest practical alternatives, if
any)

Practical Application Or Examples

Critically analyse the method of transportation your organisation is currently

using. (Do you think this is the best mode of transport? Suggest practical
alternatives, if any)

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3.12. Achieving Competitive Advantage Through Operations

Grütter (2010) argues that the term competitiveness is understood to imply different things in different fields. He
goes on to say that an organisation that does better at value addition for its customers may not necessarily be
competitive if it does so at a high cost, even if they made the right products for the right market. Hence an
organisation has to add value while being productive at the same time.

As discussed by Heizer and Render (2020) each of the three strategies, that is, differentiation, low cost and
response do provide opportunities for operations managers to achieve competitive advantage. Competitive
advantage means creating a system that has a unique advantage over other competitors.

The firm has to create value for customers in an efficient and sustainable way. Operations managers can use these
strategies in their pure form or in combination.

Competing on Differentiation – Heizer and Render (2020) give an example of Safeskin Corporation the
manufacturer of latex exam gloves as a good example of differentiation. Latex has differentiated itself and its
products by producing gloves designed to prevent allergic reactions about which doctors were complaining. When
direct competitors caught up Safeskin developed another product, the hypoallergenic gloves. They then added
texture to their gloves. They followed this up with the creation of synthetic disposable gloves for those allergic to
latex thus constantly staying ahead of competitors.

Differentiation is preoccupied with uniqueness. Imagination is the only limit to expanding uniqueness. Competing
on Cost- Heizer and Render (2020) further explain using the example of Southwest Airlines as a good example of
low cost approach. Southwest Airlines has fulfilled the need for low cost and what are called shop-hop flights. It
has used secondary airports and terminals, first come first serve seating, few fare options smaller crews flying
more hours, snacks only or even no meal at flights and no downtown ticket offices. They have also have matched
capacity and demand very well. Low-cost leadership is premised on achieving maximum value as defined by the
customer. This means that each of the ten operations management decisions has to be re-examined constantly
and consistently. The main focus is to reduce cost while meeting customer expectation.

Competing on Response- Heizer and render (2020) argue that this strategy is based on flexibility, reliability as well
as quick response. Response is therefore defined as a set of values that relating to rapid, flexible, and reliable
performance. A good example of this is Hewlett-Packard. They have demonstrated flexibility in their designs and
volume changes in the volatile world of personal computers.

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Video Activity 3.2

Strategies for Competitive Advantage: https://www.youtube.com/watch?v=1XVZVcCr0ds

Watch the video link to validate the above discussion in terms of the importance of
completive advantage.

Revision Questions 3.2

1. Mance Fraily, the Production Manager at Ralts Mills, can currently expect his
operation to produce 1000 square yards of fabric for each ton of raw cotton. Each
ton of raw cotton requires 5 labour hours to process. He believes that he can buy
better quality raw cotton, which will enable him to produce 1200 square yards per
ton of raw cotton with the same labour hours.

What will be the impact on productivity (measured in square yards per labour-hour)
if he purchases the higher quality raw cotton?

2. C. A. Ratchet, the local auto mechanic, finds that it usually takes him 2 hours to
diagnose and fix a typical problem. What is his daily productivity (assume an 8-
hour day)? Mr. Ratchet believes he can purchase a small computer trouble-
shooting device, which will allow him to find and fix a problem in the incredible (at
least to his customers!) time of 1 hour. He will, however, have to spend an extra
hour each morning adjusting the computerised diagnostic device. What will be the
impact on his productivity if he purchases the device?

3. Joanna French is currently working a total of 12 hours per day to produce 240 dolls.
She thinks that by changing the paint used for the facial features and fingernails
that she can increase her rate to 360 dolls per day. Total material cost for each doll
is approximately R3.50; she has to invest R20 in the necessary supplies
(expendables) per day; energy costs are assumed to be only R4.00 per day; and
she thinks she should be making R10 per hour for her time. Viewing this from a
total (multifactor) productivity perspective, what is her productivity at present and
with the new paint?

4. How would total (multifactor) productivity change if using the new paint raised Ms.
French’s material costs by R0.50 per doll?

5. If she uses the new paint, by what amount could Ms. French’s material costs
increase without reducing total (multifactor) productivity?

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3.13. Summary
To compete effectively, firms need to be more productive by maximising efficiency and they need to adopt one or
a combination of strategies. The professional manager is responsible for the effective use of resources as much
as the challenge is great, the rewards would benefit the entire society. Manufacturing organisations focus on
efficient production, as the equipment is usually organised in terms of production. Conversely customers are
involved in the service delivery process, so service operations need to rely on their staff to do the right things the
first time because the customer is often aware of how the service is performed.

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Answers to Activities

Think Point 3.1

Student is required to analyse the importance of productivity measures as a tool that could be used for improving
the organisations profitability.The following productivity measures need to mentioned:
• Productivity of land
• Productivity of materials
• Productivity of machines
• Productivity of labour

Activity 3.1
Student is required to utilise the following calculation to calculate productivity:
Productivity - Output
Input
Solution:

Output 2 508 000 3 207 000 3 759 000 4 056 000

Input 400 000 504 000 702 800 809 600

Productivity 6.27 6.36 5.35 5.01

Activity 3.2
Student is required to utilise the following calculation to calculate productivity:
Productivity - Output
Input

Think Point 3.2

Student is requiredto analyse the effectiveness of productivity measures. The student is required to mention the
following:
• Develop productivity measures for all operations; measurement is the first step in managing and
controlling an operation
• Consider the system as a whole in deciding which operations to concentrate on. Find bottleneck
operations in the system and try to improve them
• Develop methods for achieving productivity improvements such as getting ideas from the workers,
studying how other companies have improved productivity and re-examining the way work is done
• Establish reasonable goals for improvement

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• Obtain support of top management

• Measure improvements and publicise them

Video Activity 3.1

Student is required to watch the video and apply the knowledge learnt.

Think Point 3.3

Student is required to discuss the choice of the supply chain strategy the company would use to enter thr global
market. The student is required to mention the following:
Supply-Chains in a global environment must be:
• Flexible enough to react to sudden changes in parts availability, distribution or shipping channels, import
duties and currency rates
• Able to use latest computer and transmission technologies to manage the shipment of parts
• Staffed with local specialists to handle duties, trade, freight, customs and political issues

Think Point 3.4

Student is required to comment on the following method of transportation the company is using:
• Road
• Rail
• Airfreight
• Shipping
• Pipelines

Video Activity 3.2

Student is required to watch the video and apply the importance of competitive.

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Unit
4: Process Selection and Process
Measures

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

4.1 Introduction • Introduce topic areas for the unit

4.2 Process Planning • Assess the methodologies valuable in Process Planning

4.3 Process Selection • Appraise the methodology involved in the Process Selection

4.4 Process Selection with • Measure Process Selection types with Breakeven Analysis
Breakeven Analysis

4.5 Process Analysis • Determine appropriate Process Analysis given a business type

4.6 Process Strategies • Compare the different Process Strategies

4.7 Process Measures • Debate the validity of Process Measures

4.8 Summary • Summarise topic areas covered in unit

Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson
Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations,

strategy, and Information Technology. Ninth Edition International Edition:
McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C.,
Harrison A., Johnson R. (2010) Operations Management. SA: Pearson.

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4.1. Introduction
According to Russel and Taylor (2019), a process is a group of related tasks with specific inputs and outputs.
Processes exist to create value for the customer, the stakeholder, or society. Process design defines what tasks
need to be done and how they are to be coordinated among functions, people, and organisations.

Process Selection then is the development of the process necessary to produce the designed product. Process
strategy is an organisation’s overall approach for physically producing goods and services. Process decisions
should reflect how the firm chooses to compete in the marketplace, reinforce product decisions, and assist with
the achievement of organisational goals.

A firm’s process strategy defines the following:

Vertical integration: the extent to which the organisation will produce the inputs and control the outputs of each
stage of the production process.
Capital intensity: the mix of capital (i.e. equipment, automation) and labour resources used in the production
process.
Process flexibility: the ease with which resources can be adjusted in response to changes in demand, technology,
products or services and resource availability.
Customer involvement: the role of the customers in the production process.

4.2. Process Planning

Process planning entails determining how a product will be produced or a service provided. This includes deciding
what will be made in house or what will be outsourced. The organisation has to select processes, and develop and
document the specifications for manufacture and delivery.

Outsourcing – an organisation that sells products, assembles the product, makes all parts, and extracts the raw
material is entirely vertically integrated. However, most companies cannot or will not make all the parts. The
decision whether to make parts in-house or outsource is based on the consideration of the following factors (Russel
and Taylor (2019):
I. Cost
A determination should be made whether it will be cheaper to buy the item from suppliers or to make it in-house.
The cost of buying includes the buying price and the transport cost. The costs of coordinating production including
inventory costs can be very high as well.
II. Capacity
Companies that operate at below capacity may want to produce the parts themselves since they do not have
enough capacity to accommodate production/manufacturing. However, at times available capacity may not be
ample to make all the products. Volatile products should rather be made in-house and steady ones purchased from
outside.

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III. Quality
The ability to provide quality parts consistently is an important consideration in the outsourcing decision. It is much
easier to control the quality of goods if they are made in-house. But supplier partnerships and involvement in
designs can improve the quality of supplied parts.
IV. Speed
Buying from a supplier far from the organisation can end up not being a cost saving. Sometime smaller suppliers
can be very flexible and can therefore adapt quickly to changing circumstances. If speed is reliable then it is
effective.
V. Reliability
Reliability in terms of time and quality is crucial. Missed deliveries or even incorrect deliveries can affect
manufacturing negatively. Many companies also require that suppliers meet quality standards. The most common
applied quality standard is ISO 9000. Some organisations pay huge penalties for poor quality. Expertise
Companies good at making or even designing something may want to make parts in-house. Coca-Cola would not
like to release their trade secret to other organisations so they would rather make the product themselves.

Video Activity 4.1.

Outsourcing: Is it good or bad?

https://www.youtube.com/watch?v=7qeehDLYa8g

Watch the video above and debate the question that the video title asks.

4.3. Process Selection

The next step after process planning is to select the production process for the items that will be produced in-
house. Production processes can be categorised as follows (Russel and Taylor, 2019):
I. Projects
Projects take a long time to complete, involve a large investment of funds and resources and produce one item at
a time to consumer order. Some examples are construction projects, shipbuilding, new-product development, and
aircraft manufacturing.
II. Batch production
Batch production processes have many different jobs through the production systems at the same time, in groups
of batches. Products are thus made to customer order. This type of production process produces low volumes with
fluctuating demand.
III. Mass production
Mass production produces large volumes of a standard product for a mass market. Product demand is stable and
product volume is high. Automobiles are among goods that are mass produced, televisions, personal computers,
fast food and most consumer goods.

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Video Activity 4.2.

Types of Production Systems (Process, Mass, Flow, Batch, Job Shop & Project
Production Systems)

https://www.youtube.com/watch?v=YEJzW8rsIzo

Assess the applicability of the petroleum industry using the job shop process.

IV. Continuous production

Continuous production is used for very high-volume commodity products that are mostly very standardised. The
system is highly automated and is typically in operation continuously 24 hours a day. Examples include refined oil,
treated water, paints, chemicals, and some foodstuff. The process that is selected to create the product or service
has to be consistent with product and service characteristics respectively. The most important characteristic for
product and service selection are standardisation and demand volume. Figure 4.1 shows the product-process
matrix. The best process strategy is found on the diagonal of the matrix. Companies or products that are off the
diagonal have either made poor process choices or have found a means to execute a competitive advantage
(Russel and Taylor, 2019).

Think Point 4.1

Analyse the use of mass production in furthering China’s world domination of the
manufacturing sector.

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6 Figure 4.1: Product – Process Matrix

Source: (Russel and Taylor, 2019)

Table 54.1 – Analysis per Production Type

Project Batch Production Mass Production Continuous
Production
Type of Product Unique Made-to-order Made-to-stock Commodity
(customised) (standardised)
Type of customer One-at-a -time Few individual Mass market Mass market
customers
Product demand Infrequent Fluctuates Stable Very stable
Demand volume Very low Low to medium High Very high
No. of different Infinite variety Many, varied Few Very few
products
Production system Long-term project Discrete, job shops Repetitive, Continuous,
assembly lines process industries
Equipment Varied General purpose Special-purpose Highly automated
Primary type of Specialised Fabrication Assembly Mixing, treating,
work contracts refining

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Worker skills Experts, Wide range of skills Limited range of Equipment

craftsperson’s skills monitors
Advantages Custom work, Flexibility, quality Efficiency, speed, Highly efficient,
latest technology low cost large capacity,
easy of control
Disadvantages Non-repetitive, Costly, slow, difficult Capital investment, Difficult to change,
small customer to manage lack of far-reaching errors,
base, expensive responsiveness limited variety
Examples Construction, Machine shops, Automobiles, Paint, chemicals
shipping, print shops, televisions,
spacecraft bakeries, education computers, fast
food

Source: Russel and Taylor, 2019

Think Point 4.2

Assess the validity of the use of batch production for non-customized orders.

4.4. Process Selection with Breakeven Analysis

Russel and Taylor (2019) indicate that many quantitative techniques are available for selecting a process. One
that basis its selection decision on the cost trade-off associated with demand volume is the breakeven analysis.
The components of breakeven analysis are volume, cost, revenue and profit. Volume refers to the level of
production, usually expressed as the number of units produced and sold. We assume that the number of units
produced can be sold.

Cost is divided into two categories: fixed and variable. Fixed costs remain constant regardless of the number of
units produced, such as plant and equipment and other elements of overhead costs. Variable costs vary with the
volume of units produced, such as labour and material. The total cost of a process is the sum of its fixed costs and
variable costs. The variable cost is defined as volume time per unit variable cost.

Think Point 4.3

Critically analyse the cost structures in your organization indicating the share
that each type comprises in terms of total expenditure.

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Revenue on per unit basis is simply the price at which an item is sold. Total revenue is price multiplied by volume
sold. Profit is Total revenue minus total cost. The components can be expressed as an equation.
Total cost = fixed cost + total variable cost
TC = Cu +vc
Total revenue = volume x Price
TR = vp
Profit = total revenue – total cost
Z = TR – TC
= vp – (Cf + vcv)

Where Cf = fixed cost

V = volume (i.e., number of units produced and sold)
cv= variable cost per unit
p = price per unit

In selecting a process, it is useful to know at what volume of sale and production we can expect to earn a profit.
We want to make sure that the cost of producing a product does not exceed the revenue we will receive from the
sale of the product. By equating total revenue with total cost and solving for v, we can find the volume at which
profit is zero. This is called the breakeven point. At any volume above the breakeven point, we will make a profit.

A mathematical formula for the breakeven point can be determined as follows:

TR = TC
vp = cf + vcv
vp - vcv = cf
v (p - cv) = cf
Cf
v=
𝑝−𝐶𝑣

Practical Example 1 – Breakeven Analysis

Travis and Jeff own Up Right Paddlers, a new start-up company with the goal of designing, making, and marketing
stand-up paddle boards for streams and rivers. A new fitness craze, stand-up paddle boards are similar to
surfboards in appearance, but are used by individuals to navigate down rivers in an upright position with a single
long pole (or paddle), instead of sitting in tubes or rafts and floating down. The boards are constructed from heavy-
duty raft material that is inflatable, rather than the fibreglass material used in surfboards.

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Unlike surfboards that market for $500 to $1 000 each, paddle boards are typically sold for between $100 and
$400. Since Travis and Jeff are just starting out and the demand for paddle boards on the East Coast has not been
firmly established, they anticipate selling their product for $100 each. Travis estimates the fixed cost for equipment
and space will be $2 000, and the material and labour costs will run $50 per unit.

What volume of demand will be necessary for Travis and Jeff to break even on their new venture? (Russel and
Taylor, 2019).

Solution
Fixed cost = cf = $2000
Variable costs = cv =$50 per load
Price = p = & $100 per board
Cf 2000
V =p-Cv = 100-50 = 40 units

The solution can also be shown graphically as in the Figure 4.2.

Dollars

$5,000
Total cost line

$4,000

Breakeven
$3,000 point

Total revenue
line
$2,000

$1, 10 20 30 40 50 Units
00
Figure 4.2: Breakeven Analysis
7

Source: Russel and Taylor, 2011

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Practical Example 2 – Using break even analysis to guide process selection

When evaluating different degrees of automation for instance, breakeven analysis is very useful. More automated
processes have higher fixed costs but lower variable costs. The best processes depend on the anticipated volume
of demand for the product and the trade-offs between fixed and variable costs.

Jeff, the more optimistic of the two owners of Upright Paddlers, believes that demand for paddle boards will exceed
the breakeven point of 40 units calculated in example 1.

He proposes spending $10 000 in fixed costs to buy more automated equipment that would reduce the materials
and labour cost to $30 per board.

The boards would sell for $100, regardless of which manufacturing process is chosen. Compare the two processes
and determine for what level of demand each process would be preferred. Label Travis’s proposal as Process A
and Jeff’s proposal as Process B (Russel and Taylor, 2019).

Solution
Process A Process B
$2,000 + $50v = $10,000 + $30v
$20v = $8000
v = 400 units
If demand is less than or equal to 400 boards, the alternative with the lowest fixed cost, Process A should be
chosen. If demand is greater than or equal to 400 boards, the alternative with the lowest variable cost, process B
will be selected. Our decision can thus be confirmed be examining the next graph. Note that because the boards
will be sold for $100 per piece regardless of which process is used to make them, no revenue line is needed
(Russel and Taylor, 2019).

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$45,000
Total Cost of
Process A
$40,000

$35,000

Process A
$30,000 Process B

Total Cost of
Process B
$25,000

$20,000

$15,000
Choose
Process B
$10,000
Choose
Process A
$5,000

$0
0 200 400 600 800

Point of Indifference = 400 units

Figure 4.3: Breakeven Analysis
8

Source: (Russel and Taylor, 2019)

4.5. Process Analysis

Heizer and Render (2020) advises that when analysing and designing processes to transform resources into
goods, the following questions should be asked:
• Is the process that is designed to achieve competitive advantage in terms of differentiation,
response or low cost?
• Does the process eliminate steps that do not add value?
• Does the process maximize customer value as perceived by the customer?
• Will the process win orders?
Heizer and Render (2020) highlight the following tools that can be used to understand the complexities of
process analysis and design:

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Flow Diagrams
This is a schematic drawing of the movement of people, materials or product. These diagrams are useful in
understanding the analysis and communication of a process. An example of a flow diagram is depicted below:

Frame tube Frame-building Frame Hot-paint

bending work cells machining frame painting
THE ASSEMBLY LINE
TESTING Engines and
Incoming parts transmissions
28 tests
From Milwaukee
on a JIT arrival
Air cleaners Oil tank work cell schedule

Fluids and mufflers Shocks and forks

Fuel tank work cell Handlebars

Wheel work cell Fender work cell

Roller testing
Crating

Figure 4.4: Example of a Flow Diagram

9

Source: (Heizer and Render, 2020)

Time-Function Mapping
This is similar to a flow process chart, but with time added to the horizontal axis. With time-function mapping,
notes indicate the activities and arrows indicate the flow direction, with time on the horizontal axis.

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(a) “Baseline” Time Function Map

Order Receive
Customer product product

Process
Sales order

Production Wait
control

Plant A Print

Warehouse Wait Wait Wait

Plant B Extrude

Transport Move Move

12 days 13 days 1 day 4 days 1 day 10 days 1 day 0 day 1 day

52 days

Figure 4.5: “Baseline” Time Function Map

10

Source: (Heizer and Render, 2020)

(b) “Target” Time-function Map

Order Receive
Customer product product

Process
Sales order

Production
control Wait

Plant Print Extrude

Warehouse Wait

Transport Move

1 day 2 days 1 day 1 day 1 day

6 days

Figure 4.6: “Target” Time Function Map

11

Source: Heizer and Render (2020)

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Value-Stream Mapping
Helps managers understand to add value in the flow of material and information through the production process.
Value-Stream Mapping (VSM) takes into account not only the process but also the management decisions and
information systems that support the process.

Process Charts
Process charts use symbols and sometimes time and distance to provide an objective and structured way to
analyse and record activities that make up a process. They allow you to focus on value-added activities.

Service Blueprinting
A process analysis technique is one that that lends itself to a focus on the customer and the provider’s interaction
with the customer. An example of a Service blueprint is shown below:

Personal Greeting Service Diagnosis Perform Service Friendly Close

Level Customer arrives
#1 for service Customer departs

Customer pays bill

Determine Notify
Warm greeting specifics customer
and obtain No and recommend
service request an alternative
Standard provider
request Can
Level service be
#2 done and does No
Direct customer customer
to waiting room approve? Notify
customer the
car is ready

Yes Yes
Perform
Level required work
#3
Potential failure point
Prepare invoice

Figure 4.7: Example of a Service Blueprint

12

(Heizer and Render; 2020)

4.6. Process Strategies

Heizer and Render (2020) argues that there are basically four process strategies that an organisation can use,
and they are:
1. Process focus
2. Repetitive focus
3. Product focus
4. Mass Customisation

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Process Focus
According to Heizer and Render (2020), almost 75% of all global production is devoted to making low-volume,
high-variety products in a job shop environment. Such facilities are organised around performing processes. In a
factory, these processes might be departments such as welding, grinding, assembly and painting. In an office
environment, the processes include accounts payable, sales and salaries department.

In a restaurant, it may be the bar, kitchen, grill and bakery. Such facilities are process-focused in terms of
equipment, layout and supervision. They provide high degrees of product flexibility. Each process is designed to
perform a wide variety of activities and to handle frequent changes. Therefore, they are sometimes called
intermittent processes. These facilities have high variable costs with extremely low utilisation of facilities.

Repetitive Focus
Repetitive processes use modules, which are parts or components that have been previously prepared. The
repetitive process line is usually an assembly-line producing goods such as cars and household appliances
amongst other things. It is more structured and therefore has less flexibility than a process-focused facility. Fast
food outlets are examples of repetitive processing. There is a certain amount of pre-processing done e.g. meat,
cheese, sauce, onions are prepared in advance.

Product Focus
High-volume, low variety processes are referred to as product focus. The facilities are organised around products
and it also known as continuous processing. Products including glass, paper, tin sheets, light bulbs, beer and
canned foods are made via a continuous process. It is through standardisation and effective quality control that
companies have established product-focused facilities. The specialised nature of the facility requires high fixed
cost, but low variable cost.

Mass Customization
Rapid low-cost production that caters to constantly changing unique customer desires. Mass Customisation brings
us the variety of products traditionally provided by low-volume manufacture (a process focus) at the cost of
standardised high-volume (product focused) production.

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Table 4.2: Comparison of Process Choice

6

PROCESS FOCUS REPETITIVE FOCUS PRODUCT FOCUS

(e.g. Dorbyl Ship Builders) (e.g. Toyota Manufacturing) (e.g. South African Breweries)

1. Small quantity and large variety 1. Long runs usually a 1. Large quantity and small
of products are produced. standardised product. variety of products are
2. Equipment used is general 2. Special equipment used in produced.
purpose. the assembly line. 2. Special purpose equipment
3. Operators are broadly skilled. 3. Employees are properly used.
4. There are many job instructions trained. 3. Operators are less broadly
because each job changes. 4. Repetitive operations reduce skilled.
5. Raw material inventories are changes in job instruction. 4. Work orders are few because
high relative to the value of the 5. Just-in-Time techniques are they are standardised.
product. used. 5. Raw material inventories are
6. Work-in-progress is high 6. Just-in-Time reduces the low.
compared to output. need for carrying high stock. 6. Inventory of work-in-progress
7. Units move slowly through the 7. Movement is measured in is low.
plant. hours and in days. 7. Swift movement of units
8. Finished goods are made to 8. Finished goods are made to through the plant.
order and not stored. frequent forecasts. 8. Finished goods are for stock.
9. Scheduling of orders is 9. Scheduling is based on 9. Scheduling is relatively
complex. building various models. simple.
10. Fixed costs are low and 10. Fixed costs are dependent on 10. Fixed costs are high and
variable costs are high. the flexibility of the plant. variable cost low.
11. Costing is estimated prior to 11. Costs are usually known prior 11. Costs are dependent on
doing the job. to starting the job. utilisation of capacity.

Source: Heizer and Render (2020)

Think Point 4.4

Justify the use of JIT inventory management by Toyota.

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4.7. Process Measures

To measure processes appropriate performance metrics should be used. The following metrics are commonly
used:

Table 4.3: Process Measures

7

Measure Definition

1. Throughput time Average amount of time product takes to move

through the system.

2. Process velocity =
Throuput time A measure of wasted time in the system.
Value−added time

3. Productivity =
Output A measure of how well a company uses its
Input
resources.

4. Utilisation =
Time a resource used The proportion of time a resource is actually used.
Time a resource available

Actual output
5. Efficiency = Standard output Measures performance relative to a standard.

6. Operating time =
Setup time The proportion of time actually used for operating.
Run Time

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Knowledge Check Questions 4.1

Question 1

Jackson Custom Machine Shop has a contract for 130 000 units of a new
product. Sam Jumper, the owner, has calculated the cost for three process
alternatives. Fixed costs will be: for General-Purpose Equipment (GPE), R150
000; flexible manufacturing (FMS), R350, 000; and dedicated automation
(DA), R950 000. Variable costs will be: GPE, R10; FMS, R8; and DA, R6.
Which should he choose? Solve Problem 1 graphically.

Question 2

Using either your analytical solution found in Problem 1, or the graphical

solution found in Problem 2, identify the volume ranges where each process
should be used.

Question 3

Jack’s Grocery is manufacturing a “store brand” item that has a variable cost of
$0.75 per unit and a selling price of $1.25 per unit. Fixed costs are $12,000.
Current volume is 50 000 units. The Grocery can substantially improve the
product quality by adding a new piece of equipment at an additional fixed cost
of $5,000. Variable cost would increase to $1.00, but their volume should
increase to 70,000 units due to the higher quality product. Should the company
buy the new equipment?

4.8. Summary
Critical issues in process design include types of processes, process planning, analysis, process innovation and
technology decisions. The type of production and operations process selected depends on the volume and degree
of product standardisation. Projects are produced one at a time to customer order. Batch production is used to
process a variety of low volume jobs. Mass production produces large volumes of standard product for a mass
market. Continuous production is used for very-high-volume commodity products (Russel and Taylor, 2019)

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Answers to Activities
Video Activity 4.1.
Student is required to the watch the video and provide justification for whether outsourcing is good or bad?

Video Activity 4.2.

Student is required to the watch the video and assess the applicability of the petroleum industry using the job shop
process.

Think Point 4.1

Student is required to analyse the use of mass production in in furthering China’s world domination of the
manufacturing sector. Student is required to mention the following:
Mass production produces large volumes of a standard product for a mass market. Product demand is stable and
product volume is high. Automobiles are among goods that are mass produced, televisions, personal computers,
fast food and most consumer goods.

Think Point 4.2

Student is required to assess the validity of the use of batch production for non-customized orders. Student is
required to mention the following:
Batch production processes have many different jobs through the production systems at the same time, in groups
of batches. Products are thus made to customer order. This type of production process produces low volumes with
fluctuating demand.

Think Point 4.3

Student is required to analyse the cost structures of the chosen company.

Think Point 4.4

Student is required to justify the use of JIT inventory management by Toyota.

Knowledge Check Questions 4.1

Question 1
Solve Problem 1 graphically
Solve for the crossover between GPE and FMS:
10X + 150000 = 8X + 350000
Or
2X = 200000
x = 100,000 units
Solve for the crossover between FMS and DA:
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8X + 350000 = 6X + 950000
Or
2X = 600000
X = 300000
Therefore, at a volume of 130,000 units, FMS is the appropriate strategy.

Question 2

Below 100,000 units use GPE, between 100,000 and 300,000 use FMS, above 300,000 uses DA

Question 3
If Jackson Custom Machine is able to get the customer to extend the contract for another two years, the owner
would certainly wish to take advantage of the savings using Dedicated Automation.

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Unit
5: Process Improvement: Lean
Operations and Just-In-Time Systems

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

5.1 Introduction • Introduce topic areas for the unit

5.2 Eliminate Waste • Assess the reasoning behind Waste Elimination

5.3 Remove Variability • Critically Analyse the need to Remove Variability

5.4 Throughput • Probe the concept of throughput

5.5 JIT Partnerships • Defend the use of JIT Partnerships

5.6 JIT Layout • Construct a JIT Layout

5.7 JIT Inventory • Appraise the validity of JIT Inventory

5.8 JIT Scheduling • Analyse the methodology of JIT Scheduling

5.9 JIT Quality • Evaluate JIT Quality in a given business type

5.10 Summary • Summarise topic areas covered in unit

Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain Management.
Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and Practice
for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations,

strategy, and Information Technology. Ninth Edition International Edition: McGraw
Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C., Harrison A.,
Johnson R. (2010) Operations Management. SA: Pearson.

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5.1. Introduction
This Chapter discusses just-in-time (JIT) and lean operations as approaches used for continuous improvement
that lead to world-class operations. Heizer and Render (2020) discuss that JIT is an approach of continuous and
forced problem solving through focus on throughput and reduced inventory. Lean operations supplies the customer
with precisely what they want at the time when the customer wants, without waste, and via continuous
improvement. The “pull” system thus drives the workflow under lean operations. Lean operations are driven by
orders initiated by customers through “pull” systems. Lean operations’ emphasis is on understanding the customer
and by contrast JIT system emphasises forced problem solving.

Video Activity 5.1.

Just-in-Time (JIT) & Lean Operations

https://www.youtube.com/watch?v=kSZhQbV-eIE

5.2. Eliminate Waste

Heizer and Render (2020) state that lean producers set their sights on perfection. They want to produce no bad
parts, no inventory but only value adding activities. Hence any activity which does not add value is viewed as waste
in the eyes of the customer. Lean operations are driven by orders initiated by customers through “pull” systems.
Lean operations seek to eliminate waste (Ohno’s seven wastes) such as:
I. Overproduction
Production should not be more than what the customer wants and it should also not be earlier than
demanded. Inventory in any form is waste.
II. Queues
All idle time, storage, and waiting are wastes because they do not add value.
III. Transportation
Moving of materials and handling of materials more than once is a form of waste.
IV. Inventory
All material that is not essential, work in process (WIP), finished goods and any excess operating
supplies add no value and as such they are waste.
V. Motion
Movement of people or equipment that does not add value is a form of waste.
VI. Over-processing
These are unnecessary steps which do not add value to the organisation.
VII. Defective product
Product returns, warranty claims, rework, and scrap are a waste.
Operations managers have according to Heizer and Render (2020) pursued “housekeeping” for a neat, orderly
and efficient work place. Thus a checklist has been established that focuses on the 5Ss.

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These are:
(i) Sort/Segregate: Only keep what is needed and remove everything else in a work area, if you have
doubts regarding its usefulness throw it out. Because they add no value, removing them from the work
area avails space and improves work flow.
(ii) Simplify/Straighten: Arrange the workflow to improve flow. Also use methods analysis tools for
improving work flow and reduce motion. Ergonomics should be taken into account both for the short
and long term consideration. Labelling and display should be geared for easy use of only what is
required in the work area.
(iii) Shine/Sweep: Clean daily, eliminate all types of dirt, contamination, and clutter from the work area.
(iv) Standardise: ensure that variation is removed from the process by creating standard operating
procedures and checklists. The standards should be good so that they can make whatever is abnormal
obvious.
(v) Sustain/Self-Discipline: Review periodically to recognise efforts and motivate any progress.
Communicate via visuals where you can. In the US, managers have added two more Ss.
(vi) Safety: This ensures that good safety practices are established.
(vii) Support/Maintenance: Reduce variability, unplanned down time, and costs. Coordinate all daily tasks
with preventive maintenance.

5.3. Remove Variability

Heizer and Render (2020) argue that managers seek to eliminate variability caused by internal and external factors.
They define variability as any deviation from the optimum process that delivers perfect product on time, every time.
The less problems (variability), the better the system, meaning the less waste there is in the system. Variability
usually accumulates from tolerating waste.

The sources of variability include:

(i) Poor production processes that allow for the production of improper quantities by both employees
and suppliers, later non-conforming units.
(ii) Unknown customer demands.
(iii) Incomplete or inaccurate drawings, specifications, and Bills of Material (BOM).

Activity 5.1.

Determine under which process methods would a decrease in output variability

be advantageous.

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5.4. Throughput
Heizer and Render (2020) define throughput as the rate at which units move through a production process. Allowing
products to remain on the books for any length of time, costs accumulate and competitive advantage is lost.
Manufacturing cycle time is the time an order is in the shop. It is the time between the arrival of materials and the
shipping of completed products.

A technique used to improve throughput is the pull system. A pull system “pulls” a unit where it is needed just as it
is needed. Thus pull systems are standard tools for lean operations. They therefore act as signals to request
production as well as delivery from supplying stations. A pull system avoids inventory build-up, hence eliminating
waste. When inventory is removed, clutter around the work area is removed.

Practical Application Or Examples 5.1

Defend the use of the Pull System in order to accurately meet customer
demand

5.5. JIT Partnerships

Heizer and Render (2020) state that JIT partnerships exist when a supplier and a purchaser work together with
open communication and a goal of eliminating and reducing costs. Close relationships and trust are crucial to the
successful implementation and success of a JIT system. Some goals of JIT are:
(i) Removal of unnecessary activities, such as receiving, incoming inspection, and paperwork related to
bidding, invoicing, and payment.
(ii) Removal of in-plant inventory by ensuring deliveries in small lot sizes to the department that directly
uses them
(iii) Removal of in-transit inventory by fostering suppliers to locate nearby and provide frequent small
shipments. This ensures that inventory does not build up. Obtain improved quality and reliability
through long-term commitments, communications and cooperation.

Leading organisations take the view that suppliers are extensions of their own businesses and they expect
suppliers to commit to continuous improvement. Supplier concerns Heizer and Render (2020) include the following:
1. Diversification – suppliers may not want to be bound by long-term contracts with one customer. This
makes them reduce the risk of being tied to one supplier.
2. Scheduling – A good number of suppliers have little faith in the purchaser’s ability to produce orders to a
smooth, integrated schedule.
3. Lead Time-Engineering work or change in specifications can cause serious problems with JIT because
of insufficient lead times for suppliers to implement changes.

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4. Quality: Suppliers restrictions on budgets, processes or technology may limit the organisation’s ability to
respond to product and quality changes.
5. Lot sizes: It mays seem as the purchase of small lot sizes is an attempt by the buyer to transfer buying
costs to the supplier.

Think Point 5.1

Engage in a group discussion analysing the effect that JIT partnerships have in
improving the efficiency of operations management in your organisation

5.6. JIT Layout

JIT reduces the other type of waste – movement – i.e. the movement of material on a factory floor. Thus flexible
layouts are encouraged. Movement of material or even paper in an office adds no value to business processes.
Thus according to JIT principles, materials must be placed in the place where they are needed.
Heizer and Render (2020) discuss the following “JIT layout tactics”
(i) Distance Reduction
The use of work cells, work centres and focussed factories help reduce distance. Work cells are often
U-shape arranged. Long single production lines are being discarded. The works cells are based on
group technology codes. These codes help identify components with similar characteristics such that
they can be grouped into families. So, work cells are built for the identified families. Each work cell
produces goods only if they have been ordered.
(ii) Increased Flexibility
Work cells nowadays are designed so that they can be easily rearranged to conform to changes in
volume, product improvements or even new designs. The idea of layout flexibility is important. Almost
nothing is bolted down to ensure flexibility. All office furniture and equipment is moveable. Equipment
is modular. This makes provisions for both product and process improvement.
(iii) Impact on Employees
A JIT system allows for cross-trained employees to be flexible and efficient at the work cell.
Employees working together can share problems and opportunities for improvement. Since layouts
are sequential, feedback on operations is immediate. Because units are produced at a time, defects
can be checked and avoided as they produce the next unit. Machines are built to self-test and thus
detect defects and stop automatically to avoid defects. These functionalities are called Poka-Yoke.
No buffers exist in a JIT system because inventory is eliminated.
(iv) Reduced Space and Inventory
Since JIT layouts are meant to reduce distance travelled, they reduce inventory too by eliminating
space for inventory. Where little space exists, inventory is moved in very small lots or even as single
units. All units are always moving because there is no storage.

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Video Activity 5.2

Just in Time by Toyota: The Smartest Production System in The World

https://www.youtube.com/watch?v=cAUXHJBB5CM

Watch the video link above and revise the benefits of JIT as suggested in the
tactics above.

5.7. JIT Inventory

The existence of inventory in production and distribution is attributed to the anticipation that something might go
wrong so that the excess inventory can be used to cover production problems caused by variations. Heizer and
Render (2020) emphasise that what is needed is “JIT” not “just in case” we run out of inventory, what should we
do? They therefore propose useful JIT inventory tactics as follows:
(i) Reduce inventory and variability
To move towards JIT, operations managers have to eliminate inventory. Variability in the production
system has to be removed. This helps to uncover the “rocks” in the production system. With inventory
reduced, management chips away at the exposed problems. Managers can therefore carry on
lowering inventory levels step by step and until there is finally no inventory.
(ii) Reduce lot sizes
JIT has also meant the elimination of waste since investment in inventory is avoided. The key here
is to produce goods in small lot sizes. Batch sizes are reduced and thereby reducing inventory costs.
(iii) Reduce set up costs
Inventory and the cost to hold it go down as investment in re-order quantity and the maximum
inventory level drops. Thus the way to drive down lot sizes and reduce average inventory is by
reducing the set up cost. In the end this lowers the optimum order size.

Think Point 5.2.

Looking at your organisation as an example, could you use JIT to reduce

inventory costs?

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5.8. JIT Scheduling

According to Heizer and Render (2020) JIT is well supported by effective schedules that are communicated within
and outside the organisation. These better schedules enhance the ability to meet customer orders, drive down
inventory by allowing smaller lot sizes, and reduce work-in-process. The scheduling system is crucial as it transmits
information. To achieve proper scheduling two aspects must be considered and these are:
(i) Level schedules
Level schedules process frequent small batches rather than a few large levels using many small
batches. The operations manager has to move small lot sizes so as to have an economical level
schedule
(ii) Kanban
The Kanban approach achieves small lot sizes by moving inventory through the shop only when it is
needed instead of pushing it to the next work station. Recall that when inventory is moved when it is
needed this is called a “push” system. The ideal lot size is in fact one. Kanbans coined by the
Japanese, allow arrivals at a work centre to match or at least nearly match the process. Kanban in
Japanese means “card”. The Kanban is used to “pull” inventory through work centres.
They use the Kanban to signal the need for another container of material. The card authorises the
next container of material to be produced. The Kanban is a signal for each container needed.
Therefore, an order for each container is initiated via a Kanban. It is “pulled” from the supplying
department. A system of Kanbans “pull” the material required through the system. Kanbans have
taken many forms in recent times. In some instances, an empty position on the floor is enough to
indicate that the next container is required. Even a flag is used for this purpose or a rag.

Think Point 5.3.

Recommend organisations that should use the Kanban to improve inventory

management.

5.9. JIT Quality

There is a relationship between JIT and Quality and this is so in three ways argues Heizer and Render (2020).
Firstly, the costs of getting good quality are cut down. This happens because rework, scrap and inventory
investment and costs of damage are buried in inventory. Since JIT reduces inventory, fewer defects are produced.
JIT therefore, exposes bad quality. Secondly JIT enhances quality. As JIT reduces queues and cycle time, it keeps
evidence of errors fresh and restricts the number of potential sources of error. In this way, JIT creates an early
warning system for quality problems so that there are fewer bad units and there is immediate feedback.

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The third one implies that better quality leads to fewer buffers. A better, easier-to-employ JIT system can exist.
Most times the reason for keeping inventory is to protect against unreliable quality. When quality levels are
consistent, a JIT system allows firms to reduce costs related to inventory.

Practical Application Or Examples 5.2

Critique the usage of JIT in terms of profit maximisation and improved quality.

5.10. Summary
Lean production has really changed the face of manufacturing and transformed the global economy. Originally it
was called just-in-time and it started out at Toyota Motor Corporation with a view to eliminating waste; and large
inventories. Lean production is a philosophy as well as a collection of management methods and techniques.
Workers in a lean system are multifunctional and can perform different tasks.

Activity 5.2

Analyse the need for workers in a lean system to be multifunctional.

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Revision Questions 5.1

Question 1

ABC Analysis

Stock Number Annual R Volume Percent of Annual R Volume

J24 12,500 46.2

R26 9,000 33.3

L02 3,200 11.8

M12 1,550 5.8

P33 620 2.3

T72 65 0.2

S67 53 0.2

Q47 32 0.1

V20 30 0.1

= 100.0

What are the appropriate ABC groups of inventory items?

Question 2
A firm has 1,000 “A” items (which it counts every week, i.e., 5 days), 4,000 “B” items
(counted every 40 days), and 8,000 “C” items (counted every 100 days). How many
items should be counted per day?

Question 3
Assume you have a product with the following parameters:
Demand = 360 Holding cost per year = $1.00 per unit Order

cost := $100 per order

What is the EOQ?

Question 4
Given the data from Activity 3, and assuming a 300-day work year; how many orders
should be processed per year? What is the expected time between orders?

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Answers to Activities
Video Activity 5.1
Student is required to watch the video and apply the knowledge learnt.

Activity 5.1
Student is required to apply their knowledge.

Practical Application or Examples 5.1

Student is required to apply their knowledge.

Think Point 5.1

Student is required to apply their knowledge.

Video Activity 5.2

Student is required to watch the video and apply the knowledge learnt.

Think Point 5.2

Student is required to apply their knowledge.

Think Point 5.3

Student is required to apply their knowledge.

The Kanban approach achieves small lot sizes by moving inventory through the shop only when it is needed
instead of pushing it to the next work station. Recall that when inventory is moved when it is needed this is called
a “push” system. The ideal lot size is in fact one. Kanbans coined by the Japanese, allow arrivals at a work
centre to match or at least nearly match the process. Kanban in Japanese means “card”. The Kanban is used to
“pull” inventory through work centres.

They use the Kanban to signal the need for another container of material. The card authorises the next container
of material to be produced. The Kanban is a signal for each container needed. Therefore, an order for each
container is initiated via a Kanban. It is “pulled” from the supplying department. A system of Kanbans “pull” the
material required through the system. Kanbans have taken many forms in recent times. In some instances, an
empty position on the floor is enough to indicate that the next container is required. Even a flag is used for this
purpose or a rag.

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Practical Application or Examples 5.2

Answer required
There is a relationship between JIT and Quality and this is so in three ways argues Heizer and Render (2020).
Firstly, the costs of getting good quality are cut down. This happens because rework, scrap and inventory
investment and costs of damage are buried in inventory. Since JIT reduces inventory, fewer defects are
produced. JIT therefore, exposes bad quality. Secondly JIT enhances quality. As JIT reduces queues and cycle
time, it keeps evidence of errors fresh and restricts the number of potential sources of error. In this way, JIT
creates an early warning system for quality problems so that there are fewer bad units and there is immediate
feedback.

The third one implies that better quality leads to fewer buffers. A better, easier-to-employ JIT system can exist.
Most times the reason for keeping inventory is to protect against unreliable quality. When quality levels are
consistent, a JIT system allows firms to reduce costs related to inventory.

Activity 5.2
Student is required to apply their knowledge.

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Unit
6: Process Quality Management I:
Total Quality Management

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

6.1 Introduction to Total Quality • The concept of total quality management is explained.
Management

6.2 The Origins of TQM – The Quality • Revisew the origins of TQM – The Quality Gurus
Gurus

6.3 What is TQM? • Conclude on the basics of TQM?

6.4 TQM Concepts • Analyse TQM concepts

6.5 Steps in implementing TQM • Recommend the steps in implementing TQM

6.6 The High Cost of Poor Quality • Critically evaluate the high cost of poor quality

6.7 Cost of Quality • Discuss the categories of cost of quality

6.8 TQM in Service • Analyse the use of TQM in service

6.9 Summary • Summarise topic areas covered in unit

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Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson
Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management.

Operations, strategy, and Information Technology. Ninth Edition International
Edition: McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C.,
Harrison A., Johnson R. (2010) Operations Management. SA: Pearson.

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6.1 Introduction to Total Quality Management

Total Quality Management (TQM) is perhaps the most significant of the new ideas that have swept across the
operations management scene over the last few years. There are two reasons for this: first the ideas of TQM have
great perceptive attraction for many people – most of us want to achieve ‘high quality’, and secondly, a TQM
approach to improvement can sometimes result in dramatic increases in operational effectiveness.

6.2 The Origins of TQM – The Quality Gurus

• Armand Feigenbaum was a doctoral student at the Massachusetts Institute of Technology in the 1950s. He
defined TQM as “an effective system for integrating the quality development, quality maintenance and quality
improvement efforts of the various groups in an organisation so as to enable production and service at the
most economical levels which allow for full customer satisfaction”.
• W.E. Deming was considered as the father of quality management in Japan. Deming introduced the 14 points
for quality improvement whereby he emphasised the need for statistical quality control, participation,
education, openness and purposeful improvement.
• J.M. Juran was also a key educator in the Japanese quality management systems. He advocated that
although a dangerous product could conform to specification, it would not be fit to use. He coined the phrase
“fitness for use”. He advocated the motivation and involvement of the workforce in quality improvement
activities.
• K. Ishikawa based his work on that of Deming, Juran and Feigenbaum and has been credited with originating
the concept of quality circles and the cause-and-effect diagram (fishbone). Ishikawa realised that worker
participation was the key to the successful implementation of TQM.
• G. Taguchi was the director of the Japanese Academy of Quality and was concerned with engineering quality
into the product through the optimisation of product design. His concept of Quality Loss Function (QLF)
included such factors as warranty costs, customer complaints and loss of customer goodwill.
P.B. Crosby is best known for his work in trying to quantify the costs of quality. He stated that many
organisations did not know how much they spend on quality.

6.3 What is TQM?

According to Pycraft, Singh, Phihlela, Slack, Chambers, Harland, Harrison and Johnson (2010), TQM is a
philosophy, a way of thinking and working, that is concerned with meeting the needs and expectations of
customers. It tries to move the focus of quality away from being a purely operations activity into a major concern
for the entire organization. Through TQM, quality becomes the responsibility of all departments and chapters in
the organization. It also targets the costs of quality by trying to reduce particular failure costs. TQM also espouses
the process of continuous improvement.

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TQM places the customer in the forefront of decision-making. It also looks at the concept of internal customer and
supplier. It advocates that everyone in the organisation is a customer and consumer goods and services provided
by other internal suppliers.

6.4 TQM Concepts

Heizer (2020) suggests the following in implementing a TQM programme:
• Continuous Improvement
TQM requires a never-ending process of continuous improvement that embraces people, suppliers, material,
equipment and procedures. The argument of this philosophy is that every aspect of an operation can be improved
– the end objective is perfection, which is always sought but seldom achieved.

The Japanese use the word kaizen to describe this on-going process of improvement. In continuous improvement
it is not the size of each step which is important – rather it is the likelihood that improvements will be ongoing. We
can therefore say it is not the rate of improvement but the momentum of improvement.

• Six Sigma
This is a programme designed to reduce defects to help lower costs, save time, improve quality and improve
customer satisfaction.

Video Activity 6.1

Video Link: Introduction to Six Sigma

https://www.youtube.com/watch?v=wEBPVQ7W2wg
https://www.youtube.com/watch?v=YKwcxjUnots

Watch the video link above and debate the usefulness of six sigmas.

• Employee Empowerment
This refers to the involvement of the workforce in every step of the production process. To design equipment and
processes that consistently produce the desired quality would require the involvement of those who understand
the shortcomings of the system.

People working on the system on a daily basis understand it better than anyone else does. Techniques for building
employee empowerment include:
(i) Building communication networks that include employees.
(ii) Developing open, supportive supervisors.
(iii) Moving responsibility from both managers and staff to production employees.
(iv) Building high-morale organisations.
(v) Creating formal organisation structures such as teams and quality circles.
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• Benchmarking
This is an approach that some companies use to compare their operations with those of other companies
(preferably the best in the world). It is partly concerned with being able to judge how well an operation is doing.
Benchmarking involves selecting a demonstrated standard of products, services, costs or practices that represent
the very best performance for processes or activities very similar to your own. The steps for developing benchmarks
are:
(i) Determine what to benchmark.
(ii) Form a benchmark team.
(iii) Identify benchmarking partners.
(iv) Collect and analyse benchmarking information.
(v) Take action to match or exceed the benchmark.
(vi) Creating formal organisation structures such as teams and quality circles.

Types of Benchmarking
According to Pycraft et al. (2010), the following are some of the types of benchmarking one can use:
• Internal benchmarking is a comparison between operations or parts of operations which are within the same
organisation
• External benchmarking is a comparison between an operation and other operations that are part of a different
organisatio
• Non-competitive benchmarking is benchmarking against external organizations that do not compete directly
in the same markets
• Competitive benchmarking is a comparison directly between competitors in the same or similar markets
• Performance benchmarking is a comparison between the levels of achieved performance in different
operations
• Practice benchmarking is a comparison between an organisation’s operations practices, or ways of doing
things, and those adopted by another operation

Think Point 6.1.

Suggest a benchmarking exercise that would be useful in your organisation giving

reasons for your choice.

• Just-in Time
JIT systems are designed to produce or deliver just and when they are needed. If implemented, JIT can reduce
the amount of inventory that a firm has on hand by establishing quality and purchasing controls that bring stock
into the firm just-in-time for use. JIT is related to quality in the following manner:

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(i) JIT cuts the cost of quality – this happens because scrap and rework, damaged and lost/stolen stock is
directly related to inventory on hand.
(ii) JIT improves quality – as JIT reduces lead times, it keeps records of mistakes and sources of error.
(iii) Better quality means less inventory and a better, easier to use JIT system. One of the reasons for holding
inventory is to protect against poor production performance resulting from unreliable quality. If consistent
quality exists, JIT allows organisations to reduce all the costs associated with inventory.

6.5 Steps in Implementing TQM

1 Obtain CEO Commitment
2 Educate Upper-Level Management
3 Create Steering Committee
4 Outline the Vision Statement, Mission Statement, & Guiding Principles
5 Prepare a Flow Diagram of Company Processes
6 Focus on the Owner/Customer (External) & Surveys
7 Consider the Employee as an Internal Owner/customer
8 Provide a Quality Training Program
9 Establish Quality Improvement Teams
10 Implement Process Improvements
11 Use the Tools of TQM
12 Know the Benefits of TQM

6.6 The High Cost of Poor Quality

Facts to consider when counting the high cost of poor quality are:
• Waste is the opposite of quality.
• What is poor quality costing you?

Four Types of Quality Cost

The four types of quality cost are:
1. Prevention Cost: All costs associated with error prevention in a product, process or service.
2. Appraisal Cost: All costs associated with the assurance to conformance of quality standards
requirements, inspection, testing, observation etc.
3. Internal Failure Cost: All costs associated with the evaluation and correction of the design before it is
released for construction and all costs for rework on a project before it is turned over to the owner.
4. External Failure Cost: Similar to internal failure costs except that they occur after the “output” has been
turned over to the next processor or user. External failure costs often include significant intangible costs of
lost reputation and goodwill.

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Think Point 6.2

Determine the Cost of Quality using quantitative and qualitative techniques.

To empower employees and implement TQM everyone in the organization must be trained in the techniques of
TQM. Heizer (2020) suggest seven tools or techniques that can aid the TQM drive:
(i) Check Sheets – a check sheet is any kind of a form that is designed to record data. In many cases the
recording is done so the patterns are easily seen while the data are being taken. Check sheets help
analysts find the facts or patterns that may aid subsequent analysis. An example might be a drawing that
shows a tally of the areas where defects are occurring or a check sheet showing the type of customer
complaints.
(ii) Scatter Diagrams – show the relationship between two measurements. An example is the positive
relationship between length of a service call and the number of trips a repairperson makes back to the
truck for parts.
(iii) Cause and Effect Diagrams: are another tool for identifying quality issues and inspection points. This type
of diagram is also known as Ishikawa or fish-bone chart.
clean pillows

Machinery
Insufficient

& blankets

Material
not available
on--board

equipment
Deicing
on

Inadequate
Mechanical delay
supply of
magazines on plane
Inadequate special Broken luggage
meals on-
on-board carousel
Dissatisfied
Airline
Overbooking policies Understaffed Customer
crew
Bumping policies Understaffed
Poorly trained
check--in

ticket counters
attendants
Poor check
policies
Mistagged
bags

Methods Manpower

Figure 6.1: Cause and Effect Diagram

13

Source: (Heizer and Render. 2020)

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(iv) Pareto Charts – a graphic way of identifying the few critical items as opposed to several less important
ones.

Data for October

– 100
70 – – 93
– 88
60 – 54
Frequency (number)

Cumulative percent
– 72
50 –
40 –
Number of
30 –
occurrences
20 –
12
10 –
4 3 2
0 –
Room svc Check-
Check-in Pool hours Minibar Misc.
72% 16% 5% 4% 3%
Causes and percent

Figure 6.2: Pareto Analysis

14

Source: (Heizer and Render. 2020)

(v) Flowcharts – graphically represent a process or system using annotated boxes and interconnected
lines. They are a simple, but great tool for trying to make sense of a process or explain a process.
(vi) Histograms – show the range of values of a measurement and the frequency with which each value
occurs. They show the most frequently occurring readings as well as the variations in the
measurements.
(vii) Statistical Process Control – is used to monitor standards, making measurements and taking corrective
action as a product or service is being produced.

Practical Application Or Examples

Assess the use of flowcharts in preventing bottlenecks in your organisations

process’.

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Plots the percent of free throws missed

20% Upper control limit

10% Coach’s target value

0% | | | | | | | | |
Lower control limit
1 2 3 4 5 6 7 8 9

Game number

Figure 6.3: Control Chart

15

Source: (Heizer and Render. 2020)

Activity 6.1

Analyse the efficacy of the TQM concepts that your organisation

incorporates/utilises.

6.7 Cost of Quality

The Costs of Quality can be categorized as prevention costs, appraisal costs, internal failure costs and external
failure costs. Let us examine each of these:
• Prevention Costs – these are costs incurred in trying to prevent problems, failures and errors from
occurring in the first place and include:
o Identifying potential problems and rectifying them before poor quality occurs.
o Improving the design of products, services and processes to reduce quality problems.
o Training and developing personnel in the best way to perform their jobs.
• Appraisal Costs – are those costs associated with controlling quality to check if problems have occurred
during or after the production process? They include:
o The setting up of statistical process control programmes and acceptance sampling plans.
o The time and effort required to inspect outputs, inputs and processes.
o Obtaining processing inspection and test data.
o Investigating quality problems and providing quality reports.
o Conducting customer surveys and quality audits.

• Internal failure costs – are costs associated with errors whilst the product is within the operation, and
include:

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o Costs of scrapped parts and material.

o Reworked parts and material.
o Lost production time as a result of errors
o Lack of concentration due to time spent trouble-shooting rather than improvement
• External failure costs – are those which are associated with errors that have reached the customer. These
costs include:
o Loss of customer goodwill.
o Aggrieved customers
o Litigation
o Guarantee and warranty costs.

Video Activity 6.2

Cost of quality

https://www.youtube.com/watch?v=LA5B5g1kLkM

Watch the video above and evaluate/approximate the costs that poor quality
has cost your company over the past three years.

Think Point 6.3.

1. Quantify, in financial terms, the cost of quality within your company.

6.8 TQM in Service

It is more difficult to measure quality in services than that of manufactured goods. Heizer and Render (2020)
identify ten general attributes or determinants of service quality.
(i) Reliability – performing the service right the first time and honouring your promises.
(ii) Responsiveness – willingness or readiness of employees to provide a service.
(iii) Competence – possessing the required skills and knowledge to perform the service.
(iv) Access – involves ease of contact.
(v) Courtesy – politeness, respect and consideration.
(vi) Communication – keeping customers informed in a language they understand.
(vii) Credibility – trustworthiness and honesty.
(viii) Security – freedom from danger, risk or doubt.
(ix) Understanding – knowing the customer, and
(x) Tangibles – include the physical evidence of the service.

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Readings

• Now that you have been introduced to this unit, source and work through
the Prescribed and Recommended Reading(s)/Textbook(s) list at the
beginning of this unit. It is essential that you read all the textbook chapters
and journal articles listed.

Revision Questions 6.1

Question 1
What techniques would you use and what conclusions can you draw
about defects in the accounts receivable department?
Category Frequency
Invoice amount does not agree with the check amount 108
Invoice not on record (not found) 24
No formal invoice issued 18
Check (payment) not received on time 30
Check not signed 8
Invoice number and invoice referenced do not agree 12

Question 2
Prepare a flow chart for purchasing a Big Mac at the drive-through window
at McDonalds.

Question 3
Draw a fishbone chart detailing reasons why a part might not be correctly
machined.

6.9 Summary
The most important quality perspective is that of the customer; how they perceive the products or services.
Products and services must be designed to meet customer expectations and needs for quality. A total commitment
to quality must start with top management and filter through to the lower levels of the organisation and this must
be across all areas or departments. Employees must be active participants in the process. They must feel free to
initiate programmes for improvements.

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Answers to Activities
Video Activity 6.1
Student is required to watch the video and apply the knowledge learnt.

Think Point 6.1

Student is required to apply their knowledge.

Think Point 6.2

Student is required to apply their knowledge.

Practical Application or Examples

(i) Flowcharts – graphically represent a process or system using annotated boxes and interconnected
lines. They are a simple, but great tool for trying to make sense of a process or explain a process.

Activity 6.1
Student is required to apply their knowledge.

Video Activity 6.2

Student is required to watch the video and apply the knowledge learnt.

Think Point 6.3

Student is required to apply their knowledge.

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Unit
7: Process Quality Management II:
The Process Approach

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

7.1 Introduction • Introduce topic areas for the unit

7.2 Benefits of the Process Approach • Critically analyse the benefits of the process approach

7.3 What Is a Process? • Evacuate the determinants of what is a process

7.4 Types of Processes • Assess the differences in the types of processes used in
different industries

7.5 Typical Types of Processes can • Appraise the typical types of processes that can be identified
be identified

7.6 Understanding the Process • Critique the Understanding the process approach
Approach

7.7 Implementing the System • Outline the requirements when implementing the system

7.8 Summary • Summarise topic areas covered in unit

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Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson
Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations,

strategy, and Information Technology. Ninth Edition International Edition:
McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C., Harrison
A., Johnson R. (2010) Operations Management. SA: Pearson.

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7.1 Introduction
This Chapter also aims to promote consistency in the description of processes and use of process related
terminology. The process approach enhances an organisation’s effectiveness and efficiency in achieving its
defined objectives. This, in relation to ISO 9001:2008, implies enhancing customer satisfaction by meeting
customer requirements.

This Chapter is meant to provide an appreciation of concepts, intent and the application of the “process approach”
to the ISO 9000 family of Quality Management System standards. It may also be used to apply the process
approach to management systems regardless of the type or size of the organisation. This includes but is not limited
to the management systems for:
• Environment (ISO 14 000 family)
• Occupational Health and Safety
• Business Risk
• Social Responsibility

Video Activity 7.1

ISO 9001 Process Approach : https://www.youtube.com/watch?v=09aE-qTqhIM

Watch the video to gain further insight into the ISO9001 family of standards.

7.2 Benefits of the Process Approach

• Integration and alignment of processes to enable achievement of desired outcomes.
• Ability to focus on process effectiveness and efficiency.
• Provision of confidence to customers, and other interested parties, about the consistent performance of
the organisation.
• Transparency of operations within the organisation
• Lower costs and creation of shorter cycle times, through the effective use of resources.
• Improved, consistent and predictable results.
• Provision of opportunities for focused and prioritised improvement initiatives.
• Encouragement of the involvement of people and the clarification of their responsibilities.

7.3 What Is a Process?

A “Process” can be defined as a “set of interrelated activities that transforms inputs into outputs”. These activities
require allocation of resources such as people and materials. The process approach has a major advantage when
compared to other approaches and that is management is able to control the interactions between these processes
and the interfaces between the functional hierarchies of the firm

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Effectiveness
of process =
Ability to
achieve
desired results

Output
INPUT Requirement
Interrelated or Satisfied
Requirement Specified interacting activities (Result of a
(These include and control methods process)
resources)

Efficiency of
process=
results
achieved vs.
resources

Figure 7.1: Process Depictions

16

Source: ISO 9001: 2008

Think Point 7.1

Examine 5 activities that would qualify as a process in your organisation.

Inputs and identified outputs may be tangibles like equipment, materials or components. But they may also be
intangibles such as waste or pollution. Each process has customers and their interested parties. These may be
internal or external to the firm. They all have expectations and needs about the process that define the required
outputs of the process. A system has to gather data to provide information about the process performance, which
should then be analysed to determine if there is any need for corrective action or improvement.

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All processes should be aligned with the objectives, scope and complexity of the organisation and should be
designed to add value to the organisation. Process effectiveness and efficiency can be assessed through an
internal or external review process.

Practical Application Or Example 7.1.

Determine whether process improvements add value to customers as well.

7.4 Types of Processes

ISO 9001:2008 states: In sub clause 0.1 General: “The design and implementation of an organisation’s quality
management system is influenced by: its business environment, changes in that environment, or risks associated
with that environment; its varying needs; its particular objectives; the products it provides; the processes it employs;
its size and organisational structure of the quality management systems or uniformity of documentation.”

In sub clause 0.2 Process Approach: “The application of a system of processes within an organisation, together
with the identified and interactions of these processes, and their management to produce the desired outcome,
can be referred to as the “process approach”.

In sub clause 4.1 General requirements: “The organisation shall establish, document, implement and maintain a
quality management system and continually improve its effectiveness in accordance with requirement of this
International Standard”. The organisation shall:
a) Determine the processes needed for the quality management system and their application throughout the
organisation.
b) Determine the sequence and interaction of these processes.
c) Determine criteria and methods needed to ensure that both the operation and control of these processes
are effective.
d) Ensure the availability of resources and information necessary to support the operation and monitoring of
these processes.
e) Monitor, measure (where applicable), and analyse these processes, and
f) Implement actions necessary to achieve planned results and continual improvement of these processes.

These processes shall be managed by the organisation in accordance with the requirements of this International
Standard. Based on the above, the organisation ought to define the number of processes needed to fulfil business
objectives. It is allowed for a process, as required by ISO 9001:2008, to be part of a process (or processes) that is
already established by the organisation, or even to be defined by the organisation in terms of a different standard
from ISO 9001.

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Think Point 7.2.

Interrogate the use of the ISO 9001 standards in your organisation.

7.5 Typical Types of Processes Can Be Identified

Organisations need to define the number of processes and the type of processes needed to fulfil their business
objectives. Although these are unique to organisations, typical ones include the following:
• Processes for the management of an organisation - These include processes relating to strategic
planning, establishing policies, setting objectives, ensuring communication, and availability of resources
for the other organisation’s quality objectives and desired outcomes and for management reviews.
• Processes for managing resources - These include all the processes that are necessary to provide the
resources needed for the organisation’s quality objectives and desired outcomes.
• Realisation processes – These include all processes that provide desired outcomes of the organisation.
• Measurement, analysis and improvement processes - These include the processes required to measure
and gather data for performance analysis and improvement of effectiveness and efficiency. They include
measuring, auditing, performance analysis and improvement processes such as corrective and
preventive actions.

7.6 Understanding the Process Approach

A process approach is a powerful way of organising and managing activities to create value for the customer and
other parties. Organisations are thus quite often structured into functional units. Organisations are usually managed
vertically with responsibility for intended outputs being divided among functional units. Therefore, the end customer
or the other interested party is not always visible to all involved. Thus problems that occur at the interface
boundaries are often not prioritised as compared to short-term goals of the units. This leads to little or no
improvement made to the interested party, as actions are usually focused on the functions, rather than on the
intended output.

Video Activity 7.2

The process approach ISO 9001
https://www.youtube.com/watch?v=13Af7ydV0v8
Analyse the manner in which the Process approach improves customer
satisfaction.

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The process approach is said to introduce horizontal management, crossing the barriers between different
functional units and creating unity in focusing on goals of the firm. The performance of the firm improves via the
use of the process approach. This is because processes are managed as a system defined by the network of the
processes and their interactions. This creates a better understanding of added value.

Think Point 7.3

Identify a manufacturing company that adopts the above approach to enhance

customer satisfaction.

7.7 Implementing the System

This system outline below is not prescriptive. It is a guide. This involves:
(i) Identifying the processes of the organisation
(ii) Planning the process
(iii) Implementation and measurement of the process
(iv) Analysis of the process
(v) Corrective action and improvement of the processes

Practical Application Or Example 7.2.

Assess whether these steps will enhance total quality management within your
organisation.

Revision Questions 7.1

Question 1
Evaluate the external value of ISO 9001 for your organisation.

Question 2
Examine and comment on cost implications for implementing ISO standards.

Question 3
Why is process thinking important in operations management? Think of yourself
as an “operations manager” for your education. How could process thinking
improve your performance as a student?

7.8 Summary
The management of quality via processes is a formidable way to manage quality in organisations. It improves both
effectiveness and efficiency. Adapted from: ISO 9001: 2008.

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Answers to Activities
Video Activity 7.1
Student is required to watch the video and apply the knowledge learnt.

Think Point 7.1

Student is required to apply their knowledge. A “Process” can be defined as a “set of interrelated activities
that transforms inputs into outputs”. These activities require allocation of resources such as people and
materials.

Practical Application or Example 7.1

Student is required to apply their knowledge.

All processes should be aligned with the objectives, scope and complexity of the organisation and should be
designed to add value to the organisation.

Think Point 7.2

Student is required to apply their knowledge.

These processes shall be managed by the organisation in accordance with the requirements of this International
Standard. Based on the above, the organisation ought to define the number of processes needed to fulfil
business objectives. It is allowed for a process, as required by ISO 9001:2008, to be part of a process (or
processes) that is already established by the organisation, or even to be defined by the organisation in terms of a
different standard from ISO 9001

Video Activity 7.2

Student is required to watch the video and apply the knowledge learnt.

Think Point 7.3

Student is required to apply their knowledge.

Practical Application or Example 7.2

Student is required to apply their knowledge.

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Unit
8 Forecasting Demand

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Unit Learning Outcomes

Content list LEARNING OUTCOMES OF THIS UNIT:

8.1 Introduction to Forecasting • The topic of Forecasting is introduced

8.2 Forecasting Time-Horizons • Examine Forecasting Time-Horizons

8.3 Trends Predictions • Analyse the effectiveness of the use of time horizons

8.4 Regression Analysis • Conduct a Regression Analysis in order to obtain quality

information

8.5 Summary • Summarise topic areas covered in unit

Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and Supply
Chain Management. Thirteenth Edition. Cape Town: Pearson Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain Management. Tenth
Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and Practice for
Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations,

strategy, and Information Technology. Ninth Edition International Edition: McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology, Strategy.
USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C., Harrison A.,
Johnson R. (2010) Operations Management. SA: Pearson.

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8.1 Introduction to Forecasting

Heizer and Render (2020) describe forecasting as the art of predicting future events. This usually involves taking
historical data and projecting them into the future using a mathematical model sometimes adjusted by a manager’s
good judgement. We must also note that what works best in one firm under one set of conditions may be a complete
disaster in another organization. There are also limits as to what can be expected from forecasts. We must
remember that forecasts are seldom, if ever, perfect and are costly and time-consuming to prepare and monitor.

However, we cannot afford to avoid the process of forecasting by adopting a wait-and-see attitude. Effective
forecasting in both the short and long term will depend on the demand for your company’s products or services.
Business forecasts are used to predict sales, profits, costs, prices, interest rates, and other variables. In spite of
the use of computers and sophisticated mathematical models in forecasting, it is not an exact science. Experience,
judgement and technical expertise all play a role in developing useful forecasts.

In most organisations, the responsibility for preparing the demand forecasts lies with the marketing or sales
department, rather than operations. Since forecasts are a major input for operations managers, it is wise to harness
their input.

Video Activity 8.1

Video Link: Forecasting: https://www.youtube.com/watch?v=uV4g9p08nXg
Watch the above video in order to increase your understanding of the
forecasting process.

Features Common to all Forecasts

There are certain features common to all forecasts and Stevenson) explains them as follows:
• Forecasting techniques generally assume that the same underlying casual system that existed in the past will
continue to exist in the future.
• Forecasts are rarely perfect; actual results may differ from predicted values – therefore allowances should be
made for inaccuracies.
• Forecasts for group items are more accurate than forecasts for individual items.
• Forecast accuracy decreases as the time period covered by the forecast increases.

Activity 8.1
1. Analyse the types of forecasts that your organisation uses and classify them
into:
(i) Short-term
(ii) Medium-term, and
(iii) Long-term.

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8.2 Forecasting Time-Horizons

Forecasts can fall into three categories: Heizer (2020)
• Short-range forecast – has a time span up to one year but is generally less than three months. It is used for
planning purchasing, job-scheduling, workforce levels, job assignments and production levels.
• Medium-range forecast – lasts from three months to three years. It is useful in sales planning, production
planning and budgeting, cash budgeting and analysing various production plans.
• Long-range forecast – is generally of a duration of three years or more. It is used in planning for new products,
capital expenditure, facility location or expansion and research and development.

Types of Forecasts
Heizer (2020) concludes that there are three major types of forecasts in planning future operations:
• Economic forecasts: address business cycles by predicting inflation rates, money supplies and economic
indicators.
• Technological forecasts: concerned with rates of technological progress which can result in the birth of exciting
new products, requiring new plants and equipment.
• Demand forecasts: projections of demand for a company’s products or services. These forecasts are also
known as sales forecasts, which determine a company’s production capacity and scheduling systems and
serve as inputs to financial, marketing and personnel planning.

The Strategic Importance of Forecasting

We must remember that forecasts are only an estimate of demand until actual demand becomes known. Forecasts
of demand, therefore, impact upon several areas of operations:
• Human Resources
Hiring, training and laying-off the workforce depend on anticipated demand. One needs to give ample warning to
the Human Resources Department to hire, train or lay off workers. Inadequate training could result in poor quality
products or services.

• Capacity
If capacity is inadequate, our ability to meet customer orders may be compromised which could result in loss of
customers, loss of market share and loss of goodwill. On the other hand, if excess capacity is built, we could end
up in a situation whereby huge amounts of capital are tied up with little or no return.

• Supply-Chain Management
Good supplier relations and price discounts for materials and parts depend on accurate forecasting. The forecast
must strive to get the right amount of material at the right time in the right quantity at the right price.

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Steps in the Forecasting Process

Forecasting follows the seven basic steps:
• Determine the use for the forecast. What are our objectives? This will provide an indication to the level of detail
required in the forecast, the amount of resources we are willing to commit (manpower, computer time, rands)
and the level of accuracy necessary.
• Select the items to be forecasted. Are we going to forecast for individual or group items?
• Determine the time horizon of the forecast. Is it short, medium or long term? Keep in mind that accuracy
decreases as the time horizon increases.
• Select the forecasting technique.
• Gather data to make the forecast. Identify any assumptions that are made in conjunction with preparing and
using the forecast.
• Make the forecast.
• Monitor the forecast to see if is performing in a satisfactory manner. If not, re-examine the method,
assumptions, validity of data, and other significant issues, and perhaps prepare a revised forecast.

Approaches to Forecasting
There are two general approaches to forecasting: qualitative and quantitative. Qualitative methods consist mainly
of subjective inputs and incorporate such factors as the decision maker’s intuition, emotions, and personal
experiences amongst other things. Quantitative forecasts use a variety of mathematical models that are determined
by historical data. In practice either or both approaches are used to determine a forecast.

Overview of Qualitative Methods

• Forecasts based on judgements or opinions
Under this method, the opinions of a group of high level experts or managers, often in combination with statistical
models are grouped to arrive at an estimate of demand. This approach is often used as part of long-range planning
and new product development.

• Sales force composite

The sales staff is often a good source of information because of their direct contact with customers. Thus, they
may be aware of customer’s future plans. In this approach, each salesperson estimates what projected sales will
be in his or her area or region.

• Customer surveys
This method solicits inputs from customers or potential customers regarding future purchasing plans. It can assist
in not only preparing a forecast but also in improving product/service design and planning for new products. You
should ensure you exercise a great deal of care in constructing a survey, administering it and correctly interpreting
the results in order to obtain valid information.

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• Outside opinion
Occasionally, outside opinions are needed to make a forecast. These may include advice on political or economic
conditions within the region or in a global environment.

• Delphi Method
There are three different types of participants in the Delphi Method: decision makers, staff personnel and
respondents. Decision-makers usually consist of a group of five to ten experts who will make the actual forecast.
Staff personnel assist decision-makers by preparing, distributing, collecting and summarising a series of
questionnaires and survey results. The respondents are a group of people, located in different places, whose
judgement is highly respected. This group provides input to decision-makers before the forecast is made.

Activity 8.1

1. Analyse the qualitative methods of forecasting

Overview of Quantitative Methods

Five quantitative forecasting methods, all of which use historical data will be described. They fall into two
categories:
Category A - Time-series models: These models predict on the assumption that the future is a continuation of the
past. In other words, they look at what has happened over a period of time and use a series of past data to make
a forecast. These include:
1. Naïve approach
2. Moving averages
3. Exponential smoothing

Category B - Casual model: incorporate the variable or factors that might influence the quantity being forecast. If
the cause-effect relationship between variables can be modelled, then predictions of the factors, which influence
whatever we are trying to forecast, will enable a forecast to be made.
1. Trend projection
2. Linear regression

Forecasting based on Time Series Data

A time series is based on a sequence of evenly spaced data points (daily, weekly, monthly, quarterly, and
annuallyetc.). Forecasts using time series data means that future values are predicted only from past values and
other variables, no matter how valuable they are, may be ignored.

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Analysis of time series data requires you to identify the underlying behaviour of the series. This can often be done
by merely plotting the data and visually examining the plot or graph.
These behaviours can be described as follows:
• ‘Trend’ refers to a gradual, long-term movement in the data over time. Changes in income, population, age
distribution or cultural views may account for movement in trend.
• ‘Seasonality’ is a data pattern that repeats itself after a period of days, weeks, months or years. Restaurants,
supermarkets and theatres experience weekly or even daily ‘seasonal’ variations.
• ‘Cycles’ are patterns in the data that occur every several years. These are often related to a variety of
economic and political factors or even agricultural conditions.
• ‘Random’ or ‘irregular variations’ are due to unusual circumstances such as severe weather conditions, strikes,
or a major change in a product or service.

Trend
component
Demand for product or service

Seasonal peaks

Actual
demand

Average
demand over
Random four years
variation
| | | |
1 2 3 4
Year

Figure 8.1: Random and Irregular Forecasting

17

Source: (Heizer and Render. 2020)

Naïve Approaches
This is a forecasting technique that assumes demand in the next period is equal to demand in the most recent
period. For example, if Vodacom sold 1550 cellular phones in January, then we assume that they will sell 1550
cellular phones in February.

Moving Averages
This is a forecasting method that uses an average of the n most recent periods of data to forecast the next
period. If n represents 3 months, then we simply add up the actual sales in the last three months and divide by 3.
8.1 shows how moving averages are calculated.

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Table 8.1: 3 Month Moving Average

MONTH ACTUAL SALES 3-MONTH MOVING AVERAGE
January 10
February 12
March 13
April 16 (10+12+13) /3 = 11.67
May 19 (12+13+16) /3 = 13.67
June 23 (13+16+19) /3 = 16
July 26 (16+19+23) /3 = 19.33
August 30 (19+23+26) /3 = 22.67
September 28 (23+26+30) /3 = 26.33
October 18 (26+30+28) /3 = 28
November 16 (30+28+18) /3 = 25.33
December 14 (28+18+16) /3 = 20.67

Exponential Smoothing
This is a weighted moving-average forecasting technique in which data points are weighted by an exponential
function. It is useful when very little past data is available. The formula can be shown as follows:
New forecast = last period’s forecast +  (last period’s actual demand – last period’s forecast), where  is a weight,
or smoothing constant, chosen by the forecaster, that has a value between 0 and 1. This equation can be written
mathematically as:
Ft = Ft-1 + (At-1 – Ft-1) where

Ft = new forecast

Ft-1 = previous forecast

 = smoothing constant (0    1)

At-1 = previous period’s actual demand.

Example 1
In January a car dealer predicted February demand for 142 new cars. Actual February sales were 153 new cars.
Using a smoothing constant chosen by management of  = .20, we can forecast March demand using the
exponential smoothing model.

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New forecast for March demand = 142 + .2(153 – 142)

= 144.2
Therefore, our March demand for new cars is rounded off to 144.

8.3 Trends Predictions

This is a time series forecasting method that fits a trend line to a series of historical data points and then projects
the line into the future for forecasts. Figure 8.2 depicts the Least Squares Method for finding the Best-Fitting
Straight Line, Where the Asterisks are the Locations of the Seven Actual Observations or Data Points.
Values of Dependent Variable

Actual observation Deviation7

(y value)

Deviation5 Deviation6

Deviation3

Deviation4

Deviation1
Deviation2 ^ = a + bx
Trend line, y

Time period

Figure 8.2: Time Predictions

18

Source: (Heizer and Render. 2020)

8.4 Regression Analysis
Linear Regression Analysis is a straight-line mathematical model used to describe the functional relationships
between independent and dependant variables. We use this technique to verify whether our sales might be related
to our advertising budget, our prices, competitor’s prices or promotional strategies.

We use the equation

y = a + bx
Where y = value of the dependant variable (e.g. Sales)
a = y-axis intercept
b = slope of the regression line
x = independent variable

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Practical Example 1

The values of y and

their corresponding
values of y are shown 0 1 2 3 4
in the Table below:
x

Y 2 3 5 4 6

a) Find the least square regression line y = ax + b.

b) Estimate the value of y when x = 10.
We use a table to calculate a and b.

X y xy x2

0 2 0 0

1 3 3 1

2 5 10 4

3 4 12 9

4 6 24 16

x = 10 y = 20 x y = 49 x2 = 30

We now calculate a and b using the least square regression formulas for a and b.

a = (nx y - xy) / (nx2 - (x)2) = (5*59 - 10*20) / (5*30 - 102) = 1.9.

b = (1/n)(y - a x) = (1/5)(20 - 1.9*10) = 0.2.

b) Now that we have the least square regression line y = 1.9 x + 0.2, substitute x by 10 to find the value of the
corresponding y.

y = 1.9 * 10 + 0.2 = 19.2.

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Practical Example 2
The sales of a company (in million dollars) for each year are shown in the Table below:

x (year) 2005 2006 2007 2008 2009

y (sales) 12 19 29 37 45

a) Find the least square regression line y = ax + b.

b) Use the least squares regression line as a model to estimate the sales of the company in 2012.
We first change the variable x into t such that t = x - 2005 and therefore t represents the number of years after
2005. Using t instead of x makes the numbers smaller and therefore manageable. The table of values becomes.

t (years after 2005) 0 1 2 3 4

y (sales) 12 19 29 37 45

We now use the Table to calculate an and b included in the least regression line formula.

T y ty t2

0 12 0 0

1 19 19 1

2 29 58 4

3 37 111 9

4 45 180 16

x = 10 y = 142 xy = 368 x2 = 30

We now calculate a and b using the least square regression formulas for a and b.

a = (nΣt y - ΣtΣy) / (nΣt2 - (Σt)2) = (5*368 - 10*142) / (5*30 - 102) = 8.4.

b = (1/n)(Σy - a Σx) = (1/5)(142 - 8.4*10) = 11.6.

b) In 2012, t = 2012 - 2005 = 7

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The estimated sales in 2012 are: y = 8.4 * 7 + 11.6 = 70.4 million dollars.

Activity 8.2

https://bizfluent.com/info-12089071-advantages-regression-analysis-
forecasting.html

Using the link, analyse the main advantages of using linear regression to assist in
accurate forecasting.

Revision Questions 8.1

Question 1
Auto sales at Carmen’s Chevrolet are shown below. Develop a 3-week moving
average.

Week Auto Sales

1 8

2 10

3 9

4 11

5 10

6 13

7 -

Question 2
A firm uses simple exponential smoothing with  = 0.1 to forecast demand.
The forecast for the week of January 1 was 500 units whereas the actual demand
turned out to be 450 units. Calculate the demand forecast for the week of
January 8.

Question 3
Exponential smoothing is used to forecast automobile battery sales. Two value
of  are examined,  = 0.8 and  = 0.5. Evaluate the accuracy of each
smoothing constant. Which is preferable? (Assume the forecast for January was
22 batteries.) Actual sales are given below:

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Month Actual Battery Sales Forecast

January 20 22

February 21

March 15

April 14

May 13

June 16

Question 4
Use the sales data given below to determine: (a) the least squares trend line,
and (b) the predicted value for 2003 sales.

Year Sales (Units)

1996 100

1997 110

1998 122

1999 130

2000 139

2001 152

2002 164

8.5 Summary
Forecasting of product demand is a necessity for almost all aspects of operational planning. Short–term demand
forecasts determine the daily resources requirements needed for production, including labour and material, as well
as for the development of work schedules and shipping dates and controlling inventory levels. Long-term forecasts
are needed for the development of new products for development and changes in existing products and to acquire
the plant, equipment, personnel, resources, and supply chain necessary for future operations. A number of
forecasting methods have been presented including qualitative and quantitative. Quantitative methods are easy to
understand and are not costly. Also understand that the forecast are estimates that aid in decision-making.

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Answers to Activities
Video Activity 8.1
Student is required to watch the video and apply the knowledge learnt.

Activity 8.1
Student is required to apply their knowledge.

Activity 8.1
Student is required to apply their knowledge.

Activity 8.2
Student is required to apply their knowledge.

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Unit
9: Product Design

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

9.1 Introduction to Designing of Goods • The operational function of designing goods and services is
and Service introduced

9.2 Objectives of Product and Service • Question the Objectives of Product and Service Design
Design

9.3 Goods and Service Selection • Compare the Goods and Service Selections that are available
to organisations

9.4 The Design Process • Critically analyse the Design Process

9.5 Product Life Cycle • Analyse the product Life Cycle

9.6 Product Development Stages • Critically evaluate the product Development Stages

9.7 Summary • Summarise topic areas covered in unit

Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson
Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management.

Operations, strategy, and Information Technology. Ninth Edition
International Edition: McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C.,
Harrison A., Johnson R. (2010) Operations Management. SA: Pearson.

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9.1 Introduction to Designing of Goods and Service

Global firms know that the basis for an organisation’s existence is the goods or services it provides to society.
Great products are the keys to great success. To maximise the potential for success, top companies tend to focus
on a few key products and spend enormous amounts of time and resources in improving them. Because most
products have limited or even predictable life cycles, companies must be constantly on the lookout for new products
to design, develop and introduce to the market. Good operations managers insist on strong communications
between customers, products, processes and suppliers.

An effective product strategy links product decision with investment, market share and product life cycle. The
objective of product design is to develop and implement a product strategy that meets the demands of the market
place with a competitive advantage. Product strategy often focuses on developing a competitive advantage through
product differentiation, low cost, rapid response, flexibility or a combination of these.

Video Activity 9.1.

Chapter 5 part 1 Product and Service design-

https://www.youtube.com/watch?v=iPTCz1S2-h4

Watch the video above to assess the importance of product service and design
on customer satisfaction.

9.2 Objectives of Product and Service Design

Stevenson (2021 asserts that the objectives are:
• To bring new or revised products or services to the market as quickly as possible.
• To design products/services which have customer appeal.
• To increase the level of customer satisfaction.
• To improve quality.
• To reduce costs.

9.3 Goods and Service Selection

Generation of new product Opportunities
Product selection, definition and design takes place on a continuing basis because so many new product
opportunities exist. Heizer and Render (2020) concludes that the following factors can influence market
opportunities:
• Understanding the customer is the premier issue in new product development. Many commercially
important products are initially thought of and even prototyped by users rather than producers.
• Economic change, which brings increasing levels of affluence in the long run, but economic cycles and
price changes in the short run.
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• Sociological and demographic change which may occur as a result of decreasing family size, for
example AIDS.
• Technological change, which makes possible everything from home computers to cellular phones to
artificial hearts.
• Political/legal change, which brings about new trade agreements, tariffs and government contract
requirements.
• Other changes, which may be brought about through market practice, professional standards, suppliers
and distributors.

Think Point 9.1

Identify innovative ideas that your company may adopt to generate new products.

9.4 The Design Process

The design process begins with a motivation for a design. Ultimately, the customer is the driving force for product
and service design. Failure to satisfy customers can result in customer complaints, returns, and warranty/guarantee
claims, amongst other things. Ideas for new or improved designs come from a variety of sources including:
• Customer – the marketing department can tap this source of ideas through focus groups, surveys and an
analysis of buying patterns.
• Research and development – which is an organized effort to increase scientific knowledge or product
innovation.
• Competitors – by studying our competitor’s product or service, we can learn a great deal in improving our
own products.
• Reverse engineering – dismantling and inspecting a competitor’s product.

Ideas for new or improved design cannot work in isolation. We must ensure that we have the capability of
production which includes equipment, skills, and types of material, technology and special abilities.

Manufacturability is a key concern for manufactured goods. Ease of assembly is important for costs, productivity
and quality. In general, design, marketing and production must work closely together, keeping each other informed
and taking into account the needs of the customer.

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9.5 Product Life Cycle

Many new products exhibit a product life cycle. Heizer and Render (2020) contends that there are four stages in
product/service life cycles and these are:

• Introduction
When an item is first introduced it may be treated as a curiosity. Demand is generally high because
potential buyers may not be familiar with the product/service.

Video Activity 9.2

The Product Life Cycle Explained

https://www.youtube.com/watch?v=_26E6QR_hmU

Argue the use of this marketing model in assisting with production forecasting.

• Growth
As products or services survive the rigors of their introduction to the market, they will begin to be more
widely accepted. Increasing numbers of customers accept the value of the product or service and volume
starts to grow.

• Maturity
After a period of rapid growth, customers may become bored with products or services. Demand starts to
level off as many customers have already been supplied.

• Decline
Sales start to decline and the product life cycle is at the end. No new capital investments are made in the
product.

Activity 9.1

Compile a catalogue of your organization’s products and then identify into which
stage of the Product Life Cycle it falls.

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The strategies and issues within the product life cycle are depicted in Figure 9.1:

Introduction Growth Maturity Decline

Product design Forecasting Standardization Little product
and critical Less rapid differentiation
development Product and product changes Cost
OM Strategy/Issues

critical process – more minor minimization

Frequent reliability changes Overcapacity
product and Competitive Optimum in the
process design product capacity industry
changes improvements Increasing Prune line to
Short production and options stability of eliminate
runs Increase capacity process items not
High production Shift toward Long production returning
costs product focus runs good margin
Limited models Enhance Product Reduce
Attention to distribution improvement capacity
quality and cost cutting

Figure 9.1: Product Life Circle

19

Source: (Heizer and Render. 2020)

9.6 Product Development Stages

Product concepts are developed from a variety of sources, both external and internal to the firm. Concepts that
survive the product idea stage progress through various stages, with nearly constant review, feedback and
evaluation in a highly participative environment to minimize failure.
Key Terms
▪ Product Development teams are responsible for moving from market requirements for a product to achieving
product success.
▪ Concurrent Engineering uses participating teams in the design and engineering activities.
▪ Computer-Aided Design (CAD) is the use of a computer to interactively develop, design and document
products.
▪ Modular Design is parts or components of a product which are subdivided into modules that are easily
interchanged or replaced.
▪ Robust Design is a design that can be produced to requirements even with unfavourable conditions in the
production process.
▪ Value Analysis is a review of successful products that takes place during the production process.
▪ Standardization is the extent to which there is absence of variety in the product, service or process.
▪ Quality Function Deployment (QFD) is a structured approach for integrating the customers’ needs into the
product development process. It is used to connect customer attributes to engineering characteristics. This is
typically done by a technique called the House of Quality.

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Activity 9.2

3M Compagnie (https://www.3m.co.za/3M/en_ZA/company-mea/ )

On reading the information provided on this webpage, critically analyse rapid evolution and
rapid innovation.

Revision Questions 9.1

Question 1
You wish to compete in the super premium ice cream market. The task is to determine the
wants of the super-premium market and the attributes/hows to be met by their firm. Use the
house of quality concept.

Question 2
Market research has revealed that customers feel four factors are significant in making a
buying decision. A “rich” taste is most important followed by smooth texture, distinct flavour,
and a sweet taste. From a production standpoint, important factors are the sugar content,
the amount of butterfat, low air content, and natural flavours.

Question 3
Prepare a bill-of-material for a ham and cheese sandwich.

Question 4
Prepare an assembly chart for a ham and cheese sandwich.

Question 5
Michael’s Engineering, Inc. manufactures components for the ever-changing notebook
computer business. He is considering moving from a small custom design facility to an
operation capable of much more rapid design of components. This means that Michael must
consider upgrading his CAD equipment. Option 1 is to purchase two new desktop CAD
systems at R100, 000 each. Option 2 is to purchase an integrated system and the related
server at R500, 000. Michael’s sales manager has estimated that if the market for notebook
computers continues to expand, sales over the life of either system will be R1, 000,000. He
places the odds of this happening at 40%. He thinks the likelihood of the market having
already peaked to be 60% and future sales to be only R700, 000. What do you suggest
Michael do?

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9.7 Summary
New product and service design improve a firm’s image, invigorates employees, and helps a firm to grow and
prosper. The design process starts with ideas formulated into product concepts. Once a product concept passes
through a feasibility study, performance specifications are given to designers who then develop the test prototype
designs for some of these prototypes. The specifications for design and manufacturing are taken through to a pilot
run where designs are finalised and the planning for product launch begins.

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Answers to Activities
Video Activity 9.1
Student is required to watch the video and apply the knowledge learnt.

Think Point 9.1

Student is required to apply their knowledge.

Activity 9.1
Student is required to apply their knowledge.

Product Life Cycle

• Introduction
• Growth
• Maturity
• Decline

Video Activity 9.2

Student is required to watch the video and apply the knowledge learnt.

Activity 9.2
Student is required to apply their knowledge.

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Unit
10: Planning Facilities and Capacity

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

10.1 Introduction • Introduce topic areas for the unit

10.2 Capacity • Interrogate the concept of capacity

10.3 Facilities • Reflect on the importance of facilities

10.4 Basic Layouts • Critically analyses the basic layouts in terms of functionality

10.5 Designing Product Layouts • Appraise the various designing product layouts

10.6 Hybrid Layouts • Probe the concept of hybrid layouts

10.7 Comparisons of Product and • Differntiate between product layout and process layout
Process Layouts

10.8 Summary • Summarise topic areas covered in unit

Prescribed and Recommended Reading(s)Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations,

strategy, and Information Technology. Ninth Edition International Edition:
McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C., Harrison
A., Johnson R. (2010) Operations Management. SA: Pearson.

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10.1 Introduction
This Chapter addresses matters of capacity and facilities planning. We will discuss both long - term capacity
panning, intermediate and short - term capacity planning. Russel and Taylor (2019) define capacity is the maximum
capability to produce. Capacity planning takes place at various levels of detail.

Long term capacity planning is a strategic decision meant to establish a firm’s overall level of resources. The time
horizon spanned by this term is long enough to get resources, usually a year or even more for building or indeed
expanding facilities or acquiring new businesses. Capacity decisions do affect product lead times, customer
responsiveness, operating costs, and a firm’s ability to compete. Excess capacity can drain resources of a
company and prevent investments on more attractive ventures.

Video Activity 10.1

Video link: QDC1 Chapter 5 - Strategic Capacity Planning

https://www.youtube.com/watch?v=gUDn0-kCWM0

Watch the video above and appraise the importance of capacity planning.

10.2 Capacity
Russel and Taylor (2019) discuss strategies for timing of capacity expansion in relation to a steady growth in
demand as follows:
(i) Capacity lead strategy – Capacity is expanded in anticipation of growth in demand. This strategy is
used to attract customers from competitors who have capacity constraints or simply to obtain a
foothold in a rapidly expanding market. It affords a company a chance to respond to sudden surges in
demand. The idea is to meet peak demand with high levels of service.
(ii) Average capacity strategy – Capacity is expanded to coincide with average expected demand.
Managers anticipate selling a certain amount of output. Unmet demand periods are endured. It may be
observed that half the time capacity leads demand or that demand leads capacity.
(iii) Capacity lag strategy – Capacity increases after documenting increases in demand. This strategy is
conservative and it produces a higher return on investment but it may lose customers in the process.
It is applied in industries with standard products and cost-based or weak competition. The idea is that
once capacity is expanded, lost customers will return. Russell and Taylor (2019) make a point that
capacity increase depends on (1) the volume and certainty of anticipated demand and (2) strategic
objectives in terms of growth, customer service, and competition; and the costs of both expansion
and operation. Small increments at a time can be made for capacity although such increments are
costly over time. They argue that the best operating level for capacity is the percent of capacity
utilisation that minimises average unit cost. Capacity that operates at 100% is not very productive as
productivity slows down in the end because there is no room for capacity cushioning. In industries

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where demand varies a lot, resource flexibility is low, and customer service is important, large
capacity cushions are common.
A 20% capacity cushion is there ideal. This means that in these industries the best operating capacity is at 80%.
Capacity cushions take care of unexpected surges in demand or temporary work stoppages. Capital intensive
industries with less flexibility and higher costs keep the cushion level at about 10%. Airlines maintain a negative
cushion by overbooking flights. The best operating levels can refer to the most economic size of a facility.

The best operating point is where the economies of scale have reached their peak and the diseconomies of scale
have not yet started. Economies of scale do occur when costs per unit to produce or operate at high levels of
output. This is true when:
• Fixed costs can be spread over a large number of units.
• Production or operating costs do not increase in a linear fashion in proportion to levels of output.
• Quantity discounts are available for material purchases, and
• Operating efficiency increases as the workforce gains experience.

Russel and Taylor (2019) point out that capacity decisions have implications for new facility locations and how
the flow of work is arranged in a facility.

10.3 Facilities
Facilities can be a source of competitive edge asserts Russel and Taylor (2019). Facilities do make a difference.
For instance, the Bank of America has created an exemplary facility that showcases green designs. Green designs
can save energy costs and boost productivity. Facilities affect the efficiency with which workers carry out their jobs.
Decisions such as how much and how fast goods can be produced are affected by capacity planning.
Considerations such as product mix, how responsive the system should be, and how difficult it is to automate are
all affected by capacity planning. Facilities must thus be well planned, located and laid out.

Nowadays factories are T-shaped, so that deliveries can be made directly to the point of use within the factory. For
example, stores have portable kiosks for customers to be able to enquire and they also have checkouts at various
locations in the entire facility. Classrooms are designed to incorporate moving desks for ease of repositioning to
allow for different teaching styles. Effective layouts are meant to achieve many objectives such as:
• Minimising movement and costs of materials handling
• Using space efficiently
• Using labour efficiently
• Removing bottlenecks
• Facilitating communication and interaction between workers, workers and their supervisors and
between workers and customers

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• Reduce manufacturing cycle time and customer service time

• Removing wasted or redundant movements
• Facilitating the entry, exit and placement of people, material and products
• Incorporating safety and security measures
• Promoting product and service quality
• Encouraging good maintenance activities
• Providing a visual control of activities
• Providing flexibility to adapt to changing conditions
• Increasing capacity

10.4 Basic Layouts

Russel and Taylor (2019) discuss three basic layouts as follows:
1. Process Layout
These layouts also go by the name “functional layouts”. Similar activities in a department or work centre are
grouped together based on the process or function performed. For instance, in a machine shop, all drills can be
located in one work centre, lathes can be in another work centre and milling machines in yet another. Another
example is a departmental store, where women’s clothes, men’s clothes, children’s clothes, cosmetics, and shoes
can be in separate departments. This layout type lends itself to common use in service shops, job shops and in
batch production.

These are intermittent operations that serve the various needs of customers. Usually the volume of customer
orders is low, and the sequence for performing each customer order can differ. Equipment used in a process layout
is usually general purpose. Workers are skilled at operating departmental equipment. The advantage of this type
of layout, according to (2019) is that it is very flexible. The obvious disadvantage is inefficiency. Either customers
or jobs do not flow through the system in an orderly manner. Backtracking therefore takes place and sometimes
there are many non-value adding movements. It may also be required that an operation be set differently for each
new operation.

Though workers can operate different machines in their departments, their workloads may not be optimised due
to constant fluctuations. There are many queues for jobs and customers tend to wait long times. This results in idle
time between jobs and customers. It must be noted that material storage and movement are directly affected by
the type of layout adopted. This type of layout results in a lot of in-process inventories building up in the system as
materials move from one work centre to another, awaiting processing. The challenge in this type of layout is on
where to locate machines and departments so that they can relate to each other. The aisles for forklift movement
require a lot of space.

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Practical Application Or Examples 10.1

Select a product that would best suite intermittent operations and defend your
answer through a practical example.

2. Product Layout
Also, called “assembly lines”; these arrange activities in a line according to the sequence of operation that need to
be performed in assembling a product. Therefore, each product has its own assembly line. Flow of work is always
orderly, and efficient. The operations proceed from one work centre to another, down the assembly line until the
final product comes off the production line.

The product made or service is standard for a general market not for a particular customer. A good example of this
is the automobile industry. Due to high demands, product layouts are highly automated. The worker’s role in this
type of layout is different. The advantage of this type of layout is that it is efficient and easy to use. The disadvantage
is that it’s not flexible since it suits only one type of product or service. Conveyors are used to control the speed or
work automatically. Aisles are narrow and hence there is enough space in this type of layout to facilitate material
flow.

Think Point10.1

Recommend a product that lends itself to assembly line type production.

3. Fixed-Position Layout
These are typical of projects in which the product produced is very fragile, bulky or heavy to move. Ships, houses
and aircrafts are produced this way. The product is stationery for the entire production cycle. People, materials and
equipment are all brought to the production site.

10.5 Designing Product Layouts

Russel and Taylor (2019) argue that a product line ensures that machines or workers operate in line for producing
a certain product. Hence layouts are established by following the order of an assembly line. Precedence
relationships and requirements however, are important in the assembly of products. Although, other factors may
complicate decision-making. Product layouts are used for high volume-volume production. To achieve the required
output, jobs are broken down into smallest indivisible portions called work elements. The elements are so small
that they cannot be performed by more than one worker. But one worker often performs several of these work
elements. A workstation is an area along an assembly line that requires at least one worker or one machine. If
each work station on the assembly line takes the same amount of time to complete the assigned work elements,
then products will move successively from workstation to workstation with no need for a product to wait or a worker
to be idle. The process of making the amount of work equal at each work station is called line balancing.

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Think Point 10.2

True or false?
Toyota plant utilises the assembly line setup to complete their product
development.

10.6 Hybrid Layouts

Russel and Taylor (2019) clearly state that hybrid layouts are a combination of both product and process layouts.
There are three hybrid layouts we are going to discuss.

10.6.1 Cellular Layouts

Cellular layouts attempt to combine the flexibility of a process layout with the efficiency of a product layout. Using
group technology (GT) non-similar machines or activities are grouped together into work centres called cells to
process families of parts or customers with similar requirements.

Practical Application Or Example 10.2

Recommend a product that would suit a cellular process layout.

10.6.2 Flexible Manufacturing

A flexible manufacturing system (FMS) consists of numerous programmable machine tools connected by an
automated materials handling system. It is controlled by a common computer network. It is different from traditional
automation in the sense that the machine is fixed and although fixed machines are efficient, they are not flexible.

10.6.3 Mixed Model Assembly Lines

Although traditional assembly line can be used to process different models, they are not efficient. To avert the
ramifications of changing production runs such as frequent shutdowns from one model to the other, one of the
solutions has been the development of a mixed model assembly lines. It reduces the time required to change over
the line to produce different models. Workers are trained to perform a variety of tasks and are allowed to work at
more than one work station and finally the arrangement and organisation of the work schedule is changed as well.

Think Point 10.3

Advise on the level of expertise required by labour in order to facilitate the

mixed model assembly line.

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10.7 Comparison of Product Layout and Process Layout

Table 910.1: A comparison of Product and Process Layouts

Product Layout Process Layout

1. Description Sequential arrangement of activities Functional grouping of activities

2. Type of process Continuous, mass production, mainly Intermittent, job shop, batch
assembly production, mainly fabrication

3. Product Standardised, made to stock Varied, made to order

4. Demand Stable Fluctuating

5. Volume High Low

6. Equipment Special purpose General purpose

7. Workers Limited skills Varied skills

8. Inventory Low in-process, high finished goods High in-process finished goods

9. Storage space Small Large

10. Materials handling Fixed path (conveyor) Variable path (forklift)

11. Aisles Narrow Wide

12. Scheduling Part of balancing Machine location

13. Layout decision Line balancing Machine location

14. Goal Equalise work at each station Minimise material handling cost

15. Advantage Efficiency Flexible

(Russel and Taylor (2019)

Activity 10.1

Engage in a group discussion analysing the key layout advantages and

disadvantages in your organisation or an organisation of your choice

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Revision Questions 10.1

To be discussed in groups

Question 1

Take a tour of two production or distribution facilities in your area. Look for the
basic and hybrid layouts discussed in this chapter. Also, look for bottlenecks
and smooth flow. Write an essay comparing the two.

Question 2

Case Study: People Square Subway Restaurant Flow Optimisation

A new fast-food restaurant has opened up in Shanghai’s People Square

subway station. The subway station is busy 24 hours a day, seven days a week
so the fast–food restaurant is a welcome addition and money-making
proposition. The success of the restaurant has resulted in crowds of people
trying to figure out what to buy, how to order it, where to pick things up, and
where to pay for their purchase. The restaurant manager knows if they can
improve the flow of people, they can serve more people, the customers will be
happier; happier people tend to return more often and spend more money, and
the restaurant will make a greater profit. Over the first three months, a detailed
study of the customer’s purchase experience was conducted. The following
table identifies 25 of the typical customers.

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Customer Bakery Fountain Soups Bottle Fresh Salads Sandwiches Tea or Total Time
Drinks Drinks Fruit Cookies (min)
1 X X X 4
2 X X 1
3 X X X 3
4 X X 3
5 X X X 6
6 X X 9
7 X X X 5
8 X X 5
9 X X X 5
10 X X X 10
11 X X X 7
12 X X X 3
13 X X X 4
14 X X X 5
15 X 9
16 X 3
17 X X X 8
18 X X 7
19 X X 7
20 X X X X 6
21 X X 1
22 X X 1
23 X X 9
24 X X 7
25 X X X 1
Recommend changes you would make in the layout so that the restaurant can be successful at serving more
people.

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Fountain Drinks Bottled drinks, fruit,

Sandwich salads and fresh food
corner

Bakery items

Coffee Trays
and
Cookies

CKout Ckout

Figure 10.1: People Square Subway Restaurant Facility Layout

20

Source: (Russel and Taylor, 2019)

10.8 Summary
Capacity planning is the process of establishing the overall level of productive resources for the firm. It involves
long-term strategic activities such as the acquisition of new facilities, technologies or businesses which take a year
or more to complete. Capacity expansion can either lead or lag demand.

The best operating level should include a capacity cushion. Facility decisions are essential parts of the firm’s
strategy.

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Answers to Activities
Video Activity 10.1
Student is required to watch the video and apply the knowledge learnt.

Practical Application or Examples 10.1

Student is required to apply their knowledge.

Think Point10.1
Student is required to apply their knowledge.

Think Point 10.2

Student is required to apply their knowledge.

Practical Application or Example 10.2

Student is required to apply their knowledge.

Think Point 10.3

Student is required to apply their knowledge.

Activity 10.1
Student is required to apply their knowledge.

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Unit
11: Location Decisions

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

11.1 Introduction to Location • An introduction to location strategies lays out the topics that
Strategies follow

11.2 General Procedure for Making • Critically analyse the General Procedure for Making Location
Location Decisions Decisions

11.3 Factors Affecting Location • Investigate the Factors Affecting Location Decisions
Decisions

11.4 Trends in Location Strategies • Interrogate the Trends in Location Strategies

11.5 Methods of Evaluating Location • Evaluate the Methods of Evaluating Location Alternatives
Alternatives

11.6 Summary • Summarise topic areas covered in unit

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Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson
Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations,

strategy, and Information Technology. Ninth Edition International Edition:
McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C., Harrison
A., Johnson R. (2010) Operations Management. SA: Pearson.

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11.1 Introduction to Location Strategies

Organisations become involved in location decisions for many reasons. Many firms including banks, retailers, fast-
food chains and supermarkets view location as part of a marketing strategy and they look for locations that will
assist them to expand their respective markets.

A similar situation occurs when an organisation experiences a growth in demand for its products that cannot be
satisfied with the expansion of current facilities. Some firms are forced to relocate because of the depletion of their
markets e.g. fishing, mining or logging operations. For other firms, a shift in their markets would force them to
relocate.

Location options include:

• Expanding a current facility instead of moving
• Maintaining current sites whilst adding another facility elsewhere
• Closing the current facility and moving elsewhere

Video Activity 11.1

Video Link: Chap 8 Location Strategies

https://www.youtube.com/watch?v=eer5pRXVQDQ

Watch the video and above and determine the importance of location in the
operations management function.

11.2 General Procedure for Making Location Decisions

The way in which an organisation approaches location decisions often depends on its size and the nature of its
operations. New and small organisations tend to adopt rather informal approaches to location decisions. Stevenson
(2007) infers that the general procedure for making location decisions consist of the following steps:
• Decide on the criteria that will be used to evaluate location alternatives, such as increased revenues or
community service
• Identify factors that are important, such as location of markets or raw materials
• Develop location alternatives
• Evaluate alternatives and make a selection

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11.3 Factors Affecting Location Decisions

Selecting a facility location is becoming much more complex due to the rapid globalisation of many countries.
Many factors can influence location decisions, and these include:

Regional Factors
The primary regional factors involve raw materials, markets and labour considerations.
Locations of Raw Materials – there are three primary reasons why firms locate near the source of raw materials:
necessity, perishability and transport costs.
Location of Markets – firms tend to locate in close proximity to the markets they intend to serve as part of their
competitive strategies.

Labour Factors
This relates to availability and cost of labour (wage/salary rates) in an area, or if there is a serious potential
problem with the unions. Skills of potential employees may also be a factor.
Other factors one has to consider, include:
• Climate and taxes
• Business and personal income tax
• Cost of energy and services
• Tax incentives
• Tariff protection
• Effectiveness of governments
• Housing
• Educational systems
• Local customs
• Language
• Exchange rates
• Municipal by-laws
• Proximity to suppliers
• Environmental regulations
• Site/ Land costs
• Availability of transport

11.4 Trends in Location Strategies

Recent trends in locating manufacturing facilities reflect a combination of competitive and technological factors.
One such trend is for foreign producers, especially Japanese automotive firms, to locate factories in the United
States. One reason for this is the fact that the United States represents a tremendous market for Japanese cars,

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trucks and recreational vehicles. By locating in the United States, these firms can reduce delivery times and costs.
Furthermore, they can avoid any tariffs or quotas that may be applied to imports.

Another trend is Just-in-Time manufacturing techniques, which encourages suppliers and customers to locate in
close proximity to each other in order to reduce lead times. We can expect to see the establishment of micro-
factories with narrow product focuses that will be located near major markets in order to reduce response times.
Advances in information technology have enhanced the ability of companies to gather, track and distribute
information. With the introduction of the internet, many companies are now global players.

Think Point 11.1

In terms of strategic objectives, assess the manner in which goods producing

and service location decisions differ?

11.5 Methods of Evaluating Location Alternatives

Heizer and Render (2020) suggest four methods that can be used to solve location problems:

The Factor-Rating Method

This is a location method that instils objectivity into the process of identifying hard-to-evaluate costs. It has six
steps as identified by Heizer and Render (2020):
(i) Develop a list of relevant factors.
(ii) Assign a weight to each factor that reflects its relative importance in the company’s objectives.
(iii) Develop a scale for each factor (for example 1 to 10 or 1 to 100).
(iv) Have management score each location for each factor, using the scale in step (iii).
(v) Multiply the score by the weights for each factor and the total score for each location.
(vi) Make a recommendation based on the maximum point score.

The Locational Break-Even Analysis

This is a cost-volume analysis to make an economic comparison of location alternatives. There are three steps:
(i) Determine the fixed and variable costs for each location.
(ii) Plot the costs for each location, with costs on the vertical axis of the graph and the annual volume on the
horizontal axis.
(iii) Select the location that has the lowest total cost for the expected production volume.
Refer to Example 2 in Heizer and Render (2020), for a typical Locational Break-Even Analysis scenario.

Centre-of-Gravity Method
This is a mathematical technique used for finding the best location for a single distribution point that services
several stores in the area.

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Refer to Example 3 in Heizer and Render (2020), for a typical Centre-of-Gravity Method application.

Transportation Model
The objective of the transportation model is to determine the best pattern of shipments from several points of
supply (sources) to several points of demand (destinations).

Activity 11.1

Distinguish between the methods of evaluating location alternatives.

Revision Questions 11.1

Question 1
A major drug store chain wishes to build a new warehouse to serve the whole
Midwest. At the moment, it is looking at three possible locations. The factors,
weights, and ratings being considered are given below:
Ratings
Factor Weights Peoria Des Chicago
Moines
Nearness to 20 4 7 5
markets
Labour cost 5 8 8 4
Taxes 15 8 9 7
Nearness to 10 10 6 10
suppliers
Which city should they choose?

Question 2
Balfour’s is considering building a plant in one of three possible locations. They
have estimated the following parameters for each location:
Location Fixed Cost Variable Cost
Waco, Texas R300,000 R5.75
Tijuana, Mexico R800,000 R2.75

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Fayetteville, R100,000 R8.00

Arkansas
For what unit sales volume should they choose each location?
Question 3
Our main distribution center in Phoenix, AZ is due to be replaced with a much
larger, more modern facility that can handle the tremendous needs that have
developed with the city’s growth. Fresh produce travels to the seven store
locations several times a day making site selection critical for efficient
distribution. Using the data in the following table, determine the map coordinates
for the proposed new distribution center.
Store Locations Map Coordinates Truck Round Trips per
(x,y) Day
Mesa (10,5) 3
Glendale (3,8) 3
Camelback (4,7) 2
Scottsdale (15,10) 6
Apache Junction (13,3) 5
Sun City (1,12) 3
Pima (5,5) 10

Question 4
A company is planning on expanding and building a new plant in one of three
countries in Middle or Eastern Europe. The general manager, Patricia Donegal,
has decided to base her decision on six critical success factors: technology
availability and support, availability and quality of public education, legal and
regulatory aspects, social and cultural aspects, economic factors, and political
stability. Using a rating system of 1 (least desirable) to 5 (most desirable) she
has arrived at the following ratings (you may, of course, have different opinions).
In which country should the plant be built?
Critical Success Factor Turkey Serbia Slovakia
Technology availability and support 4 3 4
Availability and quality of public 4 4 3
education
Legal and regulatory aspects 2 4 5

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Social and cultural aspects 5 3 4

Economic factors 4 3 3
Political stability 4 2 3

Question 5
Assume that Patricia decides to use the following weights for the critical
success factors:
Technology availability and support 0.3
Availability and quality of public education 0.2
Legal and regulatory aspects 0.1
Social and cultural aspects 0.1
Economic factors 0.1
Political stability 0.2
Would this change her decision?

Question 6
Patricia’s advisors have suggested that Turkey and Slovakia might be better
differentiated by either
(a) doubling the number of critical success factors, or (b) breaking down each of
the existing
Critical success factors into smaller, more narrowly defined items e.g.,
Availability and quality of public education might be broken into primary,
secondary, and post-secondary education. How would you advise Ms.
Donegal?

11.6 Summary
Location may determine up to 50% of operating expense. Location is also a critical element of the determination
of revenue in service, retail or professional firms. Industrial firms need to consider both tangible and intangible
costs. Industrial location problems are typically addressed through a factor rating method, location cost-volume
analysis, the centre of gravity methods and the transportation method of linear programming

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Answers to Activities
Video Activity 11.1
Student is required to watch the video and apply the knowledge learnt.

Think Point 11.1

Student is required to apply their knowledge.

Activity 11.1
Student is required to apply their knowledge.

This is a cost-volume analysis to make an economic comparison of location alternatives. There are three steps:
(iv) Determine the fixed and variable costs for each location.
(v) Plot the costs for each location, with costs on the vertical axis of the graph and the annual volume on the
horizontal axis.
(vi) Select the location that has the lowest total cost for the expected production volume.

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Unit
12: Designing the Supply Chain

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

12.1 Introduction • Introduce topic areas for the unit

12.2 The Supply Chain • Examine the components of The Supply Chain

12.3 The Management of Supply Chains • Interrogate The Management of Supply Chains

12.4 Supply Chain Sustainability • Inspect the Supply Chain Sustainability

12.5 Information Technology a Supply • Question the Information technology a supply chain enabler
Chain Enabler

12.6 Supply Chain Integration • Critically evaluate the need for Supply Chain Integration

12.7 Summary • Summarise topic areas covered in unit

Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain Management.
Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and Practice
for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations,

strategy, and Information Technology. Ninth Edition International Edition: McGraw
Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C.,
Harrison A., Johnson R. (2010) Operations Management. SA: Pearson.

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12.1 Introduction
Globalisation and the evolution of information technology according to Russel and Taylor (2019) have catalysed
supply chain management to become the strategic means of companies to manage quality, satisfy customers and
remain competitive. A supply chain encompasses all activities associated with the flow and transformation of goods
and services. Suppliers are referred to as upstream members while end-users are referred to as downstream
members.

Video Activity 12.1.

What is Supply Chain Management? Definition and Introduction | AIMS UK

https://www.youtube.com/watch?v=lZPO5RclZEo

Watch the video in the link and validate the importance of the supply chain
function.

12.2 The Supply Chain

Russel and Taylor (2019) discuss modern value chains as follows:
Supply chains for service providers - these are different from the supply for products in that there are no physical
goods provided to the customer. Thus the supply chain does not focus much on the flow of items but on the human
resources and the support services required to provide its own service. Hence distribution networks are non-
existent. Instead, supply chains for services are hubs.

Value chains - the term value chain and demand - driven value chain recently entered the supply chain lexicon.
Supply chain has the following sets of processes:
• Procurement (source)
• Production (make)
• Distribution (deliver)
• Information.

All these processes have to interact to provide sound supply chain systems. A demand driven value chain is
considered to be a global supply.

Video Activity 12.2

Ten steps to a greener supply chain: https://www.youtube.com/watch?v=xg-
8O0ZImIs
Watch the video in the link and critique the need to greening the supply chain
against the backdrop of corporate governance principles.

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12.3 The Management of Supply Chains

Supply Chain Management (SCM) focuses on integration and management of the flow of goods and services and
information throughout the supply chain so that there is responsiveness to customer needs while at the same time
reducing total costs. In a global supply chain a company counts on the coordinated effort of all members of the
supply chain. Supply chains need the collaboration, cooperation, and communication of all members in order to be
effective. Thus suppliers and their customers must share information. Customers need to be able to count on the
quality and timeliness of the products and services of the suppliers (Russel and Taylor, 2019).

Think Point 12.1

Assess the link between forecasting and supply chain management.

Supply chain uncertainty and inventory - Companies want to synchronise the upstream flow of incoming
materials, parts, subassemblies, and services with production and distribution downstream so they can respond to
uncertainty in customer demand without increasing inventory costs. Businesses use inventory to insure themselves
against uncertainties in demand. In other words, demand fluctuations are catered for through inventory kept as
safety stock. Thus supply chain members carry buffer stock at various stages of the supply chain. This deals with
many issues such as delays in supply if ordered parts do not arrive on time. This way, the supplier can still serve
their customers from safety stock.
(Russel and Taylor 2019).

The Bullwhip Effect - if information is distorted, inaccurate demand data or forecasts from the customer can end
up with a back ripple effect on the upstream of the supply chain and magnify demand variability at each stage. This
would lead to higher buffer inventories, poor customer service; missed production schedules wrong capacity plans,
inefficient shipping and high costs. The bullwhip effect occurs when slight to moderate demand variability gets
magnified and demand information is transmitted back upstream in the supply chain.

Risk management - Russel and Taylor argue that when supply chains are stretched over long distances and
multiple locations around the world, uncertainty and risk increases. This is where lean manufacturing makes a lot
of sense in that there is little redundancy and slack, that is carried as inventory. Carrying inventor to take care of
uncertainty is an expensive option. As a consequence, a number of top firms in supply chain now engage in risk
management to cope with uncertainty in supply chain. This requires due diligence to evaluate and anticipate the
likelihood and possibility of impact of unexpected supply chain disruptions which can be economic, marketplace or
natural and to plan ahead of them.

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Think Point 12.2

Determine areas of attention that require management intervention in order to

avoid the Bullwhip effect.

This type of planning is called resiliency (or continuity) into the supply chain. Circumstances that because
disruptions are identified in advance. Events are monitored worldwide to anticipate disruptions and develop
contingency plans. Risk pooling is an approach to managing risks where an attempt is made to aggregate risks to
reduce the impact of individual risks. One way to pool risks is to combine inventories from multiple at risk locations
into few, or one location like a warehouse or distribution centre, in a more risk free environment.

12.4 Supply Chain Sustainability

Russel and Taylor (2019) state that sustainability; also referred to as “going green” has become one of the most
visible recent trends in operations and supply chain management. The United Nations defines sustainability as
meeting the present needs without compromising the ability of future generations to meet their needs. The
challenge for many companies is that they view sustainability as a way to be environmentally friendly and socially
conscious rather than being competitive.

Think Point 12.3.

Argue the link between business sustainability and achieving sustainability in

the supply chain.

12.5 Information Technology a Supply Chain Enabler

Information essentially links all supply chain processes and members. Computer and information technology allows
real-time, online communications throughout the supply chain (Russel and Taylor 2019). Supply chain managers
therefore, say that in modern supply chain management, inventory has been replaced by information.

Electronic Business- E-business replaces physical processes with electronic ones. E-business supply chain is
conducted via a variety of electronic media, including data interchange (EDI), email, electronic funds transfer (EFT),
electronic publishing, image processing, electronic bulletin boards, shared databases, bar coding, fax, and
automated voice mail, CD-ROM catalogues, the Internet, websites, and so on. Companies are able to automate
the process of moving information electronically between suppliers and customers thereby saving labour costs and
time.

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Practical Application Or Example 12.1

Infer the link between Amazon’s online sales platform and E-business.

12.6 Supply Chain Integration

Russel and Taylor (2019) propose that one of the keys to successful, efficient supply chain is to get the various
supply chain members to collaborate and work together that is referred to as getting “synchronised.” This type of
coordination is called supply chain integration. Information technology is thus a key part of getting the supply chain
integrated and it is done in four areas – information sharing, collaborative planning, work coordination, and adoption
of new models and technologies.

Table 12.1: Supply Chain Integration

10

Information sharing among supply chain members

Reduced bullwhip effect
Early problem detection
Faster response
Builds trust and confidence
Collaborative planning, fostering, replenishment, and design
Reduced bullwhip effect
Lower costs (material, logistics, operating, etc.)
Higher capacity utilisation
Improved customer service levels

Coordinated workflow, production and operations, procurement

Production efficiencies
Fast response
Improved service
Quicker to market
Adopt new business models and technologies
Penetration of new markets
Creation of new products
Improved efficiency
Mass customisation
Russel and Taylor (2019)

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Revision Questions 12.1

To be discussed in groups
Question 1
Analyse the supply chains, in general terms, for McDonald’s and for Toyota.
Question 2
Critically evaluate the differences in the supply chains of service providers and
manufacturing companies.
Question 3
Identify three service businesses in your community and compare their supply
chains.

12.7 Summary
Supply chain management is one of the most important strategic aspects of operations management. This is so
because it incorporates many functions. Who to buy materials from, how to transport goods and services, and
constitutes much of an organisation’s strategic planning. Contracting the wrong suppliers can result in poor
materials and late deliveries. Selecting the wrong transport mode or carrier can imply late deliveries to customers
that will need high, costly inventories to offset.

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Answers to Activities
Video Activity 12.1
Student is required to watch the video and apply the knowledge learnt.

Video Activity 12.2

Student is required to watch the video and apply the knowledge learnt.

Think Point 12.1

Student is required to apply their knowledge.

Companies want to synchronise the upstream flow of incoming materials, parts, subassemblies, and services
with production and distribution downstream so they can respond to uncertainty in customer demand without
increasing inventory costs. Businesses use inventory to insure themselves against uncertainties in demand. In
other words, demand fluctuations are catered for through inventory kept as safety stock. Thus supply chain
members carry buffer stock at various stages of the supply chain. This deals with many issues such as delays in
supply if ordered parts do not arrive on time. This way, the supplier can still serve their customers from safety
stock.

Think Point 12.2

If information is distorted, inaccurate demand data or forecasts from the customer can end up with a back ripple
effect on the upstream of the supply chain and magnify demand variability at each stage. This would lead to
higher buffer inventories, poor customer service; missed production schedules wrong capacity plans, inefficient
shipping and high costs. The bullwhip effect occurs when slight to moderate demand variability gets magnified
and demand information is transmitted back upstream in the supply chain

Think Point 12.3

• Business sustainability:
Russel and Taylor (2019) state that sustainability; also referred to as “going green” has become one of the most
visible recent trends in operations and supply chain management. The United Nations defines sustainability as
meeting the present needs without compromising the ability of future generations to meet their needs. The
challenge for many companies is that they view sustainability as a way to be environmentally friendly and socially
conscious rather than being competitive.
• Achieving sustainability in the supply chain
Ensuring supply chain processes are operating in a sustainable manner.

Practical Application or Example 12.1

Student is required to apply their knowledge.
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Unit
13: Managing Inventory

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

13.1 Inventory Management • The topic of inventory management is introduced

13.2 Functions of Inventory • Critically analyses Functions of Inventory

13.3 Requirements for Effective • Examine the Requirements for Effective Inventory
Inventory Management Management

13.4 Inventory Accounting System • Interrogate the Inventory Accounting System

13.5 Cost Information • Analyse the Cost Information

13.6 Classification System • Inspect the cost Classification System

13.7 Economic Order Quantity Models • Calculate the Economic Order Quantity Models as per given
scenarios

13.8 Summary • Summarise topic areas covered in unit

Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations,

strategy, and Information Technology. Ninth Edition International Edition:
McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C.,
Harrison A., Johnson R. (2010) Operations Management. SA: Pearson.

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13.1 Inventory Management

An inventory is a stock or store of goods. Inventory can take various forms and these include:
• Raw Material Inventory – what has been purchased, but not processed?
• Work-in-Process inventory (WIP), which is incomplete products or components that are no longer
considered raw material but have yet to become finished products.
• Maintenance, repair and operating materials which are supplies necessary to keep machines and processes
productive.
• Finished goods inventory which comprise end items, ready to be sold.

Video Activity 13.1.

Introduction to Inventory Management

https://www.youtube.com/watch?v=qtmfCMtlsag

Watch the video in the link and determine the principles of inventory
management.

13.2 Functions of Inventory

There are six basic functions of inventory:
(i) To provide a stock of goods to meet expected customer demand.
(ii) To de-couple components from the production-distribution system.
(iii) To take advantage of quantity discounts as purchases in larger quantities may reduce the costs of
goods or delivery.
(iv) To strike a balance against inflation and upward price changes.
(v) To protect against delivery variation due to weather, supplier shortages, quality problems or improper
deliveries.
(vi) To permit operations to continue easily.

13.3 Requirements for Effective Inventory Management

Management has two basic functions with respect to inventory. One is to establish a system of accounting for items
in inventory, and the other is to make decisions on how much to order and when to order. To be effective,
companies should have the following:
(i) A system to keep track of inventory on hand and on order.
(ii) A reliable forecast of demand that includes the forecast error.
(iii) Knowledge of lead times and lead-time variability.
(iv) Reasonable estimates of inventory holding costs, shortage costs and order costs.
(v) A classification system for inventory items.

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13.4 Inventory Accounting System

Inventory accounting systems can be periodic or perpetual. Under a periodic system, a physical count of inventory
items is made at periodic intervals (weekly, monthly, quarterly etc.) in order to decide how much to order of each
item. A perpetual inventory system keeps track of removals from inventory on a continuous basis, so that the
system can provide information on the current level of inventory for each item. When the amount of inventory
reaches a certain level, an order is triggered. The Two-Bin system is a very simplified system. It involves the use
of two containers for inventory. Items are withdrawn from the first bin, when its contents are finished, it’s time to
order. Cycle counting is a continuous reconciliation of inventory with inventory records.

Think Point 13.1.

Critically analyse the advantages and disadvantages of inventory

13.5 Cost Information

There are three basic costs associated with inventory:
Holding or Carrying Costs
These relate to physically holding items in storage. They include insurance, interest, depreciation, obsolescence,
deterioration, spoilage, pilferage, and warehousing costs (electricity, services, security and rent, rates, staff… right
down to cleaning materials, coffee/tea/milk/water usage).

Ordering Costs
These are costs associated with the ordering and receiving of inventory. It includes determining how much is
needed, typing up invoices, inspecting goods upon arrival for quantity and quality and moving goods to temporary
storage.

Shortage Costs
This often results when demand exceeds the supply of inventory on hand. The costs can include the lost
opportunity of not making a sale, loss of customer goodwill, lateness charges etc. Shortage costs are usually
difficult to measure.

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13.6 Classification System

Operations managers need to establish systems for managing inventory. We will briefly investigate two systems:
(1) how inventory items can be classified, and (2) how to accurately maintain inventory records.

ABC Analysis
This method classifies inventory into three categories according to some measure of importance with the intention
of allocating control efforts accordingly. The idea is to establish inventory policies that focus resources on a few
critical inventory parts and not the many trivial ones. It is not realistic to monitor inexpensive stock with the same
intensity as very expensive items.

We classify items into three categories; class A items (very important); B (moderately important) and C (least
important) based on annual rand value.

The following is a graphic representation of ABC Analysis

Percent of annual dollar usage

A Items
80 –
70 –
60 –
50 –
40 –
30 –
20 – B Items
10 – C Items
0 – | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100
Percent of inventory items

Figure 13.1: ABC Analysis

21

Source: Heizer and Render (2020)

The ABC analysis divides on hand inventory into three classifications on the basis of annual rand volume. ABC
analysis is an inventory application of what is known as the Pareto principle (named after Wilfred Pareto, a 19th
century Italian economist). It states that there are a “critical few and trivial many” inventory items. The idea then, is
to establish policies that focus resources on the few critical inventory items and not the many trivial ones. It does
not make sense to manage trivial items with the same intensity as critical ones. Class A items are those on which
the annual Rand demand volume is high. These items represent about 20 percent of the items. Class B items
represent medium annual rand volume and represent about 30 percent of the items. Class C items have lo annual
rand volume and represent about 50 percent of the stock items
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Activity 13.1

1 .Using the ABC approach, classify the inventory items provided in the
example below.

.
Table 13.1: ABC Analysis
11

Item Stock Number Annual volume in units Unit cost (R)

# 10286 1000 90.00

# 11526 500 154.00

# 12760 1550 17.00

#10867 350 42.86

# 10500 1000 12.50

# 12572 600 14.17

# 14075 2000 0.60

# 01075 100 8.50

# 01307 1200 0.42

# 10572 250 0.60

To conduct an ABC analysis properly, students are always encouraged follow the following steps:
• Create a Table with nine columns.
• Obtain the annual rand value by multiplying the annual volume (demand in units with their respective
costs).
• Add all annual volume in rand value.
• Express each annual volume in rand value as a percentage of the total of annual rand value you
obtained in step 3.
• Rank importance based on percentage of annual demand.
• Then re arrange stock items to reflect the new priority. (Notice that in this example coincidentally the
stock items are not re arranged since importance has not changed. This is an important point to
observe. It will not be like this in all cases).
• Determine the percentage of items in each category of the ABC classes (that is 20% to belong to class
A, 30% to class B and 50% to class C).

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• Worked as [Class A: 20/100 X 10 stock items = 2; Class B 30/100 x 10 stock items = 3; and class C
50/100 x 10 stock items = 5.
Now, this means that because your stock items are re-arranged according to priority, all you do is place the first
two items in A class; the next three are in B class; and the rest in C class. Refer to the Table 13.2.

Table 13.2: ABC Analysis

12

Item Stock Annual Unit cost Sales % of total Ranking Re- Cumulative ABC Class
Number Volume in (R) /demand sales / arranged values of %
units (annual demand Stock of demand
volume in (annual number
rand value) rand value) based on
ranking

#10286 1000 90.00 90000 38.8% 1 #10286 38.8% A

#11526 500 154.00 77000 33.2% 2 #11526 72% A

#12760 1550 17.00 26350 11.3% 3 #12760 83.2% B

#10867 350 42.86 15001 6.4% 4 #10867 89.6% B

#10500 1000 12.50 12500 5.4% 5 #10500 95% B

#12572 600 14.17 8502 3.7% 6 #12572 98.7% C

#14075 2000 0.60 1200 0.5% 7 #14075 99.2% C

#01036 100 8.50 850 0.4% 8 #01036 99.6% C

#01307 1200 0.42 504 0.32% 9 #01307 99.8% C

#10572 250 0.60 150 0.1% 10 #10572 99.9% C

Record Accuracy
Good inventory policies are meaningless if management does not know what inventory items are on hand.
Accuracy of records is a critical ingredient in production and inventory systems. Record accuracy allows
organisations to focus on items of inventory that are needed. Only if organisations can accurately determine what
it has on hand, can it make precise decisions about ordering, scheduling and distribution. To ensure accuracy,
proper documentation must be kept of incoming and outgoing stock. It is important to have a well-organized
warehouse that has limited access and good security systems. Computerization, bar coding, scanning equipment,
tracking technology and automatic storage and retrieval systems have greatly enhanced inventory management.

13.7 Economic Order Quantity Models

The Economic Order Quantity (EOQ) model is one of the oldest, most commonly known inventory-control
techniques. EOQ models identify the optimal order quantity in terms of minimizing the sum of certain annual costs
that vary with order size. This technique is relatively easy to use and is based on several assumptions:
(i) There is only one product involved.
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(ii) Annual usage (demand) requirements are known.

(iii) Usage is spread evenly throughout the year so that the usage rate is reasonably constant.
(iv) Lead time does not vary.
(v) Each order is received in a single delivery.
(vi) There are no quantity discounts.

The Inventory Cycle

Objective is to minimize total costs

Curve for total
cost of holding
and setup

Minimum
total cost
Annual cost

Holding cost
curve

Setup (or order)

cost curve
Optimal Order quantity
order
quantity

Figure 13.2: EOQ

22

Source: Heizer and Render (2020)

Video Activity 13.2.

Inventory Management Economic Order Quantity
https://www.youtube.com/watch?v=vMSARPybFxg
Watch the video in the link to assess the methodology of the EOQ model.

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We use the formula below to calculate this technique:

𝟐𝑫𝑺
𝑸𝒐 = √
𝑯

Where:
D = Demand usually expressed as units per year
Q = Order quantity in units
S = Order costs in rands
H = Holding costs usually in rands per unit per year.

The formula for the number of orders per year is shown as:
D
Q0

The formula for the length of the order cycle is shown as:
Q0
D

Practical Example 13.1:

A local distributor for a national tyre company expects to sell approximately 9600 steel radial tyres of a certain size
and tread design next year. Annual carrying costs are R16.00 per tyre and the order cost is R75.00. The distributor
works 288 days per year.
a) Determine the EOQ.
b) How many times per year does the store re-order?
c) Determine the length of the order cycle.

Solution:
D = 9600 tyres
H = R16 per unit per year
S = R75

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𝟐𝑫𝑺
a) 𝑸𝒐 = √ 𝑯

= 2x9600x75 (Do all calculations and then find the square root
16 of your final answer; Square root of 90 000)
= 300 tyres

b) Number of orders per year = D

Q0
= 9600
300
= 32 orders

c) Length of order cycle = Q0

D
= 300
9600
= 3.125% x 288 days per annum
= 9 days

When to Reorder
EOQ models generally answer the question of how much to order, but not when to order. To answer the question
of when to reorder, we must first determine the reorder point (ROP). The reorder point occurs when the quantity
on hand reaches a predetermined amount. This amount includes expected demand during lead time and safety
stock. There are four determinants of the reorder point quantity:
(i) The rate of demand.
(ii) The length of lead time.
(iii) The extent of demand and lead time variability.
(iv) The degree of stock out risk acceptable to management.

Lead time is defined as the time between placing an order and actually receiving it.
Safety stock is extra stock to allow for uneven demand (or buffer stock). Figure 13.3 depicts the re-order point
curve.

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Q*

Inventory level (units)

Slope = units/day = d

ROP
(units)

Time (days)
Lead time = L

Figure 13.3: Reorder Point

23

Source: Heizer and Render (2020)

Revision Questions 13.1

Question 1

ABC Analysis

Stock Number Annual R Volume Percent of Annual R Volume

R26 9,000 33.3

L02 3,200 11.8

M12 1,550 5.8

P33 620 2.3

T72 65 0.2

S67 53 0.2

Q47 32 0.1

V20 30 0.1

= 100.0

What are the appropriate ABC groups of inventory items?

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Question 2
A firm has 1,000 “A” items (which it counts every week, i.e., 5 days), 4,000 “B” items
(counted every 40 days), and 8,000 “C” items (counted every 100 days). How many
items should be counted per day?

Question 3
Assume you have a product with the following parameters:
Demand = 360 Holding cost per year = $1.00 per unit Order cos t: = $100 per
order
What is the EOQ?

Question 4
Given the data from Activity 3, and assuming a 300-day work year; how many orders
should be processed per year? What is the expected time between orders?

13.8 Summary
The two types of manufacturing systems for inventory are continuous and periodic. The fixed order quantity model
for determining order size and reorder points for determining when to order. The objective was to determine optimal
trade-off between inventor carrying costs and ordering costs that would minimise total inventory costs.
Management should continually strive to reduce inventory costs despite the suggestion by the model that minimal
costs are struck by balancing costs to order and costs to carry.

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Answers to Activities
Video Activity 13.1
Student is required to watch the video and apply the knowledge learnt.

Think Point 13.1

Student is required to apply their knowledge.

Activity 13.1
Student is required to apply their knowledge.

Video Activity 13.2

Student is required to watch the video and apply the knowledge learnt.

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Unit:
14 Aggregate Scheduling and
Materials Requirements
Planning (MRP II)

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

14.1 Introduction to Aggregate Scheduling • The topic of aggregate scheduling is introduced

14.2 The Purpose and Scope of • Critically Analyse The Purpose and Scope of Aggregate
Aggregate Scheduling Scheduling

14.3 Aggregate Scheduling Strategies • Compare and contrast Aggregate Scheduling Strategies

14.4 Techniques for Aggregate • Evaluate the various Techniques for Aggregate Scheduling
Scheduling

14.5 Aggregate Scheduling in Services • Debate the use of Aggregate Scheduling in Services

14.6 Production Plan • Construct a Production Plan

14.7 Master Production Schedule (MPS) • Examine the requirements of a Master Production Schedule
(MPS)

14.8 KANBAN • Question the validity of the KANBAN

14.9 Inventory Rules • Analyse Inventory Rules in achieving inventory control

14.10 Summary • Summarise topic areas covered in unit

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Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson
Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management.

Operations, strategy, and Information Technology. Ninth Edition International
Edition: McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C., Harrison
A., Johnson R. (2010) Operations Management. SA: Pearson.

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14.1 Introduction to Aggregate Scheduling

Aggregate scheduling, also known as aggregate planning, is essentially a ‘big picture’ approach to planning. The
main focus is to determine the quantity and timing of production for the intermediate future – between three and
18 months. Operations managers try to determine the best way to meet forecasted demand by adjusting production
rates, labour levels, inventory levels, overtime work, subcontracting rates and other controllable variables. The
objective of aggregate planning is to minimise costs over the planning period. According to Heizer and Render
(2020), four requirements are needed for aggregate planning:
(i) A logical overall unit for measuring sales and output.
(ii) A demand forecast for the intermediate planning period.
(iii) A method of determining the various costs.
(iv) A model that combines forecasts and costs so that scheduling decisions can be made for the planning
period.

Corporate strategies Economic, competitive Aggregate demand

and policies and political conditions forecasts

Business Plan Establishes production and

capacity strategies

Production Plan Establishes production capacity

Establishes schedules for specific

Master schedule products

Figure 14.1: Aggregate Scheduling

24

Source: Stevenson (2021)

Video Activity 14.1.

Video link: Aggregate Planning

https://www.youtube.com/watch?v=i8Hb9nqoBGk

Watch the video and determine the prerequisites for aggregate planning.

Often aggregation is done by product groupings, where products (or services) with similar requirements are lumped
together for planning purposes. As an example, let’s consider how aggregate planning might work in a large
departmental store. The manager may decide to allocate 20% of the available space to men’s clothing, 50% to

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female clothing 20% to children’s clothing and 10% to cosmetics. As you can conclude from this example no
mention is made as to what type, size, colour, etc. of clothing is to be stocked.

Activity 14.1

1. Analyse three levels of planning that operations managers are involved in,
and explain what kind of decisions are made at each lel

14.2 The Purpose and Scope of Aggregate Scheduling

Aggregate planning seeks to address the balance between supply and demand. If supply and demand are not in
balance, the organisation will incur cost penalties. There will be added costs of adjusting the system as well as
opportunity costs.
Demand Options
The basic demand options are as follows:
▪ Pricing
Adjusting of prices is commonly used to shift demand from peak periods to off-peak periods. Hotels, for example,
offer lower rates for off-peak periods. Some restaurants offer specials for children’s meals.

▪ Promotion
Advertising and other forms of promotion, such as displays and direct marketing, can be extremely effective in
shifting demand so that it matches existing capacity.

▪ Back-orders
Using this system, orders are taken in one period and deliveries promised for a later period. The success of this
approach depends on how willing customers are to wait for deliveries.

▪ New Demand
Organisations try to influence demand by creating a new demand for its product or service. For example, demand
for bus transportation is more intense during morning and afternoons. In this case, bus companies need to create
new demand during the off-peak period by offering their buses for school trips, senior citizen groups and other
facilities.

Capacity Options
• Varying Workforce size by Hiring and Laying off staff
One way to alter capacity is to hire or lay off workers to match production rates. We must remember that as new
employees need to be trained, productivity tends to decrease, as they are absorbed into the operations.

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• Working Overtime / Short-time

Using overtime or short-time is a less severe way of changing capacity than hiring and firing workers. The use of
overtime is fairly attractive when dealing with seasonal demand peaks. Overtime permits the company to maintain
a skilled workforce base and gives employees an opportunity to increase their earnings. It is advisable to use short
time when demand is less than capacity. Some organisations use this time for training workers, assisting in general
maintenance of plant and equipment etc.

• Part-time or Casual Workers

In some cases, the use of part-time workers is a viable option. Seasonal work that requires low or moderate skills
lends itself to part-time workers, who generally cost less than regular workers do. Department stores, restaurants
and supermarkets make extensive use of part-time workers. In South Africa, this has been made very difficult by
labour unions.

• Inventories
By using finished goods, inventory firms can produce goods in one period and sell or deliver them later. This,
however, carries a cost penalty, as you would incur storage or holding costs. This strategy lends itself to
manufacturing, as it is relatively easy to store tangible products. One cannot use this approach in a service industry,
as services can’t be stored.

• Outsourcing
Outsourcing enables planners to acquire temporary capacity. The question of hiring someone else to do your work
generally depends on factors such as available capacity, relative experience, quality considerations, costs and the
stability of demand.

Video Activity 14.2.

Why demand and capacity planning is important?

https://www.youtube.com/watch?v=uoSVfyIETaA

Watch the video link and determine the link between capacity and demand.

14.3 Aggregate Scheduling Strategies

Arising out of the above, we can conclude that operations managers have a wide range of decision options that
they can they can consider to achieve a balance between demand and capacity. Some of the strategies used
according Heizer and Render (2020) are:
▪ Maintaining a level workforce.
▪ Maintaining a steady output rate.
▪ Matching demand period-by-period.

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▪ Using a combination of decision variables.

Under a level capacity strategy, variations in demand are met by using some combination of inventories, overtime,
part-time workers, backorders and outsourcing. Matching capacity to demand implies a chase demand strategy,
which is the planned output for a period, is set at the expected demand for that period.

14.4 Techniques for Aggregate Scheduling

Several techniques have been developed to help decision-makers with the tasks of aggregate scheduling. These
generally fall into one of two categories: informal trial-and-error techniques and mathematical techniques. In
practice, informal techniques are more commonly used. A general procedure for aggregate planning consists of
the following steps:
(i) Determine the demand for each period.
(ii) Determine the capacities for each period – this includes regular time, overtime, sub-contracting etc.
(iii) Identify company or departmental policies that apply (e.g. the amount of safety stock that the organisation
has to carry, employment/ retrenchment policies and other issues).
(iv) Calculate the unit cost for regular time, overtime, sub-contracting, carrying stock, retrenchments and other
related issues.
(v) Develop alternative plans and calculate the cost for each plan.
(vi) Select the plan that best satisfies the objectives.

Think Point 14.1.

1. Is there a need for aggregate scheduling in your organisation? Critically

evaluate providing reasons.

Informal Techniques
Informal techniques consist of developing simple tables or graphs that enable operations managers to visually
compare projected demand requirements with existing capacity. Frequently, graphs can be used to guide the
development of alternatives.

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7,000 –

6,000 – Reduction
Cumulative demand units

of inventory
5,000 – Cumulative level
production using
4,000 – average monthly
forecast
requirements
3,000 –

2,000 – Cumulative forecast

requirements
1,000 –
Excess inventory

–
Jan Feb Mar Apr May June

Figure 14.2: Projecting Demand Requirements

25

Source: Heizer and Render (2020)

Activity 14.2 (Internet Activity)

 Internet

Visit the following website for additional reading on Aggregate Scheduling:

https://smallbusiness.chron.com/use-aggregate-production-planning-service-
22570.html

Construct an argument for aggregate scheduling in the Service industry.

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Mathematical Techniques
Several mathematical techniques have been developed to deal with aggregate scheduling. These include:
• Linear Programming
These are mathematical models used to obtain optimal solutions to problems involving the allocation of scarce
resources in terms of cost minimisation or profit maximisation
• Linear Decision Rule
This is an optimisation technique that seeks to minimise combined costs, using a set of cost approximating
functions to obtain a single quadratic equation
• Simulation Models
Computerised models that can be tested under different scenarios to identify acceptable solutions to problems
• Management Coefficient Models
This is a formal planning model built around a manager’s experience and performance

14.5 Aggregate Scheduling in Services

Services occur in industries such as banking, transport, hospitals, education, fast foods, etc. There are several
issues relating to the differences between manufacturing and services:
(i) Services occur when they are rendered. Services cannot be stored but they can be delayed. This removes
the option of building up inventories during slack periods in anticipation of future demand.
(ii) Demand for service can be difficult to predict. The volume of demand for services is often quite variable. In
some instances, customers may require prompt service such as ambulances, police, fire services and other
related emergency disciplines, whilst in others, they simply want prompt service e.g. pizza deliveries, and
may go elsewhere if their demands are not met.
(iii) Capacity availability can be difficult to predict. Processing requirements for services can also be extremely
variable. Bank tellers, for example, are often called upon to handle a wide variety of transactions and
requests for information thus making it difficult to establish a suitable measure of their capacities.

The flexibility of labour can be an advantage in services, although South Africa has prohibitive rules for labour.
Service providers are capable of handling a wide variety of service requirements and therefore planning is easier.
Material planning is the very heart of an MRPII system for a manufacturing company. It is important to first
understand where it fits into the overall system and the part the Bills and Routings play in material planning. The
diagram below is a simplified flow chart of the manufacturing portion of an MRPII system.

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26Figure. 14.3. Master Production Schedule

Source: Geeks4Geeks (2021)

14.6 Production Plan

Production plan is a formal plan of where the company is going, created by the company executive. The main
inputs comprise the forecast or marketing plan, the long-term or strategic plan and the budget or financial plan.
The production plan is defined in family groups and in coarse time periods (months or quarters). It is the executive’s
plan for the master scheduler to turn into a manufacturing plan. Therefore, it must be signed off to authorize the
commitment for purchasing material to meet the plan.

The production plan is the agreed-upon to plan that it created by the company management. It uses family groups
and covers the horizon of the Master Production Schedule (MPS) in monthly periods and the time required to
change the resources in quarters. It is used by the Master scheduler to create the Master Production Schedule.
The activity to create this plan is now being referred to as ‘production planning’ or ‘sales and operations planning’.

Resource Requirements Planning (RRP)

As the executive sitting in the boardroom generates the production plan, how practical is it?

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Resource Requirements Planning Objectives

Resource requirements planning is the capacity or resource check of the production plan using load profiles for
each family group. It allows you to:
• Anticipate the long-term resource requirements.
• Picture the load at critical work centre.
• Balance the requirements across the available capacity.
• Check out the plan to verify if it will give you the required performance measurements.

The Calculation
Resources requirements planning calculate the resources required by taking the quantities per time product family
and multiplying these by the contents of the load profile. Each load profile identifies the key resources and
quantities needed for one of that family. This is calculated for each family group. The total requirements are then
added for each resource per time period. The total is then compared to that which is stated to be available in the
work centre or resource file. The result is a comparison report that can be produced and that indicates the amount
of a resource that is required against that which is available.

Think Point 14.2

How can MRP contribute to improving productivity as a theoretical query, or as in

your own organisation in a practical manner?

14.7 Master Production Schedule (MPS)

This is performed by the master scheduler and is the act of converting the production plan into a detailed
manufacturing plan.

The MPS is defined normally at the finished goods part number level in much finer time periods, either actual dates
or weeks. The master production schedule is the plan on which all subsequent plans are built.

The MPS is often termed ‘the anticipated build schedule’. This first short definition sums up the whole concept of
the MPS. It is what we believe we will need to build in order to meet the company’s objectives.

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Customer Orders Forecast Demand

Master Production
Schedule

Materials
Bill of Materials Requirements Planning Inventory Records

Purchase Orders Materials Plan Works Order

27Figure 14.4. The Master Production Schedule in the MRP 1 Schematic

Source: Pycraft et al (2010)

The Purposes of MPS

The MPS is the key to an MRPII success because everything else within the system is working to meet this plan.
The MPS is where marketing and sales meet manufacturing and the link person is the master production scheduler.
The concept is that order entry and customer promises are made from information on the MPS, and the task of the
manufacturing department is to meet the schedule, which will then result in satisfied customers.

Whilst the master production schedule will differ from company to company depending on the type of software
used, the manufacturing process, and the requirements of the particular industry, the overall reasoning is similar.

Rough Cut Capacity Planning (RCCP)

One of the problems the master scheduler has when converting the production plan into the MPS is to have a
practical balanced schedule. Rough cut capacity planning is the capacity check module for the MPS. It analyses
the resources required by the MPS and uses load profiles for the critical resources.
Rough cut capacity planning is an interactive what-if approach.

Material Requirements Planning (MRP)

This part of the system is straightforward, in that it is based purely on arithmetic. It is the add-up, take-away part,
that calculates both the purchased material requirements and the lower level manufacturing requirements. MRP
creates planned orders in line with the inventory rules and goes out into the future to the full horizon of the MRP.

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Think Point 14.3.

Determine the types of resources that can be scheduled using MRPII.

Capacity Requirements Planning (CRP)

CRP is a comparison of the standard hours required with the hours stated to be available. This is summarized in
time periods but calculated on a date resolution by manufacturing order operation, per work centre. The logic of
CRP is that it receives all manufacturing orders from MRP and then breaks each order down into individual
operations. For each operation, the batch quantity is multiplied by the standard time required. In this manner, a
number of standard hours required per work centre per operation can be calculated. This can be achieved for each
manufacturing order operation. The sub-totals can then be accumulated per work centre, per time period.

The final figure can then be compared to that time which is stated to be available. Capacity requirements planning
is a comparison of the standard hours required to those stated to be available in a summarized form, either as a
histogram or as a percentage load report.

Production Activity Control (PAC)

This chapter was previously called ‘shop floor control’, but nowadays since it is fully realized that much of the
control is not situated on the shop floor but in the planning office, it is called Production Activity Control.

This means that manufacturing managers need information so they can do their jobs better. They must have the
information to make logical decisions timeously.

Input/output control is used to control the volume of work on the shop floor, and operation sequencing makes
detailed scheduling and priority control feasible.

14.8 KANBAN
The Japanese word ‘Kanban’ has become familiar to many of us in recent years. The kanban, or pull system,
serves two purposes:
• To get material for the ‘next point of use’
• To authorize the producer to make more material

The essence of this methodology is the standard container with a card attached. This creates a ‘pull system’ in
which work centres signal with a card that they wish to withdraw parts from feeding operations or vendors. ‘Pull’
signifies the production of items only as demanded for use.

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In practice, the kanban can be something other than a card, such as a returnable container, a circle/square on the
ground or a tag. When a kanban is empty or free, it authorizes material to be replenished. For example, when
material is collected by the shop feeder of the assembly line, he/she returns the empty container that held the parts
they have already used. The receipt of the empty container is the instruction to the producing work centre to make
another container full.

14.9 Inventory Rules

For any planning calculation to be made, the company’s batching, ordering and inventory rules must be clearly
stated so the system can use them to make the ordering plan both practical and in agreement with the company’s
policy. The rules normally have to be formally approved by the financial director as they have serious
consequences on the inventory holding and cash flow.

The inventory rules provide management with the means to dictate to the system how the company’s policies
should be applied. Various order methods are available to the user, such as order point, MRP, time phased order
point, and no system control (user planning and control). This means that you have a choice in the method used
by the system for the ordering of material.

You are given a choice in the method by which the order quantities are calculated, for example, least total cost,
and part period balancing or discrete. The most commonly used of all methods is period order quantity, that is, a
means of ordering a number of days’ supply instead of certain quantities. All of these methods apply different
parameters for the grouping of daily requirements for parts so that the purchase orders, or manufacturing order
quantities are economical or desirable’s quantities to be ordered. To make the resulting quantities practical,
batching rules are used.

Bill of Material (BOM)

For any calculation to be made to establish what material is required, the BOM must be available, because it is in
the BOM that the material content of each product is specified. For a works order to be scheduled the operation
lead times are needed, and these are found on the routing file.

The BOM consists of two elements: an item master file where the details of each part number used in the system
are identified, and the bill of material itself (or product structure record as it is sometimes known), where the content
of an assembly is defined. The routing file is where the operations that the product must pass through during the
manufacturing process are identified. The example on the following page represents how to develop the product
structure and “explode” it to reveal the requirements for each component.

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Level Product structure for “Awesome” (A)

0 A

1 B(2) Std. 12” Speaker kit C(3) Std.

amp-
12” Speaker kit w/
amp-booster

2 E(2) E(2) F(2) Std. 12” Speaker

booster assembly

Packing box and

3 D(2) installation kit of wire, G(1) D(2)
bolts, and screws

Amp-
Amp-booster

12” Speaker 12” Speaker

Figure 14.5: Bill of Materials

28

Source: Heizer and Render (2020)

The item master file is where the information about a part is held. It is not uncommon to find over 200 fields in this
file. For example, it will hold engineering, planning, inventory, costing and stores related data for each part number.
Each manufactured part or sub-assembly has a bill of material and a routing. A bill of material consists of a record
for each component or raw material used on that parent. The parent is the item to be made and the raw materials
or piece parts used are known as its components. A whole complex assembly is built up of sub-assemblies and
piece parts, but each sub-assembly is entered into the BOM and controlled as an entity in itself. They are known
as single level bills of material.

For each BOM there is routing which holds the detail of each operation, such as set-up time and unit run time. It is
from these times that the operation time is established for the order quantity, and is then used for scheduling the
work through the plant.

Other MRPII Modules

A full MRPII system will either include or provide interface points to other modules which are needed to run a
manufacturing business. Such modules are:
• Customer order entry
• Accounts payable (creditors)
• Accounts receivable (debtors)

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• General ledger
• Costing
• Purchasing
• Forecasting
• Sales analysis
• CAD/CAM interfaces
• Distribution (DRP)

It depends on the particular software whether these are further modules of the MRPII package or if a financial
package is made to interface. A typical approach is to provide an interface to a well-known specialized package
as in the case of payroll.

MRPII Summary
It should be realized by now that MRPII is not just a production control system but a system which provides the
tools for people throughout the whole company to manage their business better. It alerts you to potential problems
to solve, before it is too late.

Why Material Planning?

As we have seen, material planning is at the heart of the MRPII system for manufacturing companies, but perhaps
the question is, why do we need MRPII anyway?

To obtain and implement an MRPII system is not a small job, so why do companies embark on this long and
expensive journey?

It has been established internationally over the last few years that on average, the following benefits can be gained
if the implementation is taken seriously.

Tangible Benefits
• An inventory reduction of 20% or an increase in stock turnaround of 50% is normal. This obviously depends
on how well you have managed your inventory prior to the start of the implementation.
• A saving of 5% in purchased material cost due to working to a plan and knowing what is wanted when.
• A company can expect productivity improvement from 10% to 30% depending upon complexity of material
requirements. In the electronics assembly business, with hundreds of components going onto a printed circuit
board, the problem has always been how to assemble at the right time. Working to a plan and using MRPII to
calculate the component requirements reduces the number of material shortages considerably.

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• The overtime used to overcome late shipments is typically reduced by 50%. By working to a plan, the system
can identify future problems and we can solve them before they affect production.
• Due to the fact that we will be able to produce to the master plan, we will be delivering what is needed to the
finished goods store on time. This will result in us having the correct items in stock when needed. With the
correct stock available, sales should increase by 5% for a company that sells ex-stock.
• If we now apply each of these savings to the company, it will result in an overall profitability increase of 30%
or more.
These figures are not sales talk but well established over a number of years from companies that have made
a reasonable job of implementing MRPII.

Intangible Benefits
Having looked at the hard numbers with the tangible benefits we now need to examine the intangible benefits:
• Because we will now know what we have and what will be available when, it will mean that our sales and
customers service staff can talk more confidently to our customers and give more realistic promises.
• Typically, management can become ‘highly paid progress chasers’, as they are called upon to solve supply
problems with our suppliers integrated system. Much of this need will fall away and they can then do what
they are paid to do, which is to manage the business.
• The ‘what if’ facility will allow the company to manage its future growth effectively by computing what resources
will be required to meet the proposed plan.
• The MRP logic will allow us to manage the changes in business volumes and product mix before they seriously
affect the output programme and inventory levels.
• If it is a requirement to keep track of which ‘lot’ of material has been used to produce a particular product, the
‘Lot Tractability Module’ will support this.
• Many hours are often spent in ‘Output Meetings’ where the main topic is not output but shortages. Often,
much time is wasted arguing whose figures are correct, when we are all getting our information from the same
common source. With the introduction of MRP, this problem will disappear.
Overall, we can say that with everything moving in the same direction in a coordinated way, the problems will
reduce and subsequently the quality of life for everyone in the company will improve.

The Scheduling Problem

Having now stated what the benefits can be after implementing an MRPII system, we need to understand what the
main cause of our problem is. Generally, in most manufacturing companies it can be put down to the inability of
scheduling to manage a continual stream of changes. Let’s examine what can go wrong with scheduling:
• Schedules start with a forecast, and by definition they are only estimates so these will not necessarily be
accurate. It means that our basic material plan starts with unreliable numbers.
• We then find that the dates on which products are required keep changing and this plays havoc with the
material plan.

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• Our customers change their minds not only on what they want, but when they want it. This causes multiple
changes to the manufacturing plan and to the material requirements.
• The engineering design department keeps updating products and modifying them continually. To inform every
one of the alterations they produce what is known as an Engineering Change Notes (ECNs). Effectively, they
are telling the planner that the material he/she ordered is no longer required but now they need something
else urgently. Again the plan is being changed.
• Our manufacturing team does its part to upset the plan by scrapping the odd batch or so. This results in more
material being needed and an extra capacity requirement which has to be fitted into an already busy schedule.
• Our cycle counters find errors with the stock balances so put through stock adjustment transactions which
alter the basic numbers on which our initial plans were built.
• The management team goes missing by attending conferences or courses or participants may even be sick,
but while they are away more alterations are made to the plan.
• Last, but not least is our group of suppliers which has been known to deliver late on the odd occasion. When
this occurs it requires the planner to re-schedule work that cannot be built but also to bring in work that can
be built.

With all these changes taking place on a daily basis, is it any wonder that scheduling is a problem, MRPII is not
going to stop this from happening, but the occurrences should be reduced and it will give the means to manage
them better.

What else do we need to do to improve the situation? As the changes are occurring by the hour in manufacturing,
at least our system must endeavor to keep up with them so at least we are working to the latest information. This
means that we need to run MRPII system nightly so that it can identify what needs to be done each day, to keep
on top of the ever-changing situation.

The Formal or Informal System

In many companies, although each person or department is trying his or her best, things still don’t work out too
well. No matter whom you ask, they will quickly tell you why they have not met their objectives and which
department is causing their problem. This is commonly known as ‘chronic finger pointing’. It is a common ‘ailment’
that companies suffer from when their operations are not well coordinated.

We also find that the numbers in the system are not reliable. For example, the stock balances on the system do
not reflect what is really in the stock bin. The purchase order file tells us that the following quantities are due on
certain dates, but in reality these orders were completed some weeks ago.

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Overall, we call this the informal system and with it go the problem of accountability. Who is really responsible for
what, and do they have the means to be responsible and accountable for these activities? When we take on MRPII
we need to accept that if we want it to work then we must operate in the formal system. This does not mean that
the system takes over and stops us from doing what the business needs, it means that we do things properly at
the right time, in the agreed manner and we do it ‘right’ the first time.

Revision Questions 14.1

Question 1

The Hunicut and Hallock Corporation makes two versions of the same basic file cabinet, the
TOL (Top-of-the-line) five drawer file cabinet and the HQ (High-quality) five drawer filing
cabinet.

The TOL and HQ use the same cabinet frame and locking mechanism. The drawer
assemblies are different although both use the same drawer frame assembly. The drawer
assemblies for the TOL cabinet use a sliding assembly that requires four bearings per side
whereas the HQ sliding assembly requires only two bearings per side. (These bearings are
identical for both cabinet types.) 100 TOL and 300 HQ file cabinets need to be assembled
in week #10. No current stock exists.

Develop a material structure tree for the TOL and the HQ file cabinets.

Question 2

Develop a net material requirements plan for the TOL and HQ file cabinets in the previous
problems assuming a current on-hand finished goods inventory of 100 TOL cabinets. The
lead times areas follow:

Painting and final assembly of both HQ and TOL requires 2 weeks.

Both cabinet frames and lock assembly require 1 week for manufacturing.

Both drawer assemblies require 2 weeks for assembly.

14.10 Summary
Aggregate planning is critical for companies with seasonal demand patterns and services. Variations in demand
can be met by adjusting capacity or managing demand. Several mathematical techniques are applied in aggregate
planning including linear programming linear decisions rules, search decisions rules, and management coefficient
models.

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Answers to Activities
Video Activity 14.1
Student is required to watch the video and apply the knowledge learnt.

Activity 14.1
Student is required to apply their knowledge.

Video Activity 14.2

Student is required to watch the video and apply the knowledge learnt.

Think Point 14.1

Student is required to apply their knowledge.

Activity 14.2 (Internet Activity)

Student is required to apply their knowledge.

Think Point 14.2

Student is required to apply their knowledge.

Think Point 14.3

Student is required to apply their knowledge.

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Unit
15: Managing Projects

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

15.1 Introduction to Project • The topic of project management is introduced

Management

15.2 The Elements of a Project • Investigate the elements of a project

15.3 Reasons for Successful Project • Analyse reasons for successful project management
Management

15.4 The Project Manager • Investigate the duties of the project manager

15.5 The Project Life Cycle • Deconstruct the project life cycle

15.6 Gantt Charts • Construct gantt charts

15.7 PERT and CPM • Construct PERT and CPM

15.8 The Network Diagram • Construct the network diagram

15.9 Summary • Summarise topic areas covered in unit

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Prescribed and Recommended Reading(s)Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson
Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations,

strategy, and Information Technology. Ninth Edition International Edition:
McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C., Harrison
A., Johnson R. (2010) Operations Management. SA: Pearson.

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15.1 Introduction to Project Management

Pycraft et al (2019) defines a project as a set of related activities which have a definite starting point and end state,
which pursues a defined goal and uses a definite set of resources. The history of project management can be
traced back to the Manhattan Project which created the first atom bomb in the 1940s.

Examples of projects include:

• The Apollo moon programme
• An AIDS information campaign
• Producing a television programme
• Constructing the Channel Tunnel
• Designing a car, aeroplane, etc
• Relocating a factory
• Buying and moving into a new house
• Installing a new computerised system
• Conducting an election
• Co-ordinating a relief effort

Video Activity 15.1

Lecture - 2 Project Management: An Overview -

https://www.youtube.com/watch?v=wJ8HZ7hqUs8

Watch the video in the link and determine the characteristics of a project.

15.2 The Elements of a Project

All projects have some elements in common and these include:
• An objective. A definable end result, output or product, which is defined in terms of cost, quality and timing.
• Complexity. Several tasks are required to be undertaken to achieve the objectives. The relationship
between all these tasks can be extremely complex.
• Uniqueness. A project is usually a one-off undertaking.
• Uncertainty. As all projects are planned before they are executed, they carry a certain amount of risk.
• Life cycle. Projects normally go through three phases – planning, execution and phase-out.
• Temporary nature. Resources may be moved from one project to the next once the tasks have been
completed.

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15.3 Reasons for Successful Project Management

Pycraft et al (2019) outlines the following factors that can contribute to the success of a project:
• Clearly defined goals. This should include the general project philosophy or general mission of the project
and a commitment to those goals on the part of the project team members.
• Competent project manager. A skilled leader who has the technical, interpersonal and administrative skills.
• Top-management support. Senior management commitment for the project must be openly displayed and
communicated to all stakeholders.
• Competent project team members. Careful selection of team members is vital. Choose a ‘winning’ team.
• Sufficient resource allocation. Money, labour, machines, materials and other business related items must
be available in the required quantities.
• Adequate communication channels. Up-to-date information must be available to the project team on a
continual basis. Communication channels to the various role players must be established.
• Control mechanisms. A system to monitor actual events against planned outcomes must be set up.
• Feedback capabilities. All parties involved in the project must be able to review the project status on a regular
basis and make suggestions and corrections through formal feedback channels or review meetings.
• Responsiveness to clients. All stakeholders must be kept informed regularly on the projects status.
• Trouble-shooting mechanisms. You need to set up a system or a set of procedures to tackle problems when
they arise and the ability to trace back to the root cause of the problem.
• Project staff continuity. Key project personnel must be kept on for the duration of the project. Frequent staff
turnover results in the project losing the wealth of knowledge, which may have been accumulated.

15.4 The Project Manager

The projects manager bears the ultimate responsibility for the success or failure of the project. He/she must be an
organiser – a person who is capable of working through others to accomplish the objectives of the project. The
project manager is tasked with effectively managing the following duties:
(i) The work: so that all necessary activities are accomplished in the desired sequence.
(ii) The human resources: so that those employees working on the project have direction and motivation.
(iii) Communication skills to disseminate information and keep all stakeholders informed.
(iv) High quality: so that performance objectives are realised.
(v) Time: so that the project is completed on time.
(vi) Costs: keeping the project within budget.

Think Point 15.1

Analyse the differences between a project manager and a production manager

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15.5 The Project Life Cycle

Stevenson (2021) maintains the projects generally go through life cycles:
• Concept: where the organisation recognizes the need for a project or responds to a request for a proposal
from a potential customer or client.
• Feasibility analysis: which examines the expected costs, benefits and risks of undertaking the project?
• Planning: which spells out the details of work and provides estimates of the necessary human resources,
time and costs?
• Execution: during which the project itself is done. This phase often accounts for the majority of time and
resources consumed by the project.
• Termination: during which closure/finality is achieved.

Activity 15.1

You have been tasked with the construction of a house. Using the project life
cycle stages, `categorise the activities that must be performed at each stage

Project Management Techniques

There are several techniques that have been developed to assist project managers in ensuring the successful
completion of a project:

Work Breakdown Structure

As large projects usually involve numerous activities, planners need some way to determine exactly what has to
be done so that they can realistically estimate how long it would take to complete the various elements and how
much it would cost. This can be done by developing a Work Breakdown Structure (WBS) which defines the project
by dividing it into major sub components or tasks as reflected in the example below.

Level ID
Level Number Activity
1 1.0 Develop/launch Windows Longhorn OS
2 1.1 Development of GUIs
2 1.2 Ensure compatibility with earlier
Windows versions
3 1.21 Compatibility with Windows ME
3 1.22 Compatibility with Windows XP
3 1.23 Compatibility with Windows 2000
4 1.231 Ability to import files

Figure 15.1: Work Breakdown Structure

29

Source: Heizer and Render (2020)

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This methodology establishes a logical framework for identifying the required activities for the project. Developing
a good work breakdown structure can require substantial time and effort due to the uncertainties associated with
a project.

15.6 Gantt Charts

The Gantt chart is a popular tool for planning and scheduling simple projects. It enables a manager to initially
schedule project activities and then to monitor progress over time by comparing planned to actual progress. To
construct a Gantt chart, major activities and their duration and the sequence needs to be identified. Horizontal bars
are drawn for each activity along a time line. The obvious advantage of the Gantt chart is its simplicity and therefore
it has become very popular. A simple Gantt chart is depicted below:

Time
J F M A M J J A S

Design
Prototype
Test
Revise
Production

Source: Heizer and Render (2020)

An example of a Delta Jet Gantt Chart during a 60-minute layover is depicted In Figure 15.2

Deplaning
Passengers
Baggage claim
Baggage Container offload
Pumping
Fueling
Engine injection water
Cargo and mail Container offload
Main cabin door
Galley servicing
Aft cabin door
Lavatory servicing Aft, center, forward
Drinking water Loading
First-class section
Cabin cleaning
Economy section
Cargo and mail Container/bulk loading
Galley/cabin check
Flight services
Receive passengers
Operating crew Aircraft check
Baggage Loading
Passengers Boarding
0 15 30 45 60
Minutes

Figure 15.2: Gantt Chart

30

Source: Heizer and Render (2020)

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15.7 PERT and CPM

PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are widely used techniques
for planning and coordinating large-scale projects.
According to Heizer and Render (2020) they follow six basic steps:
1) Define the project and prepare the work breakdown structure.
2) Develop the relationships among activities together with their sequence.
3) Compile the network connecting all activities.
4) Assign time or cost estimates to each activity.
5) Calculate the longest time path through the network. This is known as the critical path.
6) Use the network to help plan, schedule, and monitor and control the project.

Finding the critical path is a crucial step in controlling the project. The activities on the critical path represent the
tasks that will delay the entire project unless they are completed on time.

PERT and CPM answer the following questions:

(i) When will the entire project be completed?
(ii) What are the critical activities – the ones that will delay the project if they are late?
(iii) What are the non-critical activities – the ones that can run late without delaying the completion of the project?
(iv) What is the likelihood of the project being completed by a specific date?
(v) At any particular time, is the project behind, on or ahead of schedule?
(vi) Are we meeting our budget?
(vii) Are there sufficient resources available to complete the project?
(vii) If the project is to be completed in a shorter time period, what would it cost us?

15.8 The Network Diagram

The network diagram of a project shows sequential relationships by use of arrows and nodes (circles). The arrows
represent the project activities and the nodes (circles) indicate events. The activities are project tasks that consume
resources and/or time, and the nodes (circles) indicate the starting or finishing of events. A path is a sequence of
activities that leads from the starting node to the finishing node. The critical path is the longest path of the network.
Critical activities are the activities on the critical path. Dummy activities are inserted into the network to maintain
the logic and sequence of the network – they consume no time or resources.

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An example of a typical network diagram is as follows:

C
2 4
(Construct
Stack)
Co (Ins F

nt nal
s)
nt tal

ne er

(Build Burner)
C ui A ro l
po Int
om ld ls)
H
(B

E
1 Dummy 6 7
Activity (Inspect/
Test)
Ro (M B G
of odi ll
/Fl fy
oo Insta tion )
( llu ice
r) D PoDev
3 5
(Pour
Concrete/
Install Frame)

Figure 15.3: Activity on Arrow Network Diagram

31

Source: Heizer and Render (2020)

PERT (Program Evaluation and Review Technique)

For each activity in PERT we must specify an optimistic time, a most probable time and a pessimistic time
estimate. We then use these three time estimates to calculate an expected completion time and variance for
each activity. We can use the formula:

t = a + 4m +b and v = b – a 2

6 6
where: a = optimistic time for activity completion
b = pessimistic time for activity completion
m = most likely time for activity completion
t = expected time of activity completion
v = variance of activity completion time

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Practical Example 15.1.

Compute the expected times and variances of completion for each activity based on the following time estimates:
ACTIVITY a m b
(Time in weeks) (Time in weeks) (Time in weeks)

Clear site 3 4 5
Dig foundation 1 3 5
Pour concrete 5 6 7
Build walls 6 7 8

Solution
ACTIVITY a+4m+b t b-a SQUARED
6
Clear site 24 4 2/6 4/36
Dig foundation 18 3 4/6 16/36
Pour concrete 36 6 2/6 4/36
Build walls 42 7 2/6 4/36

Using Microsoft Project to Manage Projects

MS Project is useful for project scheduling and control. First, the project is defined, next the activity information is
entered and finally the project can be viewed as a Gantt chart or as a Network. An Example as represented in
Heizer and Render (2020) is illustrated below:

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Revision Questions 15.1

Question 1
The following represent activities in a major construction project. Draw the
network to represent this project.
Activity Immediate Predecessor
A -
B -
C A
D B
E B
F C, E
G D
H F, G

15.9 Summary
Since the start of CPM/PERT in the 1990s, network analysis has been applied in a variety of government fields
concerned with project control, including the military agencies, NASA, the Federal Aviation Agency (FAA). One
reason for the popularity of network analysis is that it provides a visual display of the project that is easy for manager
and staff to understand and interpret. It is also a powerful tool for identifying and organising activities. It is also
used for control purposes.

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Answers to Activities
Video Activity 15.1
Student is required to watch the video and apply the knowledge learnt.

Think Point 15.1

Student is required to apply their knowledge.
• The projects manager bears the ultimate responsibility for the success or failure of the project. He/she must
be an organiser – a person who is capable of working through others to accomplish the objectives of the
project.
• The production manager manages the production activities of an organisation.

Activity 15.1
Student is required to apply their knowledge.

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Unit
16: The Service Industry

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

16.1 The Service Economy • Theory and text references are provided to investigate the
service economy

16.2 Characteristics of Services • Analyse characteristics of services

16.3 The Service Design Process • Investigate the service design process

16.4 Tools for Service Design • Distinguish between the tools for service design

16.5 The Strategic Service Vision • Research the strategic service vision

16.6 Understanding the Competitive • Critically analyse the competitive environment of services
Environment of Services

16.7 Service Quality • Investigate the determinants of service quality

16.8 Service Facility Location • Survey the methodology of allocating a service facility location

16.9 Elements of Waiting Line Analysis • Appraise the waiting line theory

16.10 Supply Chain Management • Analyse supply chain management within a service industry

16.11 Summary • Summarise topic areas covered in unit

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Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson
Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations,

strategy, and Information Technology. Ninth Edition International Edition:
McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C., Harrison
A., Johnson R. (2010) Operations Management. SA: Pearson.

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16.1 The Service Economy

According to Russel and Taylor (2019) services are the predominant force in our society. Globally, services account
for over 50% of economies of countries like Brazil, Russia, Japan, Germany, India and China. The impact of
supporting services on products has turned product producing companies into service providers. Increased
outsourcing of business services demands more in-depth understanding of the service product and standards for
quality. Service computing has prompted a new level of understanding of customer requirements and design
theory. Major societal problems, such as education, healthcare, disaster relief, and government services, depend
on complex customer-focussed processes and benefit significantly from an innovative and interdisciplinary
approach to their study and analysis. This unprecedented shift in customer, corporate, and societal demand for
services and the management of corresponding resources has created a critical need for the study, analysis and
design of service systems. The rise of the service sector includes South Africa as well.

Video Activity 16.1

What it takes to succeed in the Service Industry | Hospitality Training Video |

Customer Service

https://www.youtube.com/watch?v=oBP0oqQljKg

Watch the video link and determine the key success factors necessary to be
successful in the service industry.

16.2 Characteristics of Services

Services are acts, deeds, performances, or relationships that produce time, place form, or psychological utilities
for customers. A cleaning service saves the customer time from doing the chores himself. Department stores and
grocery stores provide many commodities for sale in one convenient place. An online broker puts together
information in a form more usable for the investor. A night out at a restaurant or movie provides psychological
refreshment in the middle of a busy workweek, Russel and Taylor (2019).

Services can also be defined in contrast to goods. A good is a tangible object that can be created and held or used
later. A service is intangible and perishable. It is created and consumed simultaneously. Although these definitions
may seem straightforward, the distinction between goods and services is not always clear-cut. For example, when
we purchase a car, are we purchasing a good or the service of transportation? A flat-screen TV is a manufactured
good, but what use is it without the service of television broadcasting? When we go to a fast-food restaurant, are
we buying the service of having our food prepared for us, or are we buying goods that happen to be ready-to eat
food items?

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In reality, almost all purchases of goods are accompanied by facilitating services, and almost every service is
accompanied by facilitating goods. Thus, the key to understand the difference between goods and services lies in
the realisation that these items are not completely distinct but rather are two poles on a continuum.

Understanding the different characteristics of services can help to better design service activities and the systems
for their delivery. Services can be distinguished from manufacturing by the following eight characteristics. Although
not all services possess each of these characteristics, they do exhibit at least some of them to some degree.

Video Activity 16.2

Services and its Characteristics

https://www.youtube.com/watch?v=OOa2tkDBRi4

Watch the video in the link and conclude on the 5 I’s of services

(i) Services are Intangible

It is difficult to design something you cannot see, touch, store on a shelf, or try on for size. Services are experienced,
and that may be different for each individual customer. Designing a service involves describing what the customer
is supposed to “Experience,” which can be a very difficult task. Designers begin by compiling information on the
way people think, feel and behave (called psychographics). Because of its intangibility, consumers perceive a
service to be riskier to purchase than a product.

Cues (such as physical surroundings, server’s demeanour and service guarantees) need to be included in service
design to help form or reinforce accurate perceptions of the service experience and reduce the consumer’s risk.
The quality of a service experience depends largely on the customer’s service expectation. Customers also have
different expectations of various types of service providers. You probably expect more from a department store
than from a discount store, or from a car dealer’s service centre than from an independent repair shop.
Understanding the customer and his or her expectations is essential in designing good service.

(ii) Service Output is Variable

This is true because of the various service providers employed and the variety of customers they serve, each with
his or her special needs. Even though customer demands vary, the service experience is expected to remain
consistent. According to a recent survey, the most important measures of service quality to the customer are
reliability and consistency. Service design, then, must strive for predictability or robustness. Examples of services
known for their consistency include McDonald’s and many others.

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(iii) Services have Higher Customer Contact

The service “encounter” between service provider and customer is the service in many cases. Making sure that
the encounter is a positive one is part of service design. This involves giving service providers the skills and
authority necessary to successfully complete a customer transaction.

Studies show a direct link between service provider motivation and customer satisfaction. Moreover, service
providers are not motivated primarily by compensation but rather by concurrence with the firm’s “service concept”
and being able to perform their job competently. High customer contact can interface with efficiency of a service
and make it difficult to control its quality (i.e. there is no opportunity for testing and rework). However, direct contact
with customers can also be an advantage for services. Observing customer experiencing a service generates new
service ideas and facilitates feedback for improvements to existing services.

(iv) Services are Perishable

Because services cannot be inventoried, the timing and location of delivery are important. Service design should
define not only what is to be delivered but also where and when.

(v) The Service and the Service Delivery are Inseparable

That means service design and process design must occur concurrently. This is one area in which services have
an advantage over manufacturing – it has taken manufacturing a number of years to realise the benefits of
concurrent design.) In addition to deciding what, where, and when, service design also specifies how the service
should be provided. “How” decisions include the degree of customer participation in the service process, which
tasks should be done out of the customer’s sight (called front-room activities) and which should be done out of the
customer’s sight (back-room activities), the role and authority of the service provider in delivering the service and
the balance of “touch” versus “tech” (i.e. how automated the service should be).

(vi) Services tend to be Decentralised and Geographically Dispersed

Many service employees are on their own to make decisions. Although this can present problems, careful service
design will help employees successfully deal with contingencies. Multiple service outlets can be a plus in terms of
rapid prototyping. New ideas can be field-tested with a minimum disturbance to operations to operations.
McDonald’s consider each of its outlets a “laboratory” for new ideas.

(vii) Services are Consumed More Often Than Products

There are more opportunities to succeed or fail with the customer. Jan Carlzon, former president of SASD Airlines,
calls these opportunities “moments of truth”. Services are confronted with thousands of moments of truth each day.
Careful design and redesign of the service encounter can help make each moment of truth a positive experience.
In a sense, the service environment lends itself more readily to continuous improvement than does the
manufacturing environment.
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(viii) Services can be easily Emulated

Competitors can copy new or improved services quickly. New ideas are constantly needed to stay ahead of the
competition. As a result, new service introductions and service improvements occur even more rapidly than new
product introductions.

Think Point 16.2

Conclude how an operations manager would have to alter his priorities

when moving from a manufacturing industry to a service based
organisation?

16.3 The Service Design Process

Services that are allowed to just happen rarely meet customer needs. The following are world-class services that
come to mind: McDonald’s plans every action of its employees (including 49 steps to making perfect French fries);
Nordstrom creates pleasurable shopping environment with well-stocked shelves, live music, French flowers in the
dressing rooms, and legendary salespersons. FedEx designs every stage of the delivery process for efficiency and
speed; and Disney World in Japan was so well designed that it impressed even the zero-defect Japanese.
Service design is more comprehensive and occurs more often than product design. The inherent variability of
service processes requires that the service system be carefully designed.

32Figure 16.2 Service Delivery Design

Source: http://www.fedex.com/us/international/direct-distribution/how-it-works/index.html/

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The service concept defines the target customer and the desired customer experience. It also defines how service
is different from others and how it will compete in the marketplace. Sometimes services are successful because
their service concept fills a previously unoccupied niche or differs from the generally accepted mode of operation.
For example, Citibank offers 15-minute mortgage approvals through online computer networks with real estate
offices, credit bureaus, and builder’s offices, and an expert system loan-application advisor. Amazon excels at
customer service for online orders, and eBay’s worldwide reach creates more lively auctions with a huge
community of buyers and sellers.

A service package is created from the service concept to meet customer needs. The package consists of a mixture
of physical items, sensual benefits, and psychological benefits. The physical items in a restaurant consist of the
facility, food, drinks, tableware, napkins, and other touchable commodities. The sensual benefits include the taste
and aroma of the food and the sights and sounds of the people. Psychological benefits are rest and relaxation,
comfort, status and a sense of wellbeing.

Effective service design recognises and defines all the components of a service package. Finding the appropriate
mix of physical items and sensual and psychological benefits and designing them to be consistent with each other
and the service concept, are also important. A fast-food restaurant promises nourishment with speed. The
customer is served quickly and is expected to consume the food quickly. Thus, the tables, chairs, and booths are
not designed to be comfortable, nor does their arrangement encourage lengthy or personal conversation. The
service package is consistent. room the service package, service specifications are developed for performance,
design and delivery. Performance specifications outline expectations and requirements for general and specific
customers. Performance specifications and requirements are converted into design specifications and, finally,
delivery specifications (in lieu of manufacturing specifications).

Design specifications must describe the service in sufficient detail for the desired service experience to be
replicated for different individuals at numerous locations. The specifications typically consist if activities to be
performed, skilled requirements and guidelines for service providers, and cost and time estimates. Facility size,
location, and layout, as well as equipment needs are also included.

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Delivery specifications outline the steps required in the work process including the work schedule, deliverables,
and the locations at which the work is to be performed.

Table 16.1: Differences in Design for High Contact Service

13

Design Decision High-Contact Service Low-Contact Service

Facility location Convenience to customer Near labour or transport source
Facility layout Must look presentable, Designed for efficiency
accommodate customer needs,
and facilitate interaction with
customer
Quality control More variable since customer is Measured against established
involved in process; customer standards; testing and rework
expectations and perceptions of possible to correct defects
quality may differ; customer
present when defects occur
Capacity Excess capacity required to Planned for average demand
handle peaks in demand
Worker Skills Must be able to interact well with Technical skills
customers and use judgement in
decision making
Scheduling Must accommodate customer Customer concerned only with
schedule completion date
Service process Mostly front-room activities; Most back-room activities;
service may change during planned and executed with
delivery in response to customer minimal interference
Service package Varies with customer; includes Fixed, less extensive
environment as well as actual
service
Source: (Russel and Taylor, 2019)

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16.4 Tools for Service Design

(i) Service Blueprinting
Service operations involve several different players (the customer, other customers in the system, the primary
service provider, and other service providers), both front and back-room operations, and different opportunities for
interaction among the players during the service process. Service blueprinting is the process of recording in
graphical form the activities and interactions in a service process. The term blueprinting is used to reinforce the
idea that services need to be as carefully designed as a physical product and documented with a blueprint of their
own. Refer to Figure 5.6 on page 155 in your prescribed textbook (Russel and Taylor).

A Service blueprint for a Coffee Shop

Influence/ph Customer WIFi Tour bus

ysical passes Lighting, Stops
evidence "Today's Couches, Coffee condiment
bar POS terminal
speed Tables, Chairs
Menu Loyal card
Line of Influence
Customer
actions Customer Customer Customer Customer pays Customer
Placesorder waits receives order pour in

Line of Interaction
Onstage/Fro Barista
Barista
nt Office Barist gives receipt
Completes
Readies order order

Line of Visibility
Backstage/B
ack offife Baristagoes to
stockroom, gets
last bag of cups

Line of support
Support Barista tells Online credit Barista asks
procecesses manager out of service for help
cups accessed; upfront
EFT

Figure 16.2: Service Blueprint

33

Source: Russel and Taylor (2019)

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(ii) Front Office and Back-Office Activities

In manufacturing firms, the focus of activities is on the back office (i.e. producing products efficiently), whereas in
service firms, the focus is on the front office, interacting with the customer. Every firm needs both a front and back
office, but firms may structure these in different ways.

In the front office, the customer interface can be an individual, the service provider, or self-service kiosk or machine.
The interactions in the front office influence the customer’s perception of the service and thus are critical to a
successful design. Typical front office goals are courtesy, transparency, responsiveness, usability and fun.

The back-office processes material or information to support the front-office needs. Typical goals of the back office
are efficiency, productivity, standardisation, and scalability. Obvious conflict exists between front and back offices.
Connecting the front and back offices in a meaningful way and encouraging the flow of information and support
are two of the challenges of service design. Designing the service with an eye to the entire system will help alleviate
some of the tensions. Mass customisation is an example of a front/back compromise. Instead of giving customers
the freedom to order anything they want, present a menu of options from which the customer may choose. This
provides some stability to the back office, while also being responsive to the customer.

(iii) Servicescapes
It is precisely because services are so intangible that cues to service quality are needed. Servicecapes design: (1)
the space and function where the service takes place; (2) the ambient conditions, such as music, temperature,
décor, and noise; and signs, symbols, and artefacts. It is important that the servicescape be consistent with the
service concept, and that all the elements be consistent with each other. Servicecapes have proved to be extremely
important customer perceptions of service quality and to their satisfaction with the service.

(iv) Quantitative Techniques

There are many quantitative techniques for improving the service process. One of the most common and powerful
is waiting line analysis, which we will cover later.

16.5 The Strategic Service Vision

Unmet needs are at the heart of the purpose for the service organisation. This obviously, starts when the
entrepreneur recognises the opportunity. A number of questions need to be asked to formulate a strategic vision.
As an illustration, Southwest Airlines present a standard example in that they started by only serving three cities
in Texas, namely Dallas, Houston and San Antonio. The starting point in this process is to analyse the target
market first.

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The target market - The target market comprised clients who were frustrated by poor service.

Service concept- Southwest Airlines realised that on-time performance and frequent departures were critical and
meals were unnecessary on short flights-mostly less than an hour.

Operating strategy - Southwest Airlines also realised that airport gate turnaround must be fast to make productive
use of aircraft and provide frequent departures. They had to invest hugely in aircraft purchase and purposed that
passengers would enjoy a relaxed flying experience; employees would enjoy the workplace.

Service delivery system - In addition Southwest determined that its cabin crew should have interpersonal skills to
create a “fun’ atmosphere aboard the aircraft and assist in differentiating the company from the major airlines.

16.6 Understanding the Competitive Environment of Services

Slack et al. (2019) argue that services companies operate in very difficult economic environments. The reasons
are varied. Among them are the following:
Relatively low entry barriers – service innovations are patentable and in most cases, services are not capital
intensive; rather they are labour intensive. This allows innovations to be copied quite easily.

Minimal opportunities for economies of scale – Since production and consumption of service takes place at the
same time, the customers have to travel. This necessity of physical travel places a limit on the market area and
results in small-scale outlets.

Erratic sales fluctuations- Service demand varies greatly as a function of time of the day and the day of the week
in question. Arrivals are usually random.

No advantage of size in dealing with buyers or suppliers - Since many service companies are small, they are placed
at a disadvantage in bargaining with powerful buyers or suppliers. Exceptions do exist though.

Product substitution – Product innovations can be a substitute for services, for example the home pregnancy test.
Therefore, service firms must watch other service providers and also anticipate potential product innovations that
may render their service obsolete.

Customer loyalty – Most established companies use personalised service to create a loyal customer base, which
becomes a barrier to entry by would-be new service providers.

Exit barriers- Marginal service companies may carry on operating, despite low or even non-existent profits. For
instance, a business that is privately owned may have the goal of employing family members instead of maximising
profits.

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Competitive Service Strategies

• Overall Cost leadership - An overall cost leadership needs efficient scale facilities, tight cost and
overhead control and often innovative technology. The low-cost position is a defence against competition
because less efficient competitors will suffer first from competitive pressures. The investment in this
strategy is usually high because state of the art equipment and aggressive pricing are needed. The
company will thus seek out low-cost customers; standardise a customer service; reduce the personal
element in the service delivery; and taking service operations offline.
• Differentiation- The essence of the differentiation strategy lies in creating a service that is perceived as
being unique. The many types of differentiation are brand image, technology, features, customer’s service
reputation, dealer’s service. A differentiation strategy does not ignore costs, but the primary thrust is on
creating customer loyalty. Cost is achieved through some targeted customer who is willing to pay.
Attention is paid to making the intangible tangible; customising the standard product; reducing perceived
risk, giving attention to personal training; and controlling quality.
• Focus- The focus strategy is built around the concept of serving a particular target market very well and
that their specific needs are met. The market segment may in fact be a particular buyer group, service
and so forth. Ideas for service innovations can originate from many sources. Customers can offer
suggestions, as in menus for restaurants, front line employees can be trained to listen to customers
concerns. A customer database can also serve as another source. Trends in customer demographics can
suggest new services.
• Slack et al. (2019) postulate that innovation is seen as the process of creating something new as well as
the actual product or outcome. What is sought is not entirely a new service but modifications to existing
services. Radical innovations are those that do not exist. Incremental offerings are changes to existing
services that are valued as improvements.

Think Point 16.2

Compare any two fast food outlets that you have frequented. Analyse, with reasons, which
you would prefer to frequent based solely on the service you receive from their staff.

16.7 Service Quality

The attribute theory is used to express service quality generally in literature by both the practitioners and
academics. This theory makes the assumption that service quality primarily reflects attributes of the service delivery
system. It thus applies the product framework to services. It further assumes, according to Deming (1986), that
management has full control over the inputs that define these attributes and that these attributes are associated
with service quality.

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On the contrary, a customer satisfaction theory treats service quality as a perceptual phenomenon which is
identified through the eye of the customer. This is to say that the meaning, the definition and the evaluation of
quality exists in the mind of the customer. Ultimately therefore, quality is the difference between service quality
expectations and the perceptions of reality as argued by Berry (1986). This theory shifts focus from production to
the customer.

The interaction theory approach to service quality was presented by Klaus (1985). Klaus defined service quality as
a “shared experience of gain” by all participants in the service encounter. The experiences of the customer are
interrelated with the experiences of the contact employee so that service quality emerges via mutual need;
satisfaction of both the employee and the customers. The diagnostic framework presented in this module is based
on an attribute theory approach to service quality. In specific terms, it details those attributes of service delivery
that service literature indicates are important determinants of service quality.

16.8 Service Facility Location

Whilst the focus in the manufacturing sector location analysis is to minimize costs, the focus in the service sector
is to maximize revenue. This is because the costs of manufacturing firms tend to vary substantially between
locations, whilst service firms find location has more impact on revenue than cost. This means that the location for
service firms should be based on determining the volume of business and revenue.

Heizer and Render (2020) submits that there are eight major components of volume and revenue for service firms
and these are:
• Purchasing power of the customer drawing area
• Service and image compatibility with demographics of the customer drawing area
• Competition in the area
• Quality of competition
• Uniqueness of the firm’s and competitors’ locations
• Physical qualities of facilities and neighbouring businesses
• Operating policies of the firm
• Quality of management

Location does not only lead to creating entry barriers and generating demand, but it affects the strategic dimensions
of flexibility, competitive positioning, demand management and focus Fitzsimmons, J.A., and Fitzsimmons, M.J
(2019).

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Fitzsimmons, J.A., and Fitzsimmons, M.J (2019) discuss the following:

Flexibility – Flexibility of a location measures the degree to which the service can react to changing economic
situations. Since location decisions are long-term commitments, with capital-intensive aspects, it is essential to
select locations that can be responsive to future economic, demographic, cultural, and competitive changes.
Locating sites in different provinces can help to reduce overall risks associated with financial crises from regional
economic downturns.

Competitive positioning- Competitive positioning makes reference to methods which the firm can establish relative
to its competitors. Multiple locations can serve as a barrier to competition through building a firm’s competitive
position and creating awareness. Obtaining prime locations before the expansion of the market can keep
competitors from gaining access to desirable locations and therefore, create an artificial barrier to entry.

Demand management – demand management refers to the ability to control the quantity and quality, and timing
of demand. This is why hotels have difficulties in manipulating demand due to the fact that they occupy fixed
positions. Thus locating a place where there is a steady supply of demand is critical, places like airports for
example.

Focus – can be developed by offering the same narrowly defined service at many locations. Many multi service
organisations create a standard facility that can be duplicated in various locations.

16.9 Elements of Waiting Line Analysis

Russel and Taylor (2019) argue that the emergence of waiting lines is due to the faster arrival of people or things
than can be served. This does not take anything away from the service capacity nor does it imply that the service
operation is understaffed. Waiting lines arise because customer arrival is not constant. At one point there will be
many customers and at another there will be very few. The waiting line thus continually increases and decreases
in length. Decisions regarding waiting lines and their management are based on the averages of customer arrivals,
waiting times and service times observed over time. Queuing models use these to compute operating
characteristics such as the average number of customers waiting in line and the average time a customer must
wait in line. Different sets of formula are applied, depending on the type of waiting line system under investigation.
A bank drive-up teller window where a clerk serves a single line of cars is different from a single line of passengers
at an airliner ticket counter that is served by three or four agents.

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The following elements that make up waiting lines are discussed by Russel and Taylor (2019).
The Waiting Line
Basic components of the waiting line are the calling population, arrivals servers, and the waiting line or queue.

The Calling Population

Russel and Taylor (2019) say a customer in a waiting line context is a person or thing that wants service from an
operation. The calling population then is the source of the customers to the waiting line system and this can either
be finite or infinite. An infinite population makes the assumption of a large number of potential customers that is
always possible for one or more customers to arrive to be served. A finite calling population has a very specific,
quantifiable number of potential customers. Examples include a repair person in a shop who is responsible for a
constant number of machines to work on, a trucking terminal that services a fleet of say 20 trucks or even a nurse
assigned to attend to only 6 people.

The Arrival Rate

This refers to the rate at which customers arrive at the service facility during a specified period. This rate can be
estimated from empirical data obtained from studying the system or a similar system or it can even be an average
of these data. For instance, if the 100 customers arrive at a store checkout counter during a 10-hour day, it could
be said that the arrival rate averages 10 customers per hour. But it could be that no customers would arrive during
another hour. Arrivals are assumed to be independent of each other and to vary randomly over time.

The variability of arrivals at a service facility often conforms to a probability distribution (PD). Arrival may be
described by many distributions and based on research for many years in queuing theory. It has been established
that the number of arrivals per unit of time at a service facility can frequently be described as a Poisson distribution.
Thus in queuing, the average arrival rate, or the number of customers arriving during a period of time, is signified
by the Greek Letter λ. The assumption made in these models is that balking (refusing to join the queue) does not
exist.

Service Times
In analysing waiting lines, Russel and Taylor (2019) postulate that arrivals are described in terms of a rate and
service in terms of time. Service times in queuing processes may also be any one of a large number of different
probability distributions. The distribution that is mostly assumed for service times is the negative exponential
distribution. Though this distribution is for service times, it is a service that must be expressed as a rate to be
compatible with the arrival rate. The average service rate or the number of customers that can be served in a
period of time is expressed as µ.

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Since empirical evidence has shown that the assumption of the Poisson distribution and negative exponential
distribution do not hold in practice regarding arrivals, actual applications of queuing analysis need to verify these
assumptions. It is interesting to note that if service times are exponentially distributed, then the service rate is
Poisson distributed. For instance, if the average time to serve a customer is three minutes (and exponentially
distributed), then the average service rate is 20 customers per hour (and Poisson distributed). The opposite is true
for Poisson arrivals.

Queue Discipline and Length

Russel and Taylor (2019) say queue discipline is the order in which waiting customers are served. The most
common form of queue discipline is first come, first served. This implies that the first person or item waiting in line
is served first. Other disciplines include first in last out, as in when a worker stacks parts in such a way that the last
one will be removed first. The other discipline is that of picking this at random or alternatively customers can be
processed alphabetically. This is another form of queue discipline. This happens a lot at school registrations and
or interviews etc.

In manufacturing operations jobs with the shortest time may be processed first. At hospitals, the most critical case
is always attended to first. All these are various forms of queue discipline. Queues can be finite of infinite. An
infinite queue can be of any size, with no upper limit, and is the most common queue structure. For instance, at
the movie theatre, an assumption is made that a queue could stretch through the lobby and out of the door if
necessary. A finite queue is limited in size. For instance, the driveway at the bank teller window can accommodate
only a limited number of cars before it backs up to the street.

Practical Application Or Example 16.1

Critique the manner in which queueing theory has had to alter procedure given
the outbreak of the Covid pandemic.

Basic Waiting Line Structure

According to Russel and Taylor (2019), four types of waiting line structures can be identified based on the type of
service facility. These are: single-channel, single-phase; single-channel, multiple-phase; multiple-channel, single-
phase; and multiple-channel, multiple-phase. The number of channels in a queuing process is the number of
parallel servers available. The number of phases indicates the number of sequential servers each customer must
go through to complete service. An example of a single-channel, single-phase queuing operation is a post office
with only one postal clerk waiting on a single line of customers. Sometimes it’s simply called the single-server
waiting line. A post office with various postal clerks waiting on a single line of customers is an example of a multiple-
channel, single-phase process or simply called a multiple-server waiting line.

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The other two types have multiple phases. They have a sequence of servers, one following another. For instance,
when patients go to clinic for treatment, or are admitted into a hospital, they first wait in a reception room, and then
they may go to an office to fill out some paperwork. When they go to the treatment room, the patients receive an
initial check-up or treatment from a nurse, followed by treatment from a doctor. This arrangement is called multiple-
channel, multiple phase process. A manufacturing assembly is another example of this type of waiting line-one
where a product is worked on at various sequential machines or by several sequential operators at workstations.
These are more complicated and are beyond the scope of this module.

Table 16.3: Queuing System Operating Characteristics

14

Notation Operating Characteristic

L Average number of customers in the system (waiting and being served)

Lq Average number of customers in the waiting line

W Average time a customer spends in the system (waiting and being served)

Wq Average time a customer spends waiting in line

Po Probability of no (i.e., zero) customers in the system

Pn Probability of n customers in the system

P Utilisation rate: the proportion of the time the system is in use.

Source: Russel and Taylor (2019)

Waiting Line Models

The simplest, very basic waiting line structure is the single server model. Every day we run into this type of waiting
line. Examples are the use of a copier at the office, visiting a professor in their office, buying a ticket to see a movie
- you wait in line to be served by one person.

The Basic Single-Server Model

Although a variety of single server waiting lines exist, the basic assumptions of a single-server model are:
• Poisson arrival rate
• Exponential service times
• First-come, first served queue discipline
• Infinite queue length
• Infinite calling population

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16.10 Supply Chain Management

Fitzsimons et al., (2019:) argue that due to shorter product life cycles and globalisation, a system view of whole
supply chain is important. Shorter product life cycles make many products obsolete quickly. It is therefore, a
challenge to make manufacturing capacity plans, agreeing on production schedules, and setting inventory stock
levels because there is no historical data available. Poor planning can lead to lost sales or expensive end of-life
inventory write-offs. Competitive pressure thus requires organisations to think globally when looking for suppliers
as well as locating manufacturing operations.

Think Point 16.3.

Deduce whether there are any differences in the principles of supply chain
management between a manufacturing and a service business.

The real challenge of supply chain management is to balance requirements of reliable and prominent customer
delivery with manufacturing and stock costs. A supply chain is usually modelled to evaluate the chances of the
greatest improvements in customers’ relationship between asset costs such as inventory and the domain
characteristics of customer service such as responsiveness and reliability in customer delivery. A comprehensive
system view facilitates interactions between participants and assists in a collaborative search for effective
measures to meet customer demands.

Unreliable deliveries increase inventory investments in safety stocks or result in unsatisfied customers and loss of
sales. The physical goods supply chain is viewed as a network of value-adding materials-processing stages each
defined with supply input, material transformations, and demand output.

Managing Uncertainty
Slack et al. (2019) contend that managing supply would be straightforward if there were no uncertainties which
arise from three sources: supplier delivery performance, manufacturing reliability, and customer demand. Inventory
is used as insurance during times of uncertainties. To meet customer service levels, extra units of stock items are
held so that the customer delivery requirements can be met. Uncertainty can be caused by many factors. Some of
these are storms that delay shipment, quality problems, machine failure, or even late arrivals of raw material supply.
Suppliers manufacturing ability is affected by a number of problems such as internal scheduling delays caused by
several problems facing suppliers. The overall uncertainty is captured by a probability distribution of on-time
performance. It is very difficult to determine customer demand variability especially with short product life cycles.
Consequently, historical demand distributions become difficult. Market research and past experience with similar
products can assist in predicting distributions.

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Supply Chain Strategic Planning

Strategic initiatives do lessen the impact of uncertainty and thus improve customer service. The implementation of
TQM statistical process control can help improve manufacturing reliability. More dependable transport modes can
also be investigated. Changes in the manufacturing design can allow the manufacturing operations to stock
uncompleted products and postpone the final customisation thereby increasing responsiveness to customer
orders. Sometimes products are stocked in an incomplete state only to be completed when customer orders are
made.

Revision Questions 16.1

Question 1

Describe a customer experience you have personally encountered where the

good or service or both satisfactory (for example, defective product, errors,
mistakes, poor service, service upsets, and so on). How might the organisation
have handled it better and how could operations management?

Question 2

Choose one of the following services and analyse, using specific examples,
how each of the ways that services differ from manufactured goods apply.

A. a family practice medical office

B. a fire department

C. a restaurant

D. an automobile repair shop

Question 3

Appraise three recent situations in which you were directly affected by poor
product or service quality.

16.11 Summary
Services do represent a growing sector of the world economy and count for about two thirds of global output. The
most industrialised countries account for a much larger portion of services. Service design and operations present
a challenge due to the intangibility of the service; the inherent variability in service delivery and co-production of
value by the customer and the service provider.

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Answers to Activities
Video Activity 16.1
Student is required to watch the video and apply the knowledge learnt.

Video Activity 16.2

Student is required to watch the video and apply the knowledge learnt.

Think Point 16.2

Student is required to apply their knowledge.

Think Point 16.2

Student is required to apply their knowledge.

Practical Application or Example 16.1

Student is required to apply their knowledge.

Think Point 16.3

Student is required to apply their knowledge.

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Unit
17: The Impact of Environmental concerns
on Operations Management

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

17.1 Introduction • Introduce topic areas for the unit

17.2 The Three Principles of • Critically evaluate the three principles of environmental
Environmental Management management

17.3 Greening the Supply Chain • Investigate the concept of greening the supply chain

17.4 Summary • Summarise topic areas covered in unit

Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson
Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations,

strategy, and Information Technology. Ninth Edition International Edition:
McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C., Harrison
A., Johnson R. (2010) Operations Management. SA: Pearson.

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17.1 Introduction
A lack of basic environmental management principles in any contemporary business is considered a contravention
of good governance. The world is fast turning towards sustainable economic growth and development, and this
process requires the sustainable use of natural resources. People are becoming more conscious about their impact
on the environment and the ecological footprint of organisations. As a result, there is a general moral consensus
to support businesses which are efficiently conducting business operations in an environmentally friendly manner,
thus providing a competitive edge for environmentally conscious businesses.

Environmentally conscious business practices include the recognition and application of key environmental
management principles, particularly those that are prominent in international and national discourses. It also
includes adopting business practices (internally and externally) that promote sustainable development. As such,
this unit provides an introduction to environmental principles that are internationally and nationally adopted by
business practices that seek to make their business operations “greener” whilst complying with international and
national standards. Emphasis is placed on environmental management statute as business practices have the
moral and, in some cases, a legal responsibility for compliance to environmental management legislation. Although
South African environmental management legislation often lacks the attachment of criminal sanctions to
environmental principles, it is important to remember that principles fundamentally serve as a guide towards the
interpretation, administration and implementation of legislation that guide legal and responsible business practices.
The question however remains; is environmentally conscious business practice profitable?

Video Activity 17.1

Environmental Management for Business Webinar -
https://www.youtube.com/watch?v=lw_N-6Woae8

Critique the main reason relating to business management is incorporating

environmental matters as part of the decision making process.

Think Point 17.1

Apply the above discussion to the concept of corporate social responsibility and
the tennets of the King iv Report. Is the information in line with business’
responsibility to operate in a socially and environmentally friendly manner?

17.2 The Three Principles of Environmental Management

Environmental management is grounded in limiting environmental damage and encouraging conduct that is
desirable and in keeping with current knowledge of the optimum balance between profitable economic activity and
maintaining environmental quality (Glazewski, 2018).

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Three key principles have been formulated and adopted to ensure adherence to legislature and best practices by
organisations.
• The Sustainability Principle
Sustainability as a concept within environmental management has its origin within the international community.
Sustainable development as a normative principle was coined in 1980 by the International Union for Conservation
of Nature (IUCN) as part of the World Conservation Strategy (Blanchard and Buchs, 2015:2). Over the years, the
concept of sustainable development has been refined and evolved to be predicated upon the traditional three (3)
pillars of sustainability, namely, the economic, social, and environmental pillars. Historically, the sustainability
principle has commonly been cited to read:

“For development to be sustainable, it must take account of social and ecological factors, as well as
economic ones” (cited in Bosselmann 2016).

This 1980 version of the sustainability principle was simple and at best vague, focusing only on the three pillars of
sustainability. The well-known Brundtland Report that emanated from the World Commission on Environment and
Development in 1987 provided further clarity on the concept of sustainability, and produced the following often-
quoted version of sustainable development:

“Development which meets the needs of the present generation without compromising the ability of future
generations to meet their own needs” (cited in Blanchard and Buchs, 2015:).

• The Precautionary Principle

The concept of applying precaution prior to undertaking a decision of great importance appears to be a construct
of common sense. However, the international environmental community has resorted to adopting a precautionary
principle on various international treaties and conventions to ensure that common sense is indeed common
practice.

This section introduces the precautionary principle as one of the main environmental management principles
recognised internationally and within the South African context. The precautionary principle is contextualised
according to the standard international definition as the principle has its origin in international literature. The
application and limitations of the precautionary principle are thereafter discussed. We thereafter identify which
persons bear the burden of proof in applying the precautionary principle.

It is important to remember that international general principles for environmental law merely provide a theoretical
foundation upon which various nations can develop normative frameworks for their environmental management
statutes. Although the content and legal status of principles is often unclear and disputed, principles provide
predictable parameters for environmental protection, and provide direction for the development and application of
statute (Rayfuse, 2016:13).

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• The Polluter Pays Principle

Once again, it appears to be common sense to ensure that persons and organisations responsible for polluting the
environment are held liable for their actions and / or negligence. However, since most states are constitutionally
responsible for ensuring that the environment is legislatively protected, punitive laws against polluters are one such
legislative measure for the state to protect the environment.

As with the precautionary principle, the Polluter Pays Principle was one of the four (4) guiding principles for public
environmental law that were adopted at the 1992 Rio Declaration on Environment and Development. However, it
was first adopted by the Organization for Economic Cooperation and Development (OECD) in 1972, in response
to the first United Nations Conference on Environment and Development in Stockholm in 1972 (Khan, 2015:3).
The principle was captured as follows:

“The Polluter Pays Principle will be used for allocating costs of pollution prevention and control measures
in order to encourage the rational use of scarce environmental resources and avoid distortions in
international trade and investment. This means that the polluter should bear the expenses of carrying out
the aforementioned measures decided by the public authorities to ensure that the environment is in an
acceptable state. In other words, the cost of these measures should be reflected in the cost of goods and
services that cause pollution in production and / or consumption. Such measures should not be
accompanied by subsidies that would create significant distortions in international trade and investment.”
(cited in Khan 2015:3).

Notably, the Polluter Pays Principle is the most economically inclined environmental principle, and it has also
become a normative doctrine of environmental law (Khan 2015:3). Moreover, it is the only principle adopted at the
Rio Declaration that is retributive in nature (Stacey, 2016:1).

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Case Study

Read the case study below and answer the revision question that follows:

Google pledges carbon-neutral shipping, recycled plastic for all devices

Paresh Dave

https://www.reuters.com/article/us-alphabet-google-devices/google-pledges-
carbon-neutral-shipping-recycled-plastic-for-all-devices-idUSKCN1UV1J2

SAN FRANCISCO (Reuters) - Alphabet Inc’s (GOOGL.O) Google on Monday

announced that it would neutralize carbon emissions from delivering consumer
hardware by next year and include recycled plastic in each of its products by 2022.

The new commitments step up the competition among tech companies aiming to show
consumers and governments that they are curbing the environmental toll from their
widening arrays of gadgets.

Anna Meegan, head of sustainability for Google’s devices and services unit, said in
an interview that the company’s transport-related carbon emissions per unit fell 40%
last year compared to 2017 by relying more on ships instead of planes to move
phones, speakers, laptops and other gadgets from factories to customers across the
world.

The company will offset remaining emissions by purchasing carbon credits, Meegan
said.

Three out of nine Google products for which the company has detailed disclosures
online contain recycled plastic, ranging from 20% to 42% in the casings for its Google
Home speakers and Chromecast streaming dongles.

In a blog post, Google committed to introducing some recycled plastic to 100% of

products by 2022.

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Meegan acknowledged that Google’s 3-year-old hardware business trails far larger
hardware rival Apple Inc (AAPL.O) in some sustainability efforts. Apple said Thursday
that it will open a “Material Recovery” lab to investigate new techniques using robotics
and machine learning to rip apart its devices and recover valuable materials such as
copper, aluminium and cobalt. The 9,000-square-foot lab will be at the same Austin
facility as “Daisy,” an Apple-built robot that can now tear apart iPhones at the rate of
1.2 million per year. The lab is part of Apple’s broader goal to make all of its products
from recycled or renewable materials. Apple has not set a date for when it will reach
that goal, though some products such as the MacBook Air already feature aluminium
made from melted down iPhones traded in to Apple.

Apple, which in 2017 committed to “one day” only using recycled and renewable
materials, has at least 50% recycled plastic in some parts of several products, recycled
tin in at least 11 products and recycled aluminium in at least two.

But sustainability standards are now a part of Google’s hardware planning, Meegan
said. Devices cannot clear the second checkpoint in the company’s design process
unless they show that sustainable packaging and materials and ease of repair have
been considered.

“We are fundamentally looking to build sustainability into everything we do,” she said.
“It’s going to take us time to demonstrate progress.”

17.3 Greening the Supply Chain

Green supply chain management technique (GSCM) is a newer way to differentiate an organization from its
competitor organizations because it can highly influence the planned success of an organization. With rapid
increasing awareness of environmental protection globally, the green trend of conserving our planet's resources
and protecting the environment is difficult to fight against, thereby putting more pressure on firms. With the rapid
change in manufacturing scenario globally, environmental as well as social issues are becoming of great
importance in running any business. Green supply Chain Management (GSCM) is a way to improve the
performance of the process and the end products according to the requirements of environmental regulations
agency. A green supply chain management aims to constrict the waste product within the industrial system in order
to keep and protect energy as well as to prevent the dissipation of dangerous materials into the environment. In
view of the growing global environmental awareness among organizations, green supply chain management
(GSCM) has emerged as a newer solution that considers sustainability elements with combination of environmental
thinking along the intra-and inter-organizations management.

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Green Supply Chain Management (GSCM) has emerged as an important organizational philosophy to achieve the
competitive environment by reducing environmental risks and improving ecological efficiency. Research on GSCM
has grown substantially over the past two decades. Companies that have adopted GSCM practices with a focus
on distribution activities have successfully improved their business and environmental performance on many levels.
Today's also some of remaining companies have not adopted green supply chain management, due to this
environmental performance index (EPI) of India is not good. This paper represents a brief report on various issues
of GSCM on the basis of literature survey. This paper eventually contains two parts – literature survey and
discussion of existing trends and stages representing the functioning of GSCM. To serve these purpose 356
articles published during 1996 through 2016 were reviewed. Knowledge extracted from the survey of the literature
helped in knowing the existing trends and various concepts related to GSCM. The discussion of existing trends
and various phases constitute a relevant knowledge base and will help manufacturing industry and academia in
developing a better understanding about GSCM.
https://www.researchgate.net/publication/318721781_Impact_of_Green_Supply_Chain_Management_Practices_
in_India

Activity 17.1

Consider your organisation and formulate ways in which you could improve the
sustainability of the supply chain.

Some of the key points you may discuss:

1. Redesign the product/service

Even simple changes to a product design – from reducing weight to making it

easier to disassemble — can reduce energy consumption and waste throughout
the product life cycle. In some cases, innovation or new technologies may make
it possible to eliminate components or ingredients entirely and thereby shorten
the supply chain. Dutch food maker Friesland Coberico Dairy Foods reduced its
transportation needs by 127,000 miles per year by adjusting recipes and
production processes.

2. Reconfigure manufacturing

Streamlining production steps, reducing energy use, and limiting use of pollutants
and toxic materials can have a big impact on how green the supply chain is.
Employing a product lifecycle management process that takes into account green
considerations is the key. Canadian pulp and paper company Catalyst Paper
Corporation reduced greenhouse gas emission by 70 percent and saved $4.4

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million by reusing waste products and heat from its manufacturing processes and
switching to natural gas.

3. Shift to green suppliers

Although some may have higher costs, green suppliers can have a big effect on
the carbon implications of bringing products to market. An analysis of alternative
suppliers may uncover potential benefits that justify making a change, such as
helping you meet new government regulations or appealing to new categories of
consumers.

4. Shorten distances

By rationalizing sourcing, assembly and distribution in relation to markets, travel

distances and corresponding fuel use can be reduced. For some products, simply
working with suppliers who are closer to major markets can significantly reduce
energy use. An American bath and kitchen products manufacturer reduced
carbon emissions 34 percent by relocating its warehouses, without incurring
additional costs.

5. Alter service-level agreements

When evaluating the effectiveness of your supply chain, add carbon to the
traditional measurements of cost, quality and service. Review service-level
agreements for unnecessary requirements that decrease efficiency. For example,
min-max and just-in-time clauses could force suppliers to make small, expedited
deliveries that drive up energy use dramatically.

6. Shrink packaging

New materials and designs allow companies to make packages smaller and
lighter, allowing shipping containers to hold more and trucks to carry more
products in a load. Improved package designs can also reduce the burden of
recycling or eliminating packaging materials at the end of the chain. UK retailer
Tesco asked suppliers to provide lighter weight wine bottles, reducing its annual
glass usage by 2,600 tons per year and lowering carbon emissions from
transportation by 4,100 tons.

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17.4 Summary
Many organisations fail to meet the three principles of environmental management and this can impact severely
on the financial and reputational sustainability of the company. With most consumers preferring companies who
operate on ethical guidelines, we see an increase in the organisation’s competitive advantage simply by those
organisations that adhere to corporate social responsibility and protection consumers and the society against
harmful business practices.

Revision question 17.1

To be discussed in groups

Question 1

Critically analyse the impact of Google’s efforts towards sustainability and

corporate social responsibility as per Dave’s report.

Question 2

Defend the reasoning behind implementing the Polluter-pays principle.

Question 3

Explain the concept of triple bottom line reporting.

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Answers to Activities
Video Activity 17.1
Student is required to watch the video and apply the knowledge learnt.

Think Point 17.1

Student is required to apply their knowledge.

Activity 17.1
Student is required to apply their knowledge.

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Unit
18: The Importance of Marketing
in Operations Management

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Unit Learning Outcomes

CONTENT LIST LEARNING OUTCOMES OF THIS UNIT:

18.1 Introduction • Introduce topic areas for the unit

18.2 Marketing as a Driver of Production • Critically analyse marketing as a driver for production

18.3 Marketing, Consumer Needs and • Investigate the relationship between marketing, consumer
Customer Satisfaction needs and customer satisfaction

18.4 Digital Marketing Strategies that • Research the impact that digital marketing strategies that
have assisted in Business have assisted in business sustainability
Sustainability

18.5 Summary • Summarise topic areas covered in unit

Prescribed and Recommended Reading(s)/Textbook(s)

Prescribed Reading(s)/Textbook(s)
• Heizer, J and Render, B. (2020) Operations Management. Sustainability and
Supply Chain Management. Thirteenth Edition. Cape Town: Pearson
Education.

Recommended Reading(s)/Textbook(s)
• Russel, R.S. and Taylor, B.T. (2019) Operations and Supply Chain
Management. Tenth Edition. Singapore Pte Ltd: John Wiley and Sons.

• Slack et al. (2019) Operations and Process Management: Principles and

Practice for Strategic Impact. Cape Town: Pearson.

• Fitzsimons, J.A and Fitzsimons M.J. (2019) Service Management. Operations,

strategy, and Information Technology. Ninth Edition International Edition:
McGraw Hill.

• Lovelock, C., and Wirtz, J., (2016) Service Marketing. People, Technology,
Strategy. USA: Pearson Prentice Hall.

• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C.,
Harrison A., Johnson R. (2010) Operations Management. SA: Pearson.

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18.1 Introduction
Marketing is a business tool that drives sale, which in turn drives the level of operations, business profits, operations
management decisions and sustainability. The various tools of marketing, in particular, social media, plays an
important role in one of the driving forces behind production and operations.

This unit has been constructed using articles to illustrate the integral integrated nature of marketing within the
larger field of study known as operations management.

Video Activity 18.1

Video link: 20 Marketing Ideas For Manufacturers: Practical Marketing Tips For
Manufacturing Businesses - https://www.youtube.com/watch?v=1GuIRq7ejE0

Watch the video link and justify the need to incorporate marketing information
when prioritising manufacturing decisions.

18.2 Marketing as a Driver of Production

Apple's Product Development and Marketing Strategy
https://www.ukessays.com/essays/marketing/key-reasons-for-apples-success-marketing-essay.php
Info: 2228 words (9 pages) Essay
Published: 9th Jan 2018 in Marketing

With the development of technology at high speed, particularly in the field of electronic products, some companies
have launched brilliant products which are full of imagination and creativity. These products are exercising an
invisible and formative influence on society. Among these products, the series of products from Apple Inc.
(previously Apple Computer, Inc.) may be some of the most noticeable ones. Apple Inc., whose products have
attracted people’s attention all over the world and have occupied considerable market share in global range, is one
of the most successful international company currently. According to the statistics from NPD group, in the term of
premium personal computer, Mac, which is the name of a series of Apple’s PC, revenue market share was 91
percent on June 2009. (Wilcox 2009). This consequence can be attributed to two major reasons: Apple’s product
development and Apple’s extensive marketing (Schumacher 2009). In the meanwhile, Apple’s success affects
society in two aspects, namely fashion style and changing people’s habits. This essay will expand the reasons
mentioned above to analysis why Apple have achieved huge success worldwide, and then illustrate the positive
effects on society owing to Apple’s products. Due to the success of Apple Inc. and its contribution to society, I
would like to consider that Apple Inc. is one of the most outstanding companies at present age.

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Key Reasons for Apple’s Success

Admittedly, the reasons which may bring about Apple’s success are various, nevertheless this essay mainly
propose two most important reasons. Of major consideration is Apple’s product line, which is assuredly responsible
for Apple’s success. Specifically, there are four sub reasons, which are constantly improving, innovative product
line (Kingsley-Hughes 2009); simple design and user interface; high quality components; coherent hardware and
software (Schumacher 2009), relevant to Apple’s product development.

Think Point 18.1

Validate the link between innovative production and marketing success.

Apple’s Product Development

First of all, Apple’s product line encompasses a series of brilliant and distinctive products, such as Mac (Macintosh),
iPod, iPhone and iPad; and in the meantime, the designers of Apple Inc. are improving and innovating on their
product line constantly. Innovative spirit of Apple Inc. has been approved across the world. In 2005, Boston
Consulting Group held a poll whose is called “Top 20 Innovative Companies in the World”, and collected the
statistical data from 940 senior executives in 68 countries. The result of this investigation revealed that Apple Inc.
was appraised as the most innovative company in the world and accounted for 24.84% of the entire vote
(Nussbaum 2005). For example, iPod, as one of the representative product of Apple, was launched in 2001.
Initially, although it attracted consumer attention, it only supported the Macintosh operation system, which meant
that it could only be used on Macintosh computers and lost many other users who used windows operation system.
Then, in 2002, Apple Inc. launched the second generation of iPod, which began to support Windows OS. As a
result, iPod became more widely popular with both Macintosh and Windows users. Three years later, a new
generation of iPod, which can play not only audio files but also video files, was launched on 12th October 2005.
Moreover, for users’ convenience, the battery life was longer than before. In 2007, the newest generation with
larger capacity which can store up to 4000 songs or 100 movies, was launched. (Identifying iPod models 2010)
During the process of iPod’s development, we can see that Apple Inc. is improving their products constantly and
adding innovative elements on the products to offer distinctive and unique user experience.

The second element, which is considered to be relevant to Apple’s products, is their simple design style and friendly
user interface. To take a panoramic view of Apple’s product line, whether an iPod, an iPhone or an iPad, they
retain the simple design consistently. There are only a few buttons and different parts embedded into Apple’s
products. The appearance of these products is one whole piece of technology and has no splicing traces on them.
The simple user interface is a distinctive character, as well. For instance, an iPhone have no different submenus
or other ways to display the menu, it is easy for users to reach the function which they want to use directly and
avoid unnecessary confusion (Schumacher 2009).

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Thirdly, high quality components could lead to the success of Apple’s products. These products do not tend to
integrate newest hardware and offer highest available capacities. That is to say, Apple’s products use suitable
components to provide suitable functions, which ensure these products can run stably. For example, although
there may be only have a 2 mega pixel camera integrated into an iPhone and this camera could not satisfy any
user to take photos, the moment it is necessary for people to take a picture, the camera is ready and gives full
scope to photography. (Schumacher 2009)

Finally, the cohesion of hardware and software brings the success of Apple’s products. Apple Inc. not only focuses
on developing the hardware but also developing the software, which enhances the performances of these products.
For example, in order to improve iPod’s performances and provide convenience to users, Apple Inc. developed
the software named iTunes, which is a software supporting a Mac or a PC. It arranges and plays audio and video
files on a computer. Moreover, all media stored on a computer can be synchronized with an iPod, an iPhone and
an iPad. In the meantime, it is a digital store on a computer and other apple’s products with a large quantity of
music and movies (What is iTunes? n.d.). Additionally, iTune is updated on Apple’s website regularly, so that users
can use newest version to enhance their iPods.

In brief, Apple Inc. insists on improving and innovating on the product line to develop brilliant products constantly.
And these products offer friendly user interface and simple design style for users who can operate these products
easily. Moreover, high quality components are integrated into Apple’s products to enhance their performance. In
addition, Apple’s Inc. develops software to support their products in order to providing convenience to users.
Therefore, Apple’s product development is the basis of Apple’s success.

Apple’s s Marketing
Assuredly, Apple’s product development is a necessary premise to Apple’s success. On the other side, Apple’s
extensive marketing plays an important role as well. Apple’s marketing strategies can be summarized as two
primary sides. One is advertising; the other is the communication style.

Firstly, the success of Apple’s market could be caused by Apple’s advertising strategy. The slogans for Apple’s
products can be seen in almost every place, such as in the streets, at the bus stops and on the large screens of
squares. With Apple’s products, the slogans are creative and attractive, for instance, “The first music player that
talks to you” (iPod shuffle n.d.) and “Soon there will be 2 kinds of people. Those who use computers, and those
who use Apples” (Alex 2006). Due to these dense and eye-catching advertising with memorable slogans, Apple’s
products are deeply rooted among the people quickly and accepted by people.

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Secondly, one of the most brilliant points of Apple’s marketing strategies is the communication style. Midgley and
Midgley describe a successful communication style as “Golden Circle” in the following words:
If a company aligns itself with the customer’s values and consistently delivers its product or service in accordance
with those values, then the customer will consistently utilize the company’s offering. Consistent utilization of a
company’s offering will ensure a healthy top line. A healthy top line, in turn, produces healthy cash flow. (Midgley
and Midgley 2005, 6)

Apple Inc. is performing this kind of communication described in Midgley and Midgley’s book. Apple Inc. develops
their products based on consumers’ requirements and values, and then transmits its ideas and service to
consumers in various ways. For example, in Apple’s stores all over the world there are lecturers propagating their
products and explain why these products are consistent with consumers’ requirements and values. Besides the
open lectures, Apple stores hold a series of events regularly to show the brilliant ideas integrated into Apple’s
products. Via the interaction between Apple Inc. and consumers, how Apple’s products satisfy consumers’ values
is accepted by consumers in global scope.

Think Point 18.2

Critique the marketing style that Apple has adopted.

There is a diagram about the golden circle theory, which illustrates the marketing strategies of Apple Inc. vividly.
According to the description in the figure below, “Why”, “How” and “What” means “Beliefs”, “Tactics” and “Results”,
respectively (Gartland 2010). At first, Apple Inc. establishes the beliefs to meet consumers’ values, and then it
realizes the beliefs via the development of its products. At last, Apple’s products are world wildly accepted by
consumers. Therefore, Apple Inc. communicates with users in an “inside-out” way which is a remarkable way and
has achieved huge success across the world in marketing.
Source: (Gartland 2010)

Think Point 18.3

Engage in a discussion analysing the marketing strategies that contributed to

the increase in production of Apple’s products.

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18.3 Marketing, Consumer Needs and Customer Satisfaction

The Role of Customers in Marketing
Adapted from: https://courses.lumenlearning.com/wmopen-introbusiness/chapter/the-role-of-customers-in-
marketing/

In marketing, the act of obtaining a desired object from someone by offering something of value in return is called
the exchange process. The exchange involves:
• The Customer (or Buyer): a person or organization with a want or need who is willing to give money or
some other personal resource to address this need
• The Product: a physical good, a service, experience or idea designed to fill the customer’s want or need
• The Provider (or Seller): the company or organization offering a need-satisfying thing, which may be a
product, service, experience or idea
• The Transaction: the terms around which both parties agree to trade value-for-value (most often,
money for product)

Individuals on both sides of the exchange try to maximize rewards and minimize costs in transactions, in order to
gain the most profitable outcomes. Ideally, everyone achieves a satisfactory level of reward.

Marketing creates a bundle of goods and services that the company offers at a price to its customers. The
bundle consists of a tangible good, an intangible service or benefit, and the price of the offering. When you compare
one car to another, for example, you can evaluate each of these dimensions—the tangible, the intangible, and the
price—separately. However, you can’t buy one manufacturer’s car, another manufacturer’s service, and a third
manufacturer’s price when you actually make a choice. Together, the three make up a single firm’s offer or bundle.
Marketing is also responsible for the entire environment in which this exchange of value takes place.
• Marketing identifies customers, their needs, and how much value they place on getting those
needs addressed
• Marketing informs the design of the product to ensure it meets customer needs and provides value
proportional to what it cost
• Marketing is responsible for communicating with customers about products, explaining who is
offering them and why they are desirable
• Marketing is also responsible for listening to customers and communicating back to the provider
about how well they are satisfying customer needs and opportunities for improvemen
• Marketing shapes the location and terms of the transaction, as well as the experience customers
have after the product is delivered

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Marketing Creates Value for Customers

According to the influential economist and Harvard Business School professor Theodore Levitt, the purpose of all
business is to “find and keep customers.” Marketing is instrumental in helping businesses achieve this purpose
and is much more than just advertising and selling products and collecting money. Marketing generates value by
creating the connections between people and products, customers and companies.

How does this happen? Boiled down to its essence, the role of marketing is to identify, satisfy, and retain
customers.

Before you can create anything of value, first you must identify a want or need that you can address, as well as
the prospective customers who possess this want or need.

Next, you work to satisfy these customers by delivering a product or service that addresses these needs at the
time customers want it. Key to customer satisfaction is making sure everyone feels they benefit from the exchange.
Your customer is happy with the value they get for what they pay. You are happy with the payment you receive in
exchange for what you provide.

Effective marketing doesn’t stop there. It also needs to retain customers by creating new opportunities to win
customer loyalty and business.

The Product Concept

Both historically and currently, many businesses do not follow the marketing concept. For many years, companies
such as Texas Instruments and Otis Elevator have followed a product orientation, in which the primary
organizational focus is technology and innovation. All parts of these organizations invest heavily in building and
showcasing impressive features and product advances, which are the areas in which these companies prefer to
compete. This approach is also known as the product concept. Rather than focusing on a deep understanding of
customer needs, these companies assume that a technically superior or less expensive product will sell itself.
While this approach can be very profitable, there is a high risk of losing touch with what customers actually want.
This leaves product-oriented companies vulnerable to more customer-oriented competitors.

Activity 18.1

Reflect on a company that lost a line of production, ( example, Cadbury –

Chocolate Log). Could active marketing have created a continued customer
base for the product?

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18.4 Digital Marketing Strategies that have assisted in Business Sustainability

What Are the Most Effective Digital Marketing Strategies?
Adapted from: https://digitalmarketinginstitute.com/blog/what-are-the-most-effective-digital-marketing-strategies
According to Smart Insights, the most effective strategy in 2018 was social media marketing, followed by content
marketing, and the least was data management, with SEO being somewhere in the middle of it all.

While this is by no means cut and dry (some strategies will work better than others, depending on a number of
variables), it does offer an interesting glimpse as to the most probable methods of lead generation.

Email and video each constantly stand out as effective ways to market almost any product through any industry,
though in the chart listed with Smart Insights, it’s not as powerful as content or social media marketing.

What matters more than the type of marketing you are doing is whether or not your all-around approach is well-
matched with your brand and message. To that end, the following are some considerations for creating an effective
campaign in the context of your business.

Stay Nimble
Here’s the thing about digital marketing: it’s a bit of a trial and error process. So while you absolutely want to make
a plan, you also have to be flexible with:
• Upcoming trends
• Your content calendar and timeline
• One or two social channels only (the ones that perform best)
• Which KPIs to focus on
• When to get progress reports, where you can discuss and regroup

A successful strategy will always need some tweaking and as such needs careful and continual monitoring and
adjusting. If you’re working alone or in a small company, don’t be afraid to hire outside consultants to help you dig
through your metrics and redefine goals if something doesn’t seem to be working the way it was planned.

No digital marketing strategy will be effective if you don't first have a clear understanding of who buys your product
and why they buy it. Where and how they buy it may or may not be relevant as well. Dig deep and explore various
demographics in order to not only understand what they want to buy but also understand what they're concerned
with culturally, socially, and politically.

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Activity 18.2

Determine the manner in which your organisation assesses it customer and

potential customer markets.

An example of customer awareness is Airbnb's success with #we accept, initially a Super Bowl ad that came out
after President Trump's travel ban. It had 5 million views in a month on YouTube, plus the well-received hashtag
gained plenty of celebrity attention. That is not to say that you should take the risk of being political, but being
culturally sensitive, especially when on-brand, is never a bad thing.

Mercedes’ #MBPhotoPa campaign is just one of many examples of campaigns that used a combination of
technology, authenticity, and a simple message with an influencer partnership to capture the attention of animal-
and adventure-lovers. This video was part of the campaign. It offers a 360-degree VR view of a canine Instagram
star, Loki, and his owner Kelly Lund driving through snowy mountains in a Mercedes. The campaign featured a
variety of real people having real adventures, which made it go viral.

Form a robust profile of your audience and inform your tactics by:
• Defining the channels that fit key demographics best
• Speaking their language, considering that “language” isn’t just words
• Understanding their pain points and how to switch on emotions
• Creating useful personas for each of your demographics to help you visualize their lives and predict buying
patterns
• Being culturally aware
• Considering unique partnerships such as with influencers
• Focusing on action-oriented experiences and results rather than the product itself
• Using well-developed automation tools for highly detailed segmentation and targeting

Focus on the End Result

In marketing and product development, there is often so much emphasis placed on the product and the "numbers"
surrounding it (profits) that sometimes people lose sight of the need that the product fulfils.
What truly matters are who you are marketing to, and why. You need to understand their pain points in order to
get what they’re ultimately doing with your product. In other words, when you demonstrate the post-buying
moments, they’ll then remember why they need it in the first place.

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Use Content for Lead Generation

There are many ways of generating leads, but one tried and tested method is by providing valuable written content
and distributing it appropriately. When you tie your blogs and articles to a specific offer via a landing page, you
boost your conversion potential. According to Entrepreneur, bloggers are 13 times more likely to have a positive
ROI, and companies have the same type of results.

Focus on Mobile
According to Statistica, some 4.78 billion people worldwide will be connected to mobile phones as of 2020.
And Convince & Convert claims that 40% of shoppers consult at least one social or search channel as they shop
and that 4 out of 5 shoppers use their smartphones as part of their regular consuming habits.

If you think about it, this is truly becoming the norm. Whether you're looking up reviews for a popular video game,
checking restaurant ratings on Yelp or simply seeing if your local store has the right item in stock, you're using
mobile a lot for basic consumer needs.
With that in mind, here are a few ways you can ensure that your mobile marketing strategy stays on track:
• Optimize your website for both desktops and smartphones
• Use clickable phone numbers, addresses, and CTAs (calls to action)
• Make sure your contact details are connected to a map app
• Ensure a quickly loading website
• Always review ads for social media or other types of mobile-friendly platforms

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Revision Questions 18.1

Question 1

This question should be discussed in groups.

Examine the recent surge in mobile phone ownership and usage and determine
ways in which this technology may be used to improve production through
marketing strategies.

Question 2

Determine the impact that digital marketing has had during the Covid
pandemic. (Further research.)

Question 3

Evaluate the product concept against the backdrop of customer satisfaction.

18.5 Summary
The articles that have been provided indicate the clear link between marketing and improved production. Marketing
research in particular provides a clear way forward in terms of meeting customer needs and wants.

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Answers to Activities
Video Activity 18.1
Student is required to watch the video and apply the knowledge learnt.

Think Point 18.1

Student is required to apply their knowledge.

Think Point 18.2

Student is required to apply their knowledge.

Think Point 18.3

Student is required to apply their knowledge.

Activity 18.1
Student is required to apply their knowledge.

Activity 18.2
Student is required to apply their knowledge.

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Answers to Revision Questions

Unit 1

Revision Question 1.1

Operations management is equally important in small organisations. Whether an organisation is small or large,
operations is essential as all companies need to produce and deliver their products or services efficiently and
effectively. Managing operations in a small-to-medium company poses the challenge of resources to be dedicated
to specialised tasks. As such people tend to do different jobs in small organisations. The advantage of this is that
responses to problems or issues can take place faster. The demerit is that roles tend to overlap leading to confusion
in decision-making. On the contrary large organisations do possess the resources to commit to specialised tasks.

Unit 2

Revision Questions 2.1

Student is required to apply their knowledge.

Revision Questions 2.2

1.
a) A major storm or hurricane may have considerable impact on a company’s facilities and scheduling. Flooding
and wind damage can make a facility unusable or significantly reduce its capacity. Stocks of raw materials,
especially agricultural products, might be damaged or in short supply. The long-term availability of some
materials might be significantly reduced. There may be a shortage of important services during the recovery.
For example, the demand for roofers and builders is high after a major storm and they would like to be able
to rapidly increase their capacity to handle the higher demand.
b) Terrorist activity has forced organisations to rethink, and in many cases expand, their security systems. Firms
have also had to reevaluate their supply networks and consider increasing their inventory safety stock. They
may also reassess the risks of foreign locations and expansion.
c) A decrease in the skill levels of Americans entering the labour market requires that organisations place more
emphasis on training, turn to automation to obviate the need for human labour, and hire from outside the
United States.
d) WTO and NAFTA changed the rules for trading, opened new markets, and in some instances, changed the
role of labour versus capital (where labour is especially low cost, emphasis often shifts from the use of capital
to the use of labour).
e) The increasing cost of health insurance adds significantly to the cost of labour. Some large US organisations
are passing on this increased cost to the employees or reducing other parts of the benefit package in
response to these pressures.
f) The Internet has promoted globalisation of markets, and eliminated barriers of geography and time.

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2.
a. The increased use of LANs and WANs has, among other things, enabled new organisational structures, the
movement of the locus of responsibility further down the organisational hierarchy (elimination of middle
management), and the increasing practicality of JIT operations, mass customisation, etc.
b. The increased emphasis on service has, among other things, fostered an increased information or information
technology content of many products. Firms are also increasing training because so much of the service
economy is dependent upon individual competence.
c. The increased role of women in the workplace is requiring an increased emphasis on the creation and
communication of appropriate human resource policies. It may also be fostering the creation of flexible work
schedules and, to a lesser degree, telecommuting.
d. Some companies seem to be adopting the perspective that their main problem is now the “management of
change” as opposed to the management of a specific process or product. If nothing else, the management of
change is becoming a formal part of the manager’s responsibility.
3.
OM managers support the firm's strategy by achieving a competitive advantage through some combination of
differentiation, low-cost leadership, and response.

Unit 3
Revision Questions 3.1
Student is required to apply their knowledge.

Reasons for making Reasons for buying

• Maintain core competence. • Frees management to deal with its primary

• Lower production cost. business.
• Unsuitable suppliers. • Lower acquisition costs.
• Assure adequate supply (quantity or • Preserve supplier commitment.
delivery). • Obtain technical or management ability.
• Utilise surplus labour or facilities. • Inadequate capacity.
• Obtain desired quality. • Reduce inventory costs.
• Remove supplier collusion. • Ensure alternative sources.
• Obtain unique item that would entail a • Inadequate managerial or technical
prohibitive commitment for a supplier. resources.
• Protect personnel from a layoff. • Reciprocity.
• Protect proprietary design or quality. • Item is protected by a patent or trade secret.
• Increase or maintain the size of the
company.

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Solutions to Revision Questions 3.2

1.
1000 sq yds
Current labor productivity = = 200 sq yds per hour
1 ton*5 hours

1200 sq yds
New labor productivity = = 240 sq yds per hour
1 ton * 5 hours

Productivity improves 20% = (240 - 200) / 200 = 2

2.
8 hours per day
Current productivity = = 4 problems per day
2 hours per problem

7 hours per day

Productivity with computer = = 7 problems per day
1 hour per problem

7−4 3 
Productivity improves 75%  = = .75 
 4 4 

3.
Currently Using the new paint
Labour 12 hrs * R10 = R120 12 hrs * R10 = R 120
Material 240 * R3.50 = R840 360 * R3.50 = R1260
Supplies = R 20 = R 20
Energy =R 4 =R4
Total Inputs = R984 = R1404
Productivity 240/984 = 0.24 360/1404 = .26

Question 4
If the material costs increase by R0.50 per doll:

Using the new paint

Labour 12 hrs * R10 = R 120

Material 360 * R4.00 = R1440

Supplies = R 20

Energy =R4

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Total Inputs = R1584

Productivity 360/1584 = 0.23

Question 5
From the answer to Activity 3 we know the following:

Currently Using the new paint

Labour 12 hrs * R10 = R120 12 hrs * R10 = R 120

Material 240 * R3.50 = R840 360 * R3.50 = R1260

Supplies = R 20 = R 20

Energy =R 4 =R 4

Total Inputs = R984 = R1404

Productivity 240/984 = 0.24 360/1404 = .26

We want to know how high the material cost could go, using the new paint, before the productivity drops to the
current level of 0.24. In mathematical terms we make the material cost a variable (X), set the new multifactor
productivity value to the current level, 0.24, and solve for X.
360 / ((R12x10) + 360 R(X) + R20 + R4) = 0.24
360 = 0.24 (R120 + 360R(X) + R20 + R4)
360 = R28.8 + 86.4R(X) + R4.8 + R.96
325.44 = 86.4R(X)
R(X) = 325.44/86.4 = R3.7666 = R3.77

It follows then that the new paint could raise materials cost by no more than approximately R0.27 (the difference
between R3.77 and R3.50) before Ms. French would experience a decrease in multifactor productivity.

Unit 4
No Revision Questions. Refer to Knowledge Check Questions.

Unit 5
Solution to Revision Questions 5.1
Question 1

ABC Groups

Class Items Annual Volume Percent of R Volume

A J24, R26 21,500 79.5

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B L02, M12 4,750 17.6

C P33, T72, S67, Q47, V20 800 2.9

= 100.0

Question 2

Item Class Quantity Policy Number of Items to Count Per Day

A 1,000 Every 5 days 1000/5 = 200/day

B 4,000 Every 40 days 4000/40=100/day

C 8,000 Every 100 days 8000/100=80/day

Total items to count: 380/day

Question 3
2 * Demand * Order cost 2 * 360 * 100
EOQ = = = 72000 = 268 items
Holding cost 1

Question 4
Demand 360
N= = = 134
. orders per year
Q 268
Working days
T= = 300 / 134
. = 224 days between orders
Expected number of orders

Unit 6
Solutions to Revision question 6.1
Question 1
Category Frequency Percent
Invoice amount does not agree with the check amount 108 54
Invoice not on record (not found) 24 12
No formal invoice issued 18 9
Check (payment) not received on time 30 15
Check not signed 8 4
Invoice number and invoice referenced do not agree 12 6

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200 100

Use a Pareto chart to organize the defects and conclude that the obvious problem (about half the defects) is the
failure of the check to agree with the company’s records as to the correct amount. Other problems are late
payments and an apparent invoice-filing problem in the office. Notice that 27% of these common errors appear to
be the result of procedural problems within accounts receivable (invoice not on record, no invoice issued, and
invoice numbering problems). This value could be considerably higher depending on how much of the problem of
disagreement between invoice and check amounts is the result of accounts receivable process problems.

Question 2
Distance Symbol Activity
-- Pull up to speaker

-- Press button

-- Wait for response

-- Verbalize order

-- Get confirmation of order and cost

20 Move car up in line

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-- Wait

20 Move car up in line

-- Wait

-- Verify order and cost

-- Pay and receive order

-- Leave

-- Realize they forgot the extra catsup!

Question 3

Unit 7
Solutions to Revision Questions 7.1
Question 1
External Benefits
Similarly, there are many potential external benefits. The first is that company prestige increases. Companies
following ISO 9000 series standards are perceived as “good corporate citizens” that produce higher quality
products. Thus, they gain prestige that can help retain old customers and attract new ones.

Second, it improves customer satisfaction. Higher quality means higher customer satisfaction. Further, the
manufacturer of a product is certified, a customer may feel better about the product even if it is, in fact, of no higher
quality than that of a non-certified manufacturer.

Third, it creates a higher level of trust. Customers perceive a certified company as being more trustworthy than a
non-certified company.

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Fourth, it reduces the need for customer audits. With certification, a company has already been audited. Therefore,
customers will not feel a need to audit every time they want to do business with a company. This can result in
major savings. For example, it is reported that in some industry segments in the United States, a facility may be
subject to dozens of audits per year; in some cases, as many as 30 per month.

Fifth, it can help a company increase its market share. Certified companies gain access to markets that require
ISO certification and they can deepen penetration of existing markets. Finally, the company can respond more
quickly to market needs. With better quality procedures, it is easier to develop and market new product lines. Being
the first to reach a market results in higher profits for the company.
Question 2
There are costs in time and money for companies becoming certified to an ISO 9000 series standard. For example,
an ISO program may take three months to over one year to implement, and it requires continual efforts to review
progress and pursue improvement. Further, it costs money to develop a certification program and attain
certification. There may be benefits in terms of increased sales resulting from public perception that the firm
produces quality goods, but sometimes non-ISO certified companies may be able to produce a similar product
more cheaply.

ISO certification does not mean that a firm's product is better than that of a non-ISO certified firm. For example,
ISO 9000 series certification does not prevent design defects. To reiterate, the ISO series 9000 standards are
process standards; they are not product standards.

The quality of an audit performed for ISO certification purposes depends on the qualifications and honesty of the
auditor, and whether the auditor is acting in a first, second, or third party capacity. In addition, there are numerous
problems inherent in the third party certification process.

First, the ISO does not have standard procedures for certification. As a result, various countries have developed
different certification procedures. For example, in the United States, the national body of accreditation is the
Registrar Accreditation Board (RAB) (RAB). At present, the European Union (EU) does not regulate registrars.
Instead, they are accredited through national certification boards. This divergence contributes to a lack of
understanding of the certification process. Without an international certification procedure, companies and
members of the public are uninformed about what is involved in certification. And, of course, standards for
certification are not uniform.

Second, certification is not always recognized across countries’ borders. Therefore, a registrar should be chosen
in view of the company's customer base. One practice that facilitates operations of companies in various countries
is that some U.S. registrars have signed memoranda with registrars in Europe. As a result of such agreements, a
company can become ISO-certified in several countries through the completion of a single certification process.
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Third, there is no centralized record of registrations. This makes proof of certification difficult, and potential
customers must rely on documents in the possession of the certified firm or the auditing firm hired by the firm.
Fourth, certification is costly. It costs from $10,000 to $20,000 or more, and may take six to 18 months to perform,
depending on the size of the company. This can be prohibitive for small companies and for companies with severely
limited resources. Such companies tend to come, in disproportionate percentages, from developing countries as
compared to companies from industrialized countries.

Another set of objections to the ISO 9000 series standards is based on the assertion that the standards function
as a non-tariff barrier to trade. The adoption of ISO 9000 series by the EU is viewed by some commentators as a
trade barrier to companies from outside the EU. In other cases, it has been asserted that, as ISO 9000 certification
becomes a de facto requirement for doing business, it operates as a non-tariff barrier to trade with respect to
struggling companies from developing countries.

This argument is based on the premise that ISO certification is an expense that is beyond the means of firms with
extremely limited funds

Question 3
Process thinking is important since processes describe “how work gets done and performance objectives are
achieved” in all functional areas such as finance and human resource management, and industries such as
government, health care, forestry, manufacturing, and education.

At this early point in the course students know only a little bit about primary, support, and general management
processes so you may have to do a tutorial using the student’s example. However, students perform many
processes, such as studying for an exam and managing multiple reading and homework assignments on a daily
basis. Getting them to think of the process they use to accomplish such tasks helps them to understand the role
of process thinking.

Unit 8
Solutions to revision questions 8.1
Question 1

Weighted moving average =

 (weight for period n)(demand in period n)
 weights
Week Auto Sales Three-Week Moving Average

1 8

2 10

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3 9

4 11 [(3*9) + (2*10) + (1*8)] / 6 = 9 1/6

5 10 [(3*11) + (2*9) + (1*10)] / 6 = 10 1/6

6 13 [(3*10) + (2*11) + (1*9)] / 6 = 10 1/6

7 14 [(3*13) + (2*10) + (1*11)] / 6 = 11 2/3

Question 2

Ft = Ft −1 +  (A t −1 − Ft −1 ) = 500 + 0.1(450 − 500) = 495 units

Question 3

Month Actual Rounded Forecast Absolute Absolute Rounded Absolute Absolute

Battery with a =0.8 Deviation Error2 with Forecast Deviation Error2 (with
Sales with a =0.8 (0.8 Alpha) with a with a 0.5 Alpha)
=0.5 =0.5

January 20 22 2 22 = 4 22 2 22 = 4

February 21 20.4 0.6 0.62= 0.36 21 0 02 = 0

March 15 20.88 5.88 5.882 = 21 6 62 = 36

34.5744

April 14 16.176 2.176 2.1762 = 18 4 42 = 16

4.734976

May 13 14.4352 1.4352 1.43522 = 16 3 32 =9

2.05979904

June 16 13.28704 2.71296 2.712962 = 14.5 1.5 1.52 =2.25

7.360151962

Sum of Sum of
Absolute Absolute
Error2 = Error2 =
53.089327 67.25

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S= S = 16.5
14.80416

MAD = ⅀ Absolute deviations / n 2.46736 2.75

MSE = ⅀(Forecast errors)2 / n 8.848221167 11.20833333

On the basis of this analysis, a smoothing constant of a = 0.8 is preferred to that of a = 0.5 because it has a
smaller MAD and a smaller MSE.

Question 4

Year Time Period (X) Sales (Units) (Y) X2 XY

1996 1 100 1 100

1997 2 110 4 220

1998 3 122 9 366

1999 4 130 16 520

2000 5 139 25 695

2001 6 152 36 912

2002 7 164 49 1148

S X = 28 S Y =917 S X2=140 S XY = 3961

x=
 x = 28 = 4
n 7

y=
 y = 917 = 131
n 7

b=
 xy − nxy = 3961 − (7)(4)(131) = 293 = 10.46
 x − nx
2
140 − (7)( 4 )
2 2
28
a = y − bx = 131 − (10.46  4) = 8916
.

Therefore, the least squares trend equation is:

y = a + bx = 8916
. + 10.46 x

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To project demand in 2003, we denote the year 2003 as x = 8, and:

Sales in 2003 = 89.16 + 10.46 * 8 = 172.84

Unit 9
Solutions to Revision Question 9.1
Question 1
One possible solution for this problem is:

Question 2
One possible BOM would be:
Bill of Material
Bread 2 slices
Ham 1 slice
Swiss Cheese 1 slice
Lettuce 1/26 head of lettuce
Mustard 2 teaspoon
Pickle relish 1 teaspoon
Paper plate 1
Paper napkin 1

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Question 3
Based on the BOM in activity 2, an assembly chart might look like:

Question 4

The EMV for the desktop systems is R620 000 vs. R320 000 for the integrated system. Therefore, Michael
should purchase the desktop systems

Question 5
Student is required to apply their knowledge.

Unit 10
Answers to Revision Questions 10.1.

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1. Your discussion should include a brief description on the theory of these layouts and then a detailed analysis
of your observations. Note any bottlenecks and suggest a way forward to improve productivity and plant
capacity.

2. Identify the frequency of each item type in terms of customer demand. Critically analyse the existing layout in
terms of how customers could reach the products that are in greater demand and whether the checkout points
are convenient.
Restructure the layout providing theoretical reasoning for your decisions.

Unit 11
Solutions to Revision Questions 11.1
Question 1
Ratings Weighted Ratings
Des Des
Factor Weights Peoria Chicago Peoria Chicago
Moines Moines
Nearness to
20 4 7 5 80 140 100
markets
Labour cost 5 8 8 4 40 40 20
Taxes 15 8 9 7 120 135 105
Nearness to
10 10 6 10 100 60 100
suppliers
Sum of Weighted ratings: 340 375 325
Therefore, it appears that based upon the weights and rating, Des Moines should be chosen.

Question 2
Transition between Waco and Tijuana:
300, 000 + (5.75 x) = 800, 000 + (2.75 x)
3 x = 500, 000
x = 166, 000

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Transition between Waco and Fayetteville:

300, 000 + (5.75 x) = 100, 000 + (8.00 x)
200, 000 = 2.25 x
88,888 = x

Question 3
New Distribution Center should be located at:

(10*3) + (3*3) + (4* 2) + (15*6) + (13*5) + (1*3) + (5*10) 255

Cx = = = 7.97
3 + 3 + 2 + 6 + 5 + 3 + 10 32

(5*3) + (8*3) + (7 * 2) + (10*6) + (3*5) + (12*3) + (5*10) 214

Cy = = = 6.69
3 + 3 + 2 + 6 + 5 + 3 + 10 32

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Question 4
Critical Success Factor Turkey Serbia Slovakia
Technology availability and support 4 3 4
Availability and quality of public education 4 4 3
Legal and regulatory aspects 2 4 5
Social and cultural aspects 5 3 4
Economic factors 4 3 3
Political stability 4 2 3
= 23 19 22

Based upon her ratings of the critical success factors, Patricia should choose Turkey. From a practical perspective,
given the small difference between the scores for Turkey and Slovakia, and the subjectivity of the ratings
themselves, Patricia would be better advised to develop additional critical success factors, more carefully weigh
the individual factors; or, in general, to acquire more information before making her decisions.

Question 5
Critical Success Factor Weight Turkey Serbia Slovakia
Technology availability and support 0.3 4 1.2 3 0.9 4 1.2
Availability and quality of public education 0.2 4 0.8 4 0.8 3 0.6
Legal and regulatory aspects 0.1 2 0.2 4 0.4 5 .5
Social and cultural aspects 0.1 5 0.5 3 0.3 4 0.4
Economic factors 0.1 4 0.4 3 0.3 3 0.3
Political stability 0.2 4 0.8 2 0.4 3 0.6
= 3.9 3.1 3.6

No, in this case, use of the weighting factors does not change the recommendation. One might again suggest
that additional information be considered in making the decision.

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Question 6
(a) Doubling the number of critical success factors. There are two issues here. First, from a practical perspective
there are a limited number of truly “critical” success factors – and these should be the ones presently being
considered. Any additional factors should be of secondary or tertiary importance. Second, given the
subjective nature of the rating process, adding additional factors would also increase the overall margin of
error of the final ratings to a degree that may eliminate any gain in differentiation arising from the use of the
additional factors. The use of a maximum of seven to nine critical success factors is usually appropriate.
(b) Given that one’s ability to estimate or rate an aggregate is usually better than one’s ability to estimate or rate
the individual components of the aggregate, this approach is unlikely to provide much help.

Unit 12
Answers to Revision Questions 12.1
1. Research is required. Analyse the supply chain needs in terms of personnel, materials, machinery, space,
spare parts, number of suppliers, etc.
2. provide a brief theoretical discussion on the difference between the service and the manufacturing industry.
Thereafter, based on these differences in terms of materials, labour, reliability, ease of changing suppliers, etc.,
provide a discussion on what would need to be different in terms of the supply chain for these two operation
types.
3. This question requires that you research three different types of service industries. The observations and the
discussions will revolve around the nature of each service industry type that you have researched.

Unit 13
Solutions to Revision Questions 13.1
Question 1

ABC Groups

Class Items Annual Volume Percent of R Volume

A J24, R26 21,500 79.5

B L02, M12 4,750 17.6

C P33, T72, S67, Q47, V20 800 2.9

= 100.0

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Question 2

Item Class Quantity Policy Number of Items to Count Per Day

A 1,000 Every 5 days 1000/5 = 200/day

B 4,000 Every 40 days 4000/40=100/day

C 8,000 Every 100 days 8000/100=80/day

Total items to count: 380/day

Question 3

2 * Demand * Order cost 2 * 360 * 100

EOQ = = = 72000 = 268 items
Holding cost 1

Question 4

Demand 360
N= = = 134
. orders per year
Q 268
Working days
T= = 300 / 134
. = 224 days between orders
Expected number of orders

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Unit 14
Solutions to Revision Question 14.1
Question 1

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Question 2

Week

Lead
1 2 3 4 5 6 7 8 9 10
Time

2
Required date 100
weeks
TOL
Order release
date

2
Required date 300
weeks
HQ
Order release
300
date

Required date 300 1 week

Cabinet
frame and
Order release
lock 300
date

150 2
Required date
0 weeks
HQ drawer
assembly
Order release
1500
date

2
Required date 1500
Drawer weeks
frame
assembly Order release
1500
date

2
Required date 1500
weeks
HQ sliding
assembly
Order release
1500
date

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2
Required date 6000
weeks
Bearings
Order release
6000
date

Receipts: 300 cabinet frames and locks in week 8

1500 HQ drawer assemblies in week 8
1500 drawer frame assemblies in week 6
1500 HQ sliding assemblies in week 6
6000 bearings in week

Unit 15
Solution to Revision Questions 15.1
Question 1

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Unit 16
Solutions to Revision Questions 16.1
Question 1
This question is designed to help students internalize the concept of customer satisfaction and dissatisfaction, and
potential operations management activities and decisions that can influence their experiences. Graduate students
can include work and business experiences, and personal experiences such as home mortgages, vacations, and
child care.

Question 2
Generic differences between goods and services include:
Goods are tangible while services are intangible. Customers participate in many service processes, activities, and
transactions. The demand for services is more difficult to predict than the demand for goods.
Services cannot be stored as physical inventory.
Service management skills are paramount to a successful service encounter.
Service facilities typically need to be in close proximity to the customer.
Patents do not protect services.
Services especially in the “front office” (at points of contact with the customer) require different skills than producing
physical goods, and therefore, it is difficult for firms to do both well. Yes, for example, physical inventory can
compensate for poor demand forecast accuracy while service capacity is a surrogate for inventory. Therefore,
services must be better at forecasting and demand/capacity planning than goods-producing firms or they will miss
a sale. Another good contrast is pure production (backroom) skills versus service management (front room)
skills, and how they differ and which is more difficult for employees to do successfully. All of these differences,
issues, and more can be discussed for each of the four example service organizations.

Question 3
(The experience of someone)
I purchased a bag of flour that I did not open right away. I placed in it the kitchen cabinet. Weeks later, I found
bugs in many food items in the cabinet. When I examined the bag of flour, I found dead bugs in the glued seal
and inside the bag. Because of the infestation, I had to throw out a number of food items from the cabinet. I also
had to treat the kitchen with a compound that would get rid of the remaining bugs.

I did not notice that the bag of sliced beef was expired when I purchased it from a grocery store. A few days later,
I opened it and ate some beef. Within an hour, I became very sick. I then looked at the package only to determine
that it had expired 3 weeks earlier! I was very upset. I do accept some responsibility in that I did not always check
expiration dates on items I purchased. However, that package should not have been available for sale. I now check
expiration dates every time. In addition, when I went to another facility of the same grocery store, I found that every
package of sliced beef for sale was expired by at least a week. So I took all of the packages of beef up to the help
desk to give them to a manager and to complain. He apologized saying that he would deal with the problem.
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My mother came to visit me to help me unpack from my move. Her luggage did not arrive with her flight that arrived
late on the evening of August 1. She was assigned a file reference number by the airline baggage service after
standing in line for at least 15 minutes. I started calling the baggage call centre the next evening since we had not
heard from the airline nor received the luggage. Our frustration was further compounded by the fact that every time
I called the 1-800 number, it was busy. And believe me when I say that I tried many times. The following day
(August 3rd), I decided to try the flight reservation number in hopes of speaking with someone. I ended up speaking
to someone from that area many times. They would try calling the contracted baggage delivery service after they
found out that the luggage had been turned over to this service by the airline.

They were not able to get an answer from them. They gave me their phone number as well. When I was able to
speak to someone there, I would get different answers, such as the need to find more information or that the
luggage had already been delivered. I kept calling both phone numbers on the next day as well in hopes of getting
more information. Finally, on August 5th, the luggage was delivered after midnight. My mother did not have her
luggage for four full days of a six-day trip. To make matters worse, we had to deal with the frustration of not knowing
what was going on and of continuing need to spend time trying to gather information.

Unit 17
Answer to Revision Question 17.1
1. Case study
Answers may vary yet the following are key elements that should be included in the discussion.
- Focus on sustainability but from a business focus; environmental issues appear to be a secondary objective.
- Definite reduction in Carbon footprint through recycling.
- Second checkpoint shows controls in place to monitor the implementation of recycling.
- Ease of repair indicates that products are no longer disposal thus increasing product lifespan and reducing
the need for greater production in terms of replacement products.
- The plan is concretised through providing definite timelines
- Finances have been budgeted for the purchase of carbon credits showing commitment to adherence to
legislature.
- Corporate social responsibility
- environmental issues are easier to report on.
- Improves image of Google
- Move to impress both government and customers should be favourable.
- Profits should be enhanced through decreased carbon taxes and lower inventory costs through recycling.
- Google taking environmental protection seriously; positive impact on society.

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The impact of Google’s efforts has a positive influence overall on the company’s profits, stakeholder management
and environmental protection. Recycling is a major component of pollution control and reduction. Single use
plastic has now been banned in many countries due to the unhealthy effect on land, water and animal health.
Google has assisted in the drive to reduce plastic and improve the environment. Further, the suppliers to google
for their recycled parts will in turn, produce fewer, decreasing the burden on energy consumption, pollution through
transport and the need to mine further metals.

2. The principle is based on fairness and to instil societal and business order not only deter pollution buy also to
serve as a punitive and remedial measure to punish offenders.

3. In economics, the triple bottom line (TBL) maintains that companies should commit to focusing as much on
social and environmental concerns as they do on profits. TBL theory posits that instead of one bottom line, there
should be three: profit, people, and the planet.

Unit 18
Solutions to Revision Question 18.1
Question 1
1.. Target the most popular social media mobile apps
2. SMS
3. Optimize your website for both desktops and smartphones
4. Use clickable phone numbers, addresses, and CTAs (calls to action) sure your contact details are connected to
a map app
5.. Ensure a quickly loading website
6.. Always review ads for social media or other types of mobile-friendly platforms

Question 2
https://www2.deloitte.com/si/en/pages/strategy-operations/articles/changing-consumer-digital-
marketing-impact-Covid-19.html
Empowering employees start with their health and safety in Stabilize. For some companies, it might mean closing
stores or offices and having employees work remotely. This requires giving them digital tools so they can work
from home. For other businesses, safety tools mean protective gear and new operational processes.
And engaging with customers is crucial during Stabilize. This might mean reaching out proactively to top customers
and also responding to an influx of inbound calls. To help with this, many companies are setting up virtual contact
centers and self-service portals to offer service at scale.

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Question 3
Both historically and currently, many businesses do not follow the marketing concept. For many years, companies
such as Texas Instruments and Otis Elevator have followed a product orientation, in which the primary
organizational focus is technology and innovation. All parts of these organizations invest heavily in building and
showcasing impressive features and product advances, which are the areas in which these companies prefer to
compete. This approach is also known as the product concept. Rather than focusing on a deep understanding of
customer needs, these companies assume that a technically superior or less expensive product will sell itself.
While this approach can be very profitable, there is a high risk of losing touch with what customers actually want.
This leaves product-oriented companies vulnerable to more customer-oriented competitors. The marketing
concept focuses on the needs and wants of the customer and is therefore, more likely to achieve the objective of
customer satisfaction.

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References

• 5. Heizer, J & Render, B (2020). Operations Management. Sustainability and Supply Chain Management.
Thirteenth Edition. Pearson Education Limited, England.
• Russel and Taylor (2019). Operations and Supply Chain Management. Tenth edition. John Wiley & Sons
Singapore Pte.Ltd.
• Slack et al. (2019) Operations and Process Management: Principles and Practice for Strategic Impact.
Pearson, Cape Town.
• Stevenson W.J (2021) Operations Management .McGraw Hill. USA
• Fitzsimons, J.A and Fitzsimons M.J. (2019). Service Management. Operations, strategy, and Information
Technology. International Edition. Ninth Edition. McGraw Hill. USA.
• Lovelock, C., and Wirtz, J., (2016). Service Marketing. People, Technology, Strategy. 8th Edition. Pearson
Prentice Hall. USA.
• Pycraft M., Singh H., Phihlela K., Slack N., Chambers S., Harland C., Harrison A., Johnson R. (2010).
Operations Management.

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Appendices
APPENDIX A: Case Study 1
Design House Partnerships At Concept Design Services
I can’t believe how much we have changed in a relatively short time. From an inward-looking manufacturer, we
became a customer-focused “design and make” operation. Now we are an integrated service provider. Most of our
new business comes from the partnerships we have formed with design houses. In effect, we design products
jointly with specialist design houses that have a well-known brand, and offer them a complete service of
manufacturing and distribution. In many ways we are now a “business-to-business” company rather than a
“business-to-customer” company’ (Jim Thompson, CEO, Concept Design Services (CDS).

CDS had become one of Europe’s most profitable home-ware businesses. Originally founded in the 1960s, the
company had moved from making industrial mouldings, mainly in the aerospace sector, and some cheap
‘houseware’ items such as buckets and dustpans, sold under the ‘Focus’ brand name, to making very high-quality
(expensive) stylish homewares with high ‘design value.’

The move into ‘Concept’ products

The move into higher-margin homeware had been master-minded by Linda Fleet, CDS’s Marketing Director, who
had previously worked for a large retail chain of paint and wallpaper retailers. ‘Experience in the decorative
products industry had taught me the importance of fashion and product development, even in mundane products
such as paint, Premium-priced colours and new textures would become popular for one or two years, supported
by appropriate promotion and features in lifestyle magazines. The manufacturers and retailers who created and
supported these products were dramatically more profitable than those who simply provided standard ranges.
Instinctively, I felt that this must also apply to homeware. We decided to develop a whole coordinated range of
such items, and to open up a new distribution network for them to serve upmarket stores, kitchen equipment and
speciality retailers. Within a year of launching our first new range of kitchen homeware under the “Concept” brand
name, we had over 3000 retail outlets signed up, provided with point-of-sale display facilities. Press coverage
generated an enormous interest which was reinforced by the product placement on several TV cookery and
“lifestyle” programmes. We soon developed an entirely new market and within two years “Concept” products were
providing over per cent of our revenue and 90 per cent of our profits.

The price realisation of Concept products is many times higher than for Focus range. To keep ahead we launched
new ranges at regular intervals.’

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The move to the design house partnerships

‘Over the last four years, we have been designing, manufacturing and distributing products for some of the more
prestigious design houses. This sort of business is likely to grow, especially in Europe where the design houses
appreciate our ability to offer a full service. We can design products in conjunction with their own design staff and
offer them a level of manufacturing expertise they can’t get elsewhere, more significantly, we can offer a distribution
service which is tailored to their needs. From the customer’s point of view, the distribution arrangements appear
to belong to the design house itself. In fact, they are based exclusively on our own centre, warehouse and
distribution resources.’

The most successful collaboration was with Villessi, the Italian designers. Generally, it was CDS’s design expertise
which was attractive to ‘design house’ partners. Not only did CDS employ professionally respected designers, they
had also acquired a reputation for being able to translate difficult technical designs into manufactural and saleable
products.

Design house partnerships usually involved relatively long lead times but produced unique products with very high
margins, nearly always carrying the design house’s brand. ‘This type of relationship plays to our strengths. Our
design expertise gains us entry to the partnership but we are soon valued equally for our marketing, distribution
and manufacturing competence.’ (Linda Fleet< Marketing Director)

Manufacturing operations
All manufacturing was carried out in a facility located 20 km from head office. Its moulding area housed large
injection-moulding machines, most with robotic material handling capabilities. Products and components passed
to the packing hall, where they were assembled and inspected. The newer more complex products often had to
move from moulding to assembly and then back again for further moulding. All products followed the same broad
process route but with more products needing several progressive moulding and assembly stages, there was an
increase in ‘process flow recycling which was adding complexity. One idea was to devote a separate cell to the
newer and more complex products until they had ‘bedded in’. This cell could also be used for testing new moulds.
However, it would need investment in extra capacity that would not always be fully utilised. After manufacture,
products were packed and sorted in the adjacent distribution centre.

“When we moved into making the higher-margin Concept products, we disposed of most of our older, small
injection-moulding machines. Having all larger machines allowed us to use large multi-cavity moulds.

This increased productivity by allowing us to produce several products, or components, each machine cycle. It also
allowed us to use high-quality and complex mould which, although cumbersome and more difficult to change over,
gave a very high-quality product.

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For example, with the same labour we could make three items per minute on the old machines, and 18 items per
minute on the modern ones using multi-moulds. That’s a 600 per cent increase in productivity. We also achieved
high-dimensional accuracy, excellent surface finish, and extreme consistency of colour. We could do this because
of our expertise derived from years making aerospace products. Also, by standardising on single large machines,
any mould could fit any machines. This was an ideal situation from a planning perspective, as we were often asked
to make small runs of Concept products at short notice.’ (Grant Williams, CDS Operations Manager).

Increasing volume and desire to reduce cost had resulted in CDS subcontracting much of its Focus products to
other (usually smaller) moulding companies. ‘We would never do it with any complex or design house partner
products =, but it should allow us to reduce the cost of making basic products while releasing capacity for high-
margin one. However, there have been quite a few ‘testing problems’. Coordinating the production schedules is
currently a problem, as is agreeing quality standards. To some extent, it’s our own fault. We didn’t realise that
subcontracting was a kill in its own right. And although we have got over some of the problems, we still do not have
satisfactory relationship with all of our contractors.’ (Grant Williams, CDS Operations Manager).

Planning and distribution services

The distribution services department of the company was regarded as being at the heart of the company’s customer
service drive. Its purpose was to integrate the efforts of design, manufacturing and sales by planning the flow of
products from production, through the distribution centre, to the customer. Sandra White, the Planning Manager,
reported to Linda Fleet and was responsible for the scheduling of all manufacturing and distribution, and for
maintaining inventory levels for all the warehoused items. ‘We try to stick to a preferred production sequence of
each machine and mould so as to minimise set-up times by starting on a light colour, and progressing through a
sequence to the darkest. We can change colours in 15 minutes, but because our moulds are large and technically
complex, mould changes can take up to three hours. Good scheduling is important to maintain high plant utilisation.

With a higher variety of complex products, batch sizes have reduced and it has brought down average utilisation.
Often we can’t stick to schedules.

Short-term changes are inevitable in a fashion market. Certainly better forecasts would help…but even our own
promotions are sometimes organised at such short notice that we often get caught with stock outs. New products
in particular are difficult to forecast, especially when they are “fashion” items and/or seasonal. Also, I have to
schedule production time for new product mould trials; we normally allow 24 hours for the testing of each new
mould received, and this has to be done on production machines. Even if we have urgent orders, the needs of the
designers always have priority.’ (Sandra White).

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Customer orders for Concept and design house partnership products were taken by the company’s sales call
centre located next to the warehouse. The individual orders would then be dispatched using the company’s own
fleet of medium and small distribution vehicles for UK orders, but using carriers for the Continental European
Market. A standard delivery timetable was used and an ‘express delivery’ service was offered for those customers
prepared to pay a small delivery premium. However, a recent study had shown that almost 40 per cent of express
deliveries were initiated by the company rather than customers. Typically, this would be to fulfil deliveries of order
containing products out of stock at the time of ordering. The express delivery service was not required for Focus
products because almost all deliveries were to five large customers. The size of each order was usually very large,
with deliveries to customers; own distribution depots. However, although the organisation of Focus delivery was
relatively straightforward, the consequences of failure were large. Missing a delivery meant upsetting a large
customer.

Challenges for CDS

Although the company was financially successful and very well regarded in the homeware industry, there were a
number of issues and challenges that it knew it would have to address. The first was the role of the design
department and its influence over new product development.

New product development had become particularly important to CDS, especially since they had formed alliances
with design houses. This had led to substantial growth in both the size and the influence of the design department,
which reported to Linda Fleet. ‘Building up and retaining design expertise will be the key to our future. Most of our
growth is going to come from the business which will be bought in through the creativity with an understanding of
our partners’ business and design needs can now bring in substantial contracts. The existing business is important
of course, but growth will come directly from these people’s capabilities.’ (Linda Fleet)

But not everyone was so sanguine about the rise of the design department. ‘It is undeniable that relationships
between the designers and other parts of the company have been under strain recently. I suppose it is, to some
extent, inevitable. After all, they really do need the freedom to design as they wish. I can understand it when they
get frustrated at some of the constraints which we have to work under in the manufacturing or distribution parts of
the business.

They also should be able to expect a professional level of service from us. Yet the truth is that they make most of
the problems themselves. They sometimes don’t seem to understand the consequences or implications of their
design decisions or the promises they make to the design houses. More seriously they don’t really understand that
we could actually help them do their job better if they co-operated a bit more. In fact, I now see some of our design
house partners’ designers more than I do our own designers. The Villessi designers are always in my factory and
we have developed some really good relationships (Grant Williams).

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The second major issue concerned sales forecasting and again there were two different views. Grant Williams was
convinced that forecasts should be improved. ‘Every Friday morning we devise a schedule of production and
distribution for the following week. Yet, usually before Tuesday morning, it has had to be significantly changed
because of unexpected orders coming in from our customers’ weekend sales. This causes tremendous disruptions
to both manufacturing and distribution operations. If sales could be forecast more accurately we would achieve fa
higher utilisation, better customer service, and I believe significant cost savings.

However, Linda Fleet saw things differently. ‘Look, I do understand Grants frustration, but after all, this is a fashion
business. In terms of month-by month sales volumes we are in fact pretty accurate, but trying to make a forecast
foe every week and every product is almost impossible to do accurately. Sorry, that’s just the nature of the business
we are in. In fact, although Grant complain about our lack of forecast accuracy, he always does a great job in
responding to unexpected customer demand.’

Jim Thompson, the Managing Director, summed up his view of the current situation. ‘Particularly significant has
been our alliances with the Italian and German design houses. In effect we are positioning ourselves as a complete
service partners to the designers. We have a world-class design capability together with manufacturing, order
processing, order-taking and distribution services. These abilities allow us to develop genuinely equal partnerships
which integrate us into the whole industry’s activities.’

Linda Fleet also saw an increasing role for collaborative arrangements. ‘It may be that we are seeing a fundamental
change in how we do business within our industry. We have always seen ourselves as primarily a company that
satisfies consumer desires through the medium of providing good service to retailers. The new partnership
arrangement put us more into the “business-to-business” sector.

I don’t have any problem with this in principle, but I’m a little anxious as to how much it gets us into area of business
beyond our core expertise.’

The final issue which was being debated within the company was longer-term, and particularly important. ‘The two
big changes we made in this company have both happened because we exploited a strength we already had within
the company. Moving into Concept products was only possible because we brought our high-tech precision
expertise that we had developed in the aerospace sector into the home sector where none of our competitors could
match our manufacturing excellence. Then when we moved into design house partnerships we did so because we
had a set of designers who could command respect from the world-class design houses with whom we formed
partnerships.

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So what is the next move for us? Do we expand globally? We are strong in Europe but nowhere else in the world.
Do we extend our design scope into other markets, such as furniture? If so, that could take us into areas where
we have no manufacturing expertise. We are great at plastic injection moulding, but if we tried any other
manufacturing process, we would be no better than, and probably worse than, other firms with more experience.
So what’s the future for us?’ (Jim Thompson, CEO CDS).
Source: Slack et al. (2019).

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APPENDIX B: Case Study 2

Design House Partnerships at Concept Design Services

Instructions to Learners
This case study is to be analysed and prepared in your Study Groups. Your Study Group is required to present the
analysis of this case study at Workshop 2. Your presentation should not be longer than 15 minutes.

The questions that you are required to address in analysing the case study are:
1. Analyse why operations are important at CDS (15 Marks)

2. What would recommend to the company if they asked for your advice to improve their operations.
(25 marks)
3. Analyse the importance of all operations management topics mentioned in this case study.

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APPENDIX B: Case Study 1

IKEAS’s INVENTORY MANAGEMENT STRATEGY:
HOW DOES IKEA DO IT?

By Clara Lu 23 April, 2014

What are IKEA’s best-kept secrets behind its smooth backend operations and efficient supply chain processes?
The world’s largest home furnishing retailer has 298 stores in 37 countries. It ranks number 41 on Forbes’
esteemed World’s Most Valuable Brands list, and took in 35.5 billion in sales in 2013. IKEA has certainly come a
long way in its 60 years of business since its 1943 founding in Sweden.

This organisation impresses not just its consumers with affordable, high quality furniture, but also competitors and
companies around the world – especially with its unique supply chain and inventory management techniques.

Each IKEA store is huge and holds more than 9,500 products! How in the world does IKEA offer so much at such
a low price while always being able to keep items in stock?

IKEA's Vision
To start off, IKEA has a clear vision – to provide well designed, functional home furnishings at prices so low that
as many people as possible will be able to afford them. Its various functions (supply chain operations and inventory
management included) work together to support its distinctive value proposition.

IKEA is distinctive by committing to a catalog of products that will be stocked for a year at a guaranteed price.

Cost Savings in Furniture Design

IKEA designs unique products that incur low manufacturing costs while meeting strict requirements for function,
efficient distribution, quality, and impact on the environment.

According to a case study produced by The Times of London, more than 50% of the products are made from
sustainable or recycled products. IKEA seeks to use as few materials as possible to make the furniture, without
compromising on quality or durability. By using fewer materials, the company cuts down on transportation costs
because it uses less fuel and manpower to receive materials and ship products.

Sustainable Relationships with Suppliers

A key part of IKEA’s success is credited to its communications and relationship management with materials
suppliers and manufacturers to get good prices on what it procures.

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IKEA is a very high volume retailer – it buys products from more than 1,800 suppliers in 50 countries, and uses 42
trading service offices around the world to manage supplier relationships. They negotiate prices with suppliers,
check the quality of materials, and keep an eye on social and working conditions.

Although Ikea fosters competition among suppliers to ensure they attain the best prices and materials, it believes
in making long-term business relationships with them by signing long-term contracts, thus lowering prices of
products further.

For example, IKEA has a code of conduct called the IKEA Way of Purchasing Home Furnishing Products (IWAY),
containing minimum rules and guidelines that help manufacturers reduce the impact of their activities on the
environment. The requirements within IWAY raise standards by developing sustainable business activities and
leaving positive impacts on the business environment in which the suppliers operate.

This also underlines IKEA's commitment to the 'low price but not at any price' vision. Although IKEA wants its
customers to enjoy low prices, this should not happen at the expense of its business principles.

Do-It-Yourself Assembly Lowers Packaging Costs

Most IKEA furniture is designed and sold in pieces for the customer to assemble. The pieces are placed into
convenient and efficient, flat packages for low-cost transport because they take up less room in trucks, maximizing
the number of products that can be shipped.

The unique packaging also takes up less space in warehouse bins and reserve racks, allowing for more room to
stock additional items for order fulfilment. What the company saves in fuel and stocking costs is passed on to
customers.

Combining Retail and Warehouse Processes

Every IKEA store has a warehouse on the premises. On the main showroom floor, customers can browse for items.
They then obtain the products themselves from the floor pallet location with racking as high as the typical person
could reach, where furniture can be purchased and taken home. Additional products are stored in reserve racks
above these locations.

Inventory is let down to the lower slots at night (forklifts and pallet jacks are not used during store hours for safety
reasons). About one third of the lower level is comprised of a warehouse off limits to customers. This space
contains items too bulky for customers to load without help from the staff. Since IKEA wants as much self-service
as possible, it works to minimize the number of items in this bulk storage area.

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Cost-Per-Touch Inventory Tactic

Having customers select the furniture and retrieve the packages themselves is an inventory management tactic
called ‘cost-per-touch’. As a rule of thumb, companies find that the more hands touch the product, the more costs
are associated with it.

For example, imagine when someone selects a piece of furniture to buy. The item is then ordered, shipped from
the manufacturer, moved from the delivery truck into storage in the warehouse, moved from the warehouse to the
customer’s vehicle or delivered by the furniture retailer to the customer’s home. Every time the product is shipped,
moved, and loaded, it costs money. The fewer times someone moves or touches the item, the fewer costs are
associated with it. IKEA saves costs with this guiding principle to minimize touches because it doesn’t have to pay
the customer to retrieve the furniture and take it home.

In-Store Logistics IKEA also relies on something rare and unique concerning its logistical management of
reordering products – it employs in-store logistics personnel to handle inventory management at its stores.
According to the ARC Advisory Group (professionals and consultants on logistical and supply chain operations),
there is an in-store logistics manager responsible for the ordering process and a store goods manager responsible
for material handling logistics at all IKEA stores.

The duties of the logistics personnel are to monitor and record deliveries, carefully check delivery notices, sort and
separate the goods, and get them off to the correct sales area or designated overstock locations. Overall, they
ensure an efficient flow of goods within IKEA stores, which is essential to maintaining high sales and enhancing
customer loyalty.

Maximum/Minimum Settings as Proprietary System

The in-store logistics managers use an inventory replenishment management process developed by IKEA called
‘minimum/maximum settings’ to respond to store-level inventory reorder points and reorder products. Minimum
settings: The minimum amount of products available before reordering.

Maximum settings: The maximum amount of a particular product to order at one time.
Due to the fact that all IKEA inventory is only stocked at night after opening hours, the logic of its min/max settings
is based on the number of products that will be sold from the reserve stack of bin in a single day or two-day period.
The process meets customer demand while minimizing ordering too few or too many products.

This strategy also ensures that IKEA has ready inventory to meet customers’ demands, lowering the cost of lost
sales.

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Using IKEA’s proprietary inventory system, logistics managers know what is sold through point-of-sale (POS) data
and how much inventory comes into the store through direct shipping and from distribution centres through
warehouse management system data. From these data, they can forecast sales for the next couple of days and
order in the suitable amount of products to meet that demand.

If the sales data doesn’t match the projected number of items that should have been sold that day, the logistics
manager goes directly to the pallet and bin to manually count the product stock.

IKEA believes its process and system allows for the right goods to be in the store with greater certainty, and at a
lower cost, than the traditional retail forecasting and replenishment process.

Usage of High-Flow and Low-Flow Warehouse Facilities

IKEA’s store operations are supported by high-flow facilities (focused on the 20% of SKUs that account for 80% of
the volume) and low-flow warehouses that are more manual. In its high-flow warehouses, IKEA employs automatic
storage and retrieval systems to drive down its costs-per-touch. Products stocked in a low-flow facility are not in
high demand, and operations rely on manual processes since workers will not be shifting and moving inventory
around too much.

These strategies have made IKEA the world’s most successful furniture retailer with low operating costs and high
product demand. This allows the company to stay competitive in the industry as it continually seeks more advanced
methods to streamline supply chain management.

IKEA has a clear vision supported by complementary cross-functional logic. This not only differentiates IKEA from
its peers, but also provides it with a competitive advantage that is difficult to duplicate at other organisations.

While it may be hard for other organisations to copy IKEA’s successful formula with stock management and order
fulfilment, IKEA’s supply chain strategies push against boundaries. This will hopefully inspire you to develop your
company’s inventory strategies suited for your company’s particular operations. For instance, the Trade Gecko
inventory management system may be the perfect answer for small to medium retailers or wholesalers. Software
is integrated with other software solutions such as the Shopify ecommerce platform and Xero accounting system
to make backend operations even better for your business.

To end off, IKEA sets an optimistic trend where more companies will move away from traditional and outdated
supply chain management strategies used for generations, to seek creative and better-suited solutions to handle
inventory
Source: https://www.tradegecko.com/blog/ikeas-inventory-management-strategy-ikea

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APPENDIX B - Case Study 2

Ikeas’s Inventory Management Strategy: How Does Ikea Do It?

Instructions to Learners
This case study is to be analysed and prepared in your Study Groups. Your Study Group is required to present
the analysis of this case study at Workshop 3. Your presentation should not be longer than 15 minutes.

The questions that you are required to address in analysing the case study are:
1. Comprehensively evaluate IKEA’s Inventory management approach. (20 Marks)
2. Critically examine and comment on IKES’s competitive strategy. (20 Marks)

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