CIMA E1 Official Learning System - Enterprise Operations Aug 2009
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STUDY MATERIAL E1
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OPERATIONS MANAGEMENT
●
supply chain management with the aim of improving links with suppliers and customers
●
business process re-engineering (BPR).
‘Business Process Re-engineering’ is the term for reconfi guring organisational processes and
structures to bring about radical process changes in a short time. BPR challenges managers
and staff to fundamentally rethink the way they do things in order to maximise organisa-
tional effectiveness. It has been described as:
‘. . . the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements
in critical, contemporary measures of performance, such as cost, quality, service and speed’
(Hammer and Champy, 2001)
and
‘. . . areas of business activity in which repeatable and repeated sets of activities are undertaken, and the
development of improvement understanding of how they operate and of the scope for radical redesign with a
view to creating and delivering better customer value’
(CIMA, 2005)
As the improvement of an organisation’s business processes is an integral part of a quality
approach, BPR might be used as part of a TQM philosophy. Hammer and Champy iden-
tify four themes of BPR:
●
Process reorientation, a focus on jobs, tasks, constraints, resources, etc.
●
Creative use of IT (The impetus for doing this might be the introduction of new infor-
mation technologies.)
●
Ambition
●
Rule breaking.
BPR demands fi ve phases: planning, internal learning, external learning, redesign and
implementation.
Although hailed as the biggest innovation of the 1990s its effectiveness in bringing
about lasting improvement has been questioned more recently. BPR has also been stigma-
tised because it has been seen as a device to down size organisations and shed jobs.
3.6.1 Process maps
It has been suggested that the workforce spend between 20% and 40% of their time deal-
ing with ‘waste’ issues. This might involve an individual doing things which have either
not been done or were done badly. This duplication of effort, the requirement to complete
unnecessary paperwork, dealing with misdirected queries or encountering bottlenecks that
hold up production are waste. To regain control and drive out waste management must
fi rst understand the basic processes that are undertaken. One straightforward way of get-
ting this overview is through the use of process maps. (If you have been involved in sys-
tems-based auditing it is likely that you will have encountered process mapping.) Process
maps provide a visual fl owchart representation of:
●
processes that show how a product or transaction is processed
●
workfl ow either within a process or within the organisation
●
fl ows of information or products across supply chains and networks.
In certain ways process maps capture the entire operations process by demonstrating the
activities that transform inputs into pre-defi ned sets of outputs. (Flowcharting might be
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used as part of ISO registration.) An example of a typical production system is shown in
Figure 3.5.
There are potentially many types of chart each with its own conventions and symbols,
the two most popular are featured here.
Outline Process Map (fl owchart). This map gives an overview of all actions undertaken,
highlighting the sequence of activities and key points within the process. An example
of a typical process outline map is shown in Figure 3.6.
Deployment Chart. This chart depicts a process with the added detail of matters such as
in which section, department or organisation actions are performed. An example is
shown in Figure 3.7.
Charting has many advantages:
●
it provides management with a convenient overview demonstrating responsibilities and
key stages in the supply chain
●
it indicates the effi ciency of a process, where waste exists and the impact on customers
●
it can act as springboard to critical examination and improved processes
●
it might be used as a trigger for change
●
it allows everyone to understand what their job is and how their work fi ts into the whole
process.
Standards
Targets for quality,
time, cost, quantity,
reliability, etc.
Attempts to influence standards
Comparison and control
1. Identification of failures to meet
standards
2. Identify adverse trends
3. Discover causes of failures
4. Generate affector action
5. Report actions taken
6. Make suggestions to environment
for control and/or systems
improvement
ENVIRONMENT
SYSTEM
Effector
(production
manager)
Inputs
Raw materials
Equipment
Labour
Services
Information
equivalents
of 1 to 4
Production
methods
Environmental
methods
1
2
3
4
5
6
7
Production
process
Measurements
Monitoring of quantities,
times, qualities, costs.
Appraisal of methods
which produced the
measured output.
Information
Feedback
System
outputs
Finished
products
Information
equivalents
of finished
production
Adjustments
as necessary
to Inputs
1,2,3,4.
Update
methods
Figure 3.5 Production system example of GST. T. Lucey, Management Information Systems,
8th edition. Reprinted with permission of Taylor and Francis.
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3.6.2 Systems used in operations management
One important aspect of operations management is to ensure that materials are ready when
they are needed. A number of systems are used in improving fl ows, some from the application
of sophisticated information systems, others the adoption of Japanese inspired approaches.
Manufacturing Resource Planning (MRP) is a planning and control system designed for
organisations that engage in mass production. MRP is a push-based system, pushing work
through the system. The computer system MRP II is a form of inventory control matching
supply and demand with sophisticated features such as:
●
shop fl oor control
●
production planning
●
fi nancial analysis
●
capacity planning
●
customer order entry
●
purchasing
●
forecasting.
Request goods
Purchase Dept
Checks request
ok? No
Purchase Order to
Supplier
Supplier Sends
Goods to User
Goods ok?No
END
Inform User
Inform User
Simple process flow chart
Yes
Figure 3.6 Crown Prosecution Service outline process map
(Source: Crown Prosecution Service (2004) http://www.cps.gov.uk/Publications/finance/process_mapping.html)
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ENTERPRISE OPERATIONS
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Brown et al. (2001) cite the benefi ts of MRP as potentially providing:
●
reduced stock holding and stock turnover
●
increased customer service (fewer delays through materials shortage)
●
swift, reliable quotations of delivery times
●
improved facilities utilisation
●
less time spent on hurrying emergency orders
●
better relationships with suppliers by identifying clear lead times.
Enterprise Resource Planning (ERP) combines internal processes such as MRP II with exter-
nal processes. ERP is a management system that integrates all aspects of business, includ-
ing planning, manufacturing and sales. As ERP has become more popular certain software
applications have emerged to help implement activities such as inventory control, order
tracking, customer service, fi nance and human resources. It may be costly and time hungry
to implement but it does cohesively link the supply chain.
Optimised Production Technologies is a production improvement method based on bottle-
neck improvements. It concentrates on constraints and seeks to identify and then remove
obstructions that hinder the fl ow of a system.
Just-in-time (JIT) systems have an objective of producing or procuring products or compo-
nents as they are required by a customer or for use (CIMA, 2005). JIT is a pull-based system
USER PURCHASE DEPT
Check
Requests
SUPPLIER
ok ?
No
No
Ye s
Ye s
Inform
User
Send
Purchase
Order
Fills
Order
Send Goods
To User
Check
Requests
Ok ?
End
Request
Goods
Figure 3.7 Crown Prosecution Service deployment chart
(Source: Crown Prosecution Service (2004) http://www.cps.gov.uk/Publications/finance/process_mapping.html)
STUDY MATERIAL E1
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of planning and control pulling work through the system in response to customer demand.
The obvious advantage of JIT is the elimination of large stocks of materials and parts. JIT
purchasing involves a system whereby ‘material purchases are contracted so that the receipt
and usage of material, to the maximum extent possible, coincide’ (CIMA, 2005). Put simply
the stock of raw materials is reduced to near-zero levels. Financial savings are easily apparent
as is the requirement to foster an effective working relationship with suppliers.
JIT approaches are often undertaken in parallel with TQM. TQM facilitates the intro-
duction of JIT because JIT is not feasible with, for example, high reject rates and high
wastage in manufacturing, and TQM reduces these. A form of risk assessment in the pro-
duction department often takes place. The impact of production delays and stock-outs if
the JIT system fails has implications. A decision on whether to accept the risk or, perhaps,
to carry buffer stocks must be made.
The extract from the following article explains how crucial just-in-time (JIT) deliveries
are to optimising space in retail outlets.
For all the attention focused on supply chain processes, from global sourcing to the
end consumer, very little discussion is dedicated to how shipments are received into
stores. The reason is perhaps quite pragmatic: Few retailers are willing to talk about
what happens in their back rooms. When approached for this story, most declined to
comment. However, there is a clear consensus among retailer expectations: Inventory
should fl ow from the back room to the store fl oor as quickly as possibly. Back rooms,
kept to a minimum footprint, are for processing shipments, not for storage.
. . . . . . . . .
Reliance on transportation carriers and third-party logistics providers for store-
level logistics has become a dominant trend. The ultimate goal is to manage store
deliveries so that store resources, specifi cally back-room space and labour, are utilised
most effi ciently and in-stock positioning is optimised.
. . . . . . . . .
Pharmacies in traditional drug stores as well as in grocery and super-store formats
have some of the most stringent requirements for JIT deliveries. Every inch of every
footprint is at a premium, and neither the pharmacist nor technicians has time to
receive shipments.
‘A pharmacy retailer may need to receive deliveries before 6 a.m. to replenish stock
or at a defi ned time slot when they have scheduled clerks specifi cally for receiving
deliveries.’ noted Drew Kronick, executive VP of business development and supply
chain solutions for Velocity Express.
A national home-accessories and lifestyle retailer began using Velocity Express
for furniture replenishment about 18 months ago. In a targeted Northeastern mar-
ket where the retailer operates approximately 30 stores, Velocity Express makes daily
deliveries to the stores, and in some cases may deliver multiple times to a single store.
Valuable square footage that was once dedicated to back-room storage has been con-
verted to selling space, and replenishment inventory of large furnishings is held in a
centralised location. When furniture sells from the store fl oor, Velocity Express picks
up at the central warehouse and delivers to the store that same day.
The JIT service is designed to deliver to whatever parameters the retailers set. In
markets where there is a critical mass of stores, a fl eet of trucks and drivers may be
dedicated to a specifi c retailer.
Source: Robbins Gentry, C. (2007) Back-room secrets. Chain Store Age, March.
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Exercise 3.9
What is the main principle difference between MRP and JIT?
Solution
JIT is a pull-based system which responds to demand. In contrast MRP is a push-based
system which tends to use stock as buffers between the different elements of the system
such as purchasing, production and sales (CIMA, 2005).
3.7 Lean management
Lean production and its management involves a consolidation of improvement systems into
a single coherent process for continuous improvement. The concept was born from the expe-
rience of Western fi rms competing with Japanese businesses with their emphasis on qual-
ity. For some fi rms this new type of competition proved fatal whilst others realised that if
they were to survive they would have to radically change the ways in which they transformed
their inputs into outputs. Consequently, ‘operations management’ has been elevated from
being viewed in the West as a largely mundane and unimportant aspect of management to
being seen as the key to revitalising organisations. Womack et al. (1990) famously traced the
impact of new approaches to manufacturing in the automobile industry.
Henry Ford’s adoption of assembly line production methods early in the twentieth cen-
tury transformed the way cars and many other products were made. An alternative way of
making things pioneered by the Japanese is now making mass production obsolete. Lean
producers are thought to achieve a 2:1 advantage over non-lean producers. This method
involves bringing together the activities of managers, employees and suppliers into a tightly
integrated system that can respond extremely quickly to changing customer demands. The
result is what is called a ‘lean production’ system which focusses on a removal of all forms
of waste from the system, whether parts, people or processes and is explained by Dankbaar
(cited in Brown et al., 2001) as:
●
making use of the workforce by giving them more than one task
●
cross-functional management and employee involvement
●
integrating direct and indirect work
●
taking advantage of quality circles.
Cross-functional teamwork involves active project-based communication and problem
solving. Inevitably this demands a change of organisational culture in order to overcome
damaging inter-departmental rivalry, confl ict and politics. Often the only way in this can
be facilitated is by organisational restructuring and different specialists working together in
the same physical location on common problems (the use of quality circles).
Flexible manufacturing is only achieved where ‘economies of scope’ make it economical
to produce small batches of a variety of products with the same machines. This represents
a stark contrast to the infl exibility of traditional mass production assembly lines with their
emphasis on ‘economies of scale’. This leads to the manufacture of a larger variety of prod-
ucts at lower cost and higher quality. For Womack et al. (1990) the position of the cus-
tomer should be taken whereby six lean principles need to be observed:
1. Solve my problem completely.
2. Don’t waste my time.
3. Provide exactly what I want.
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4. Deliver value where I want it.
5. Deliver value when I want it.
6. Reduce the number of decisions I must make to solve my problems.
All six principles will provide a defi nition of value for the customer. Womack et al.
describe waste as any human activity that absorbs resources but creates no value. They
quote a Toyota executive who categorised waste as:
●
product defects
●
over-production of goods not needed
●
stocks of goods awaiting further processing or consumption
●
unnecessary processing
●
unnecessary movement of people
●
unnecessary transport of goods
●
employees waiting for process equipment to fi nish its work or an upstream activity to be
completed.
Coote and Gould (2006) evaluated the work of Womack and applied it to the latter day
fi nance function. They suggest that a further category of waste is the design of goods and
services that do not meet the needs of the customer. In the context of fi nance they suggest
ways of delivering customer value without waste, including:
●
focussing on products where benchmarking shows high costs for relatively little value
●
talking to customers to establish their defi nition of value
●
assigning process ownership, responsibilities and power
●
establishing clear and frequent measurement of the process’s effectiveness and effi ciency
●
building a culture of continuous improvement, and using this as a foundation for more
transformational change.
From these explanations it is clear that the main characteristics of lean production
include fl exible workforce practices and high-commitment human resource policies. It will
also require a commitment to continuous improvement through the organisation whether
inventory management, capacity management or performance enhancement methods.
Despite the obvious advantages of lean production it does have certain limitations and
has at times been criticised. For instance, Brown et al. (2001) suggest that it ignores four
critical areas of operations:
1. manufacturing’s contribution to corporate planning
2. manufacturing strategy
3. the seniority of operations staff
4. potential alliances.
In addition it may not empower employees, indeed it could be seen as a top-down
approach forcing employees to devise ways of doing more for less resource.
3.7.1 Managing inventory
From the Toyota listing of ‘waste’ (specifi cally over-production of goods not needed, stocks
of goods awaiting further processing or consumption) it is clear that lean thinking can be
applied to methods for managing inventory. Managing inventory is a major contributor
to improving material, customer and information fl ows from the business to satisfy the
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needs and wants of the customer. All those studying accountancy will readily recognise
that inventory can exist in several forms (raw materials, work in progress, fi nished goods,
etc.). They will also know that stock holding has costs attached to it and such costs may
ultimately contribute to an organisation becoming uncompetitive.
Brown et al. (2001) point out that different organisations hold inventory in different
places. For example, some sandwich shops only sell pre-packaged food (fi nished) while oth-
ers make on site at a special location, and others still hold a combination of raw materials
(salads, etc.) and allow customers to customise their basic sandwiches (work in progress).
Decisions such as these leads to the concept of ‘make-to-order’ approaches where inventory
is only taken and assembled on receipt of an order or ‘make-to-stock’ where items are held
in anticipation of an order.
There are of course several methods for managing inventory (summarised in Table 3.10)
the challenge for organisations is to determine which supports their ‘lean’ efforts best.
3.7.2 Managing operational capacity
Methods of ‘balancing’ demand and productive capacity is a key challenge in operations,
because in the short term all organisations are capacity-constrained, demand fl uctuations
impact on inventory management and operations, and demand may exceed supply leading
to a reduction in quality.
Table 3.10 Methods for managing inventory
System Explanation Usage
Continuous inventory Levels are continually monitored,
and when stock drops below
a predetermined level a fi xed
amount is ordered to ‘top up’
levels.
The tinned food in person’s home
or the cleaning materials held are
domestic examples. Continuous
inventory can be operated using a
fi xed order quantity replacement
system or an Economic Order
Quantity system (EOQ), which
takes into account variable costs
associated with ordering the item
and holding the item. The system
encourages buffer stocks and
refl ect ‘just in case’ rather than
‘just in time’.
Periodic inventory (or bin) Stock levels are checked after a
specifi c time and this leads to
variable ordering of new stock.
Commonly used in retail outlets
such as a supermarket at the end
of a day’s trading.
ABC system ABC is not an acronym, ABC is a
classifi cation based on the Pareto
80/20 rule which suggests that
20% of the items are likely to
account for 80% of the annual
expenditure. ABC focuses
on those items that are most
important and therefore need
careful monitoring.
A: items of high value, close
monitoring needed including
managing the supplier/buyer
relationship.
B: medium items less tightly
managed.
C: low value inventory requiring
little management (e.g. nails,
screws, tacks, etc.).
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There are issues when demand is high. Problems might be avoided by either manag-
ing capacity and/or managing levels of demand (usually by applying marketing practices).
Supply is inevitably fi xed by factors largely internal to the organisation such as facilities,
systems, technology, human resources and capability. Demand is by comparison an exter-
nal force. Inevitably there will be fl uctuations between these two dimensions. Three main
means are used for balancing capacity and demand, namely: level capacity, chase and
demand management strategies.
1. Level capacity strategies involve the organisation building inventory levels so that these
excess stores can be used to deal with increases in demand beyond capacity. Clearly
this has cost implications and will not apply to service organisations where excesses of
demand over capacity will result in queues (a good example being waiting lists for oper-
ations in the UK’s National Health Service).
2. Chase strategies involve constantly adjusting organisational activity levels to shadow
fl uctuations in demand. This is diffi cult for a fi xed workforce operating under rigid
conditions.
3. Demand management strategies involve attempts to infl uence demand to smooth vari-
ations above or below capacity. For example a football club that has to maximise
attendance for an upcoming fi xture against ‘unattractive’ opposition in a minor com-
petition might introduce a two people for one ticket price scheme or a ‘kids go free’
with an adult initiative. Table 3.11 summarises the main approaches available to service
organisations.
McDonald (2008) explains that in reality most organisations combine several approaches
when managing capacity. She cites the example of Ikea stores with:
●
large warehouses containing goods that have yet to be ordered
●
extended opening times over Christmas periods in order to cater for extra demand
●
price cutting in order to shift products that have gone out of fashion.
In terms of supply of goods, most modern manufacturing processes now utilise the com-
puter-aided design (CAD) and computer-aided manufacturing (CAM) operations. CAD and
CAM are also the keys to fl exible manufacturing as they enable computerised machines to
perform a variety of functions. Computer-aided design and computer-aided manufactur-
ing (CAM) can help an organisation:
●
provide fl exibility to meet customer requirements more fully
●
eliminate mistakes
●
reduce material wastage.
These advances work towards world class manufacturing performance. When CAD and
CAM are integrated it is possible to achieve computer-integrated manufacturing (CIM)
Table 3.11 Main approaches for managing service capacity
Through managing demand Through managing supply
●
Complementary services
●
Sharing capacity
●
Reservations
●
Cross-training employees (multi-skilling)
●
Price incentives
●
Part-time employees
●
Off-peak demand
●
Flexible working patterns
Source: Based on Fitzsimmons and Fitzsimmons (2004)
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whereby a system directs data fl ow whilst also directing the processing and movements of
material.
These IT developments may be allied to production techniques such as Just In Time
(JIT) methods of production which according to CIMA (2004) ‘is driven by demand for
fi nished products whereby each component on a production line is produced only when
needed for the next stage’.
A systems’ ability to accommodate signifi cant changes in volume, capacity or capa-
bility can prove an invaluable source of organisational competitive advantage. Flexible
Manufacturing Systems (FMS) react to both predicted and unpredicted changes. This might
take the form of machine fl exibility to produce new product types and change the order of
operations conducted on a part.
Exercise 3.10
What measurements of performance might be developed for a production department?
Solution
●
Degree of fl exibility
●
Time taken to acknowledge an order to the customer
●
Time taken to process orders into a form acceptable to the factory
●
Speed of dispatch to the customer
●
Quality achieved.
Queuing theory is the study of waiting times through mathematical analysis of related proc-
esses. The theory enables performance measures to be calculated including:
●
average waiting times for a product or service
●
the expected number of customers (or clients or patients) waiting at a particular time
●
the probability of encountering the system that is either empty or full (e.g. such as arriv-
ing at a hospital department).
Within the operations system itself recent approaches such as cellular manufacturing
have had the effect of altering traditional plant layouts by creating a U-shaped fl ow of
work in which different machines assisted by CAD technology are grouped to make prod-
ucts with similar machining requirements.
The relationship between manufacturing and engineering and maintenance should
be acknowledged. Engineering is responsible for providing the methods of manufacture.
While they work with design engineers, their task is to provide the most economical way
of manufacturing the product, to pre-agreed quality levels, at pre-planned costs, and in
respect of forecast quantities. The maintenance function is responsible for the maintenance
of the factory buildings, machinery, plant and for power and lighting.
3.7.3 Practices of continuous improvement
There are several practices of quality management that an organisation might operate,
some are discussed here.
Quality Circles. Prof. Kaoru Ishikawa, pioneered quality management processes in the
Kawasaki shipyards following the Second World War. One concept he introduced was that