Hill A.V. The Encyclopedia of Operations Management: A Field Manual and Glossary of Operations Management Terms and Concepts
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6Ps
–
8 wastes
The Encyclopedia of Operations Management Page 16
The Japanese characters for 5S are on the right (source:
http://net1.ist.psu.edu/chu/wcm/5s/5s.htm, November 7, 2004).
See 8 wastes, facility layout, kaizen workshop, lean thinking, multiplication principle, point of use, red tag,
shadow board, standardized work, Total Productive Maintenance (TPM), visual control.
6Ps
– The acronym for “Prior Planning Prevents Painfully Poor Performance,” which emphasizes the need for
planning ahead.
Wikipedia’s 7Ps entry includes several other variants. Apparently, the phase originated in the British Army,
but is also popular in the U.S. Army
1
. The U.S. Army replaces the word “painfully” with a coarse word.
One somewhat humorous way to write this expression is as
Prior Plan
nin
g Preven
ts P
ainf
ully
Poor
Per
forma
nce
.
See personal operations management, project management.
7 wastes
– See 8 wastes.
7S Model
– A framework developed by McKinsey to help organizations evaluate and improve performance.
The McKinsey 7S Model (Waterman, Peters, &
Phillips 1980) can be used to help organizations evaluate
and improve their performance. The elements of the 7S
Model (with simplified explanations) are as follows:
Strategy – How to gain competitive advantage.
Structure – How the organization’s units are
interrelated. Options include centralized, functional
(top-down), de-centralized, matrix, network, or
holding.
Systems – The procedures and processes that define
how the work is done.
Staff – The employees and their attributes.
Style – The type of leadership practiced.
Skills – The employee capabilities.
Shared values – The organization’s beliefs and attitudes. This is the center of McKinsey’s model and is
often presented first in the list.
These seven elements need to be aligned for an organization to perform well. The model can be used to help
identify which elements need to be realigned to improve performance. The hard elements (strategy, structure,
and systems) are easy to define and can be influenced directly by management. The soft elements (skills, style,
staff, and shared values) are less tangible and harder to define, but are just as important as the hard elements.
See operations strategy.
8 wastes
– Seven original forms of waste identified by Taiichi Ohno, plus one widely used in North America.
Taiichi Ohno, the father of the Toyota Production System, defined seven categories of waste (Ohno 1978).
Waste (“muda”) includes any activity that does not add value to the customer. More recently, Bodek (2009)
defined the eighth waste and called it “underutilized talents of workers.” Liker (2004) used the similar phrase
“unused employee creativity.” Most sources now label this “waste of human potential.” The 8 wastes include:
1. Overproduction – Producing more than what is needed or before it is needed.
2. Waiting – Any time spent waiting for tools, parts, raw material, packaging, inspection, repair, etc.
3. Transportation – Any transportation of parts, finished goods, raw materials, packaging, etc. Waste is
particularly apparent here when materials are moved into and out of storage or are handled more than once.
4. Excess processing – Doing more work than necessary (e.g., providing higher quality than needed,
performing unneeded operations, or watching a machine run).
5. Inventory – Maintaining excess inventory of raw materials, in-process parts, or finished goods.
6. Excessive motion – Any wasted motion or poor ergonomics, especially when picking up or stacking parts,
walking to look for items, or walking to look for people.
1
This statement is based on this author’s experience as a cadet in the U.S. Army at West Point in the early 1970’s.
Strategy
Structure
Systems
Style
Staff
Skills
Shared
values
The McKinsey 7S Model
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80-20 rule − ABC classification
Page 17 The Encyclopedia of Operations Management
7. Defects (correction) – Repair, rework, recounts, re-packing, and any other situation where the work is not
done right the first time.
8. Unused human potential – Unused employee minds and creativity.
One of the best approaches for eliminating these wastes is to implement a 5S program. The lean thinking
entry also suggests many specific approaches for eliminating each of these wastes.
Macomber and Howell (2004) identified several additional wastes, including too much information,
complexity, design of goods and services that do not meet users’ needs, providing something the customer does
not value, not listening, not speaking, assigning people to roles that they are not suited for, not supporting people
in their roles, and high turnover.
Many experts distinguish between necessary waste and unnecessary waste (also known as pure waste).
Unnecessary waste is any activity that adds no direct value to the customer, to the team making the product, or to
other activities that add direct value to the customer. In contrast, necessary waste is any activity that does not
add value directly to the customer, but is still necessary for the team or for another step that does add value.
Necessary waste supports the best process known at the current time, but will ideally be eliminated sometime in
the future. Examples of necessary waste might include planning meetings and preventive maintenance.
See 5S, efficiency, Lean Enterprise Institute (LEI), lean thinking, muda, overproduction, rework, subtraction
principle, waste walk.
80-20 rule – See ABC classification, Pareto’s Law.
A
A3 Report – A lean term for a concise document that combines a project charter and progress report on a single
large sheet of paper.
The A3 Report is named after the A3 paper size used everywhere in the world except for the U.S. The A3 is
equivalent to two side-by-side A4 pages and is 297 x 420 mm (about 11 x 17 inches). In the U.S., most
organizations use two side-by-side 8.5 x 11 inch pages, which is about the same size as an A3.
Although many types of A3 Reports are used in practice, the A3 is most often used as a combination of a
parsimonious project charter, project status report, and project archive. A3 Reports are often organized so it tells
a “story,” where the left side is a description and analysis of the current problem and the right side presents
countermeasures (solutions) and an implementation plan for the solutions. The A3 Report defines the problem,
root causes, and corrective actions and often includes sketches, graphics, simple value stream maps, and other
visual descriptions of the current condition and future state. The logical flow from left to right, the short two-
page format, and the practice of posting A3s on the wall help develop process thinking and process discipline.
Some lean consultants insist that A3 Reports be done by hand to avoid wasted time in making “pretty”
graphs and figures. Although many lean experts in North America insist that A3 problem solving is essential to
lean thinking, other lean experts in North America do not use it at all.
See kaizen workshop, lean thinking, project charter, value stream map.
ABAP (Advanced Business Application Programming) – The name of the proprietary object-oriented
programming language used by SAP, which is the world’s largest ERP software firm.
See SAP.
ABC – See Activity-Based Costing (ABC).
ABC classification – A method for prioritizing items in an inventory system, where A-items are considered the
most important; also called ABC analysis, ABC stratification, distribution by value, 80-20 rule, and Pareto
analysis.
The ABC classification is usually implemented based on the annual dollar volume, which is the product of
the annual unit sales and unit cost (the annual cost of goods sold). High annual volume items are classified as A-
items and low annual dollar volume items are classified as C-items. Based on Pareto’s Law, the ABC
classification system demands more careful management of A-items where these items are ordered more often,
counted more often, located closer to the door, and forecasted more carefully.
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absorption costing
–
absorptive capacity
The Encyclopedia of Operations Management Page 18
In contrast, C-items are not as important from an investment point of view and therefore should be ordered
and counted less frequently. Some firms classify obsolete or non-moving items as D-items.
One justification for this approach is based on the economic order quantity model. Higher dollar volume
items are ordered more often and therefore have a higher transaction volume, which means that they are more
likely to have data accuracy problems.
The first step in the ABC analysis is to create a ranked list of items by cost of goods sold (annual dollar
volume). The top 20% of the items are labeled A-items. The next 30% of the items in the list are labeled B-
items and the remaining 50% are labeled C-items. Of course, these percentages can vary depending upon the
needs of the firm. A-items will likely make up roughly 80% of the total annual dollar volume, B-items will
likely make up about 15%, and C-items will likely make up about 5%.
A Lorenz Curve is used to graph the
ABC distribution, where the x-axis is the
percentage of items and the y-axis is the
percentage of total annual dollar usage. The
graph on the right shows that the first 20% of
the items represent about 80% of the annual
dollar usage. Items must be first sorted by
annual dollar volume to create this graph.
See the Lorenz Curve entry for information
on how to create this graph.
Some firms use other variables for
prioritizing items in the ABC classification
such as unit sales, annual sales (instead of
cost of goods sold), profit margin, stockout
cost (such as medical criticality), shelf life,
and cubes (space requirements).
Note that the ABC inventory
classification has nothing to do with Activity Based Costing.
See bill of material (BOM), cost of goods sold, cycle counting, Economic Order Quantity (EOQ), inventory
management, Lorenz Curve, obsolete inventory, Pareto Chart, Pareto’s Law, warehouse, Warehouse
Management System (WMS).
absorption costing
– An accounting practice for allocating overhead to measure product and job costs.
With absorption costing, product costs include the direct cost (i.e., labor and materials) and indirect (fixed)
costs (e.g., administrative overhead). Overhead costs from each workcenter are assigned to products as they pass
through the workcenter. Traditionally, the overhead (indirect) cost is assigned to the product based on the
number of direct labor hours. With Activity Based Costing systems, overhead is assigned to products based on
cost-drivers, such machine hours, number of orders per year, number of inspections, and product complexity.
Absorption costing is often criticized because it tends to drive operations managers to produce more
inventory in order to absorb more overhead. This is contrary to the lean thinking and is only in the best interests
of shareholders when capacity is costly and inventory is cheap. Throughput accounting, developed by Goldratt
(Noreen, Smith, and Mackey 1995), is a form of variable costing that ignores overhead.
See Activity Based Costing (ABC), cost center, lean thinking, overhead, standard cost, Theory of Constraints
(TOC), throughput accounting, variable costing.
absorptive capacity
– The ability of an organization to recognize the value of new external information, integrate
and assimilate that information, and apply the information to make money.
Absorptive capacity can be examined on multiple levels (an individual, group, firm, and national level), but it
is usually studied in the context of a firm. Absorptive capacity can also refer to any type of external information,
but is usually applied in the context of research and development (R&D) activities. The theory involves
organizational learning, industrial economics, the resource-based view of the firm, and dynamic capabilities.
Organizations can build absorptive capacity by conducting R&D projects internally rather than outsourcing them.
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Acceptable Quality Level (AQL) − acquisition
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The term “absorptive capacity” was first introduced in an article by Cohen and Levinthal (1990). According
to the ISI Web of Science, this article has been cited more than 1500 times. This entire article can be found at
http://findarticles.com/p/articles/mi_m4035/is_n1_v35/ai_8306388 (May 10, 2010).
Adapted from http://en.wikipedia.org/wiki/Absorptive_capacity and http://economics.about.com/cs/
economics glossary/g/absorptive_cap.htm, May 10, 2010.
See capacity, empowerment, human resources, New Product Development (NPD), organizational design,
outsourcing, workforce agility.
Acceptable Quality Level (AQL) – The maximum percentage defective that can be considered satisfactory as a
process average.
When deciding whether to accept a batch, a sample of n parts is taken from the batch and a decision is made
to accept the batch if the percentage of defects is less than the AQL. The AQL is the highest proportion defective
that is considered acceptable as a long-run average for the process.
For example, if 4% nonconforming product is acceptable to both the producer and consumer (i.e.,
AQL = 4.0), the producer agrees to produce an average of no more than 4% nonconforming product.
See acceptance sampling, consumer’s risk, incoming inspection, Lot Tolerance Percent Defective (LTPD),
producer’s risk, quality management, Statistical Process Control (SPC), Statistical Quality Control (SQC), zero
defects.
acceptance sampling – Methods used to make accept/reject decisions for each lot (batch) based on inspecting a
limited number of units.
With attribute sampling plans, accept/reject decisions are based on a count of the number of units in the
sample that are defective or the number of defects per unit. In contrast, with variable sampling plans,
accept/reject decisions are based on measurements. Plans requiring only a single sample set are known as single
sampling plans; double, multiple, and sequential sampling plans may require additional samples.
For example, an attribute single sampling plan with a sample size n = 50 and an accept number a = 1 requires
that a sample of 50 units be inspected. If the number of defectives in that sample is one or zero, the lot is
accepted. Otherwise, it is rejected. Ideally, when a sampling plan is used, all bad lots will be rejected and all
good lots will be accepted. However, because accept/reject decisions are based on a sample of the lot, the
probability of making an incorrect decision is greater than zero. The behavior of a sampling plan can be
described by its operating characteristic curve, which plots the percentage defective against the corresponding
probabilities of acceptance.
See Acceptable Quality Level (AQL), attribute, consumer’s risk, incoming inspection, inspection, Lot
Tolerance Percent Defective (LTPD), operating characteristic curve, producer’s risk, quality management,
sampling, Statistical Process Control (SPC), Statistical Quality Control (SQC).
Accounts Payable (A/P) – The money owed to suppliers for goods and services purchased on credit; a current
liability; also used as the name of the department that pays suppliers.
Analysts look at the relationship between accounts payable and purchases for indications of sound financial
management. Working capital is controlled by managing accounts payable, accounts receivable, and inventory.
See Accounts Receivable (A/R), invoice, purchase order (PO), purchasing, supplier, terms.
Accounts Receivable (A/R) – The money customers owe an organization for products and services provided on
credit; a current asset on the balance sheet; also used as the name of the department that applies cash received
from customers against open invoices.
A sale is treated as an account receivable after the customer is sent an invoice. Accounts receivable may also
include an allowance for bad debts. Working capital is controlled by managing accounts payable, accounts
receivable, and inventory.
See Accounts Payable (A/P), invoice, purchase order (PO), purchasing, supplier, terms.
acquisition – A contracting term used when an organization takes possession of a product, technology, equipment,
or another organization.
In a mergers and acquisitions context, acquisition refers to one firm buying another firm. In a learning
context, learning is often called acquisition of new knowledge, skills, or behaviors. In a marketing context, the
customer acquisition cost is the cost of finding and winning new customers and is sometimes measured as the
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active item – addition principle
The Encyclopedia of Operations Management Page 20
advertising cost plus other marketing costs targeted toward new customers divided by the number of new
customers added during the time period.
See due diligence, e-procurement, forward buy, mergers and acquisitions (M&A), purchasing, service
recovery.
active item – Any inventory item that has been used or sold in the recent past (e.g., the last year).
It is common for a retailer to have 100,000 items in their item master, but only 20,000 active items.
See inventory management, part number.
Activity Based Costing (ABC) – An accounting practice that identifies the cost drivers (variables) that have the
most influence on the product (or service) cost and then allocates overhead cost to products and services based on
these cost drivers.
Allocating overhead (particularly manufacturing overhead) is an important activity for many firms.
Allocating overhead is needed to estimate product costs in product profitability analysis and important decisions
with respect to pricing, product rationalization, and marketing and sales efforts.
Traditional standard costing systems usually allocate overhead cost based on direct labor. For example,
consider a product that requires one hour of labor and $30 of materials. If the direct labor wage rate (without
overhead) is $20 and the overhead burden rate is $200 per direct labor hour, the standard cost for the product is
then direct materials ($20), direct labor ($30), and allocated overhead ($200), for a total cost of $250.
One common criticism of traditional standard costing systems is that it does not make sense to allocate the
largest cost (the overhead) based on the smallest cost (the direct labor cost). (Overhead is often the largest
component of the standard cost and direct labor cost is often the smallest component.) Traditional standard
costing systems assume that the only resource related to overhead is direct labor and that all other resources and
activities required to create the product or service cannot be related to overhead.
In contrast, Activity Based Costing begins by identifying the major activities and resources required in the
process of creating a product or service. ABC then identifies the “cost pools” (overhead cost) for each activity or
resource. Finally, ABC defines an equitable way of allocating (assigning) the overhead cost from the cost pools
to the products and services based on a variable called a “cost driver.”
A cost driver should reflect the amount of the cost pool (resource) consumed in the process of creating the
product or service. Cost drivers might include the number of setups (for a shared setup team), direct materials
cost (for allocating purchasing overhead), direct labor time (for allocating labor-related overhead), total
throughput time (for allocating manufacturing overhead), inspection time (for allocating quality control
overhead), and space used (for allocating building related overhead).
Activity Based Management (ABM) is the use of the Activity Based Costing tools by process owners to
control and improve their operations. Building an Activity Based Costing model requires a process analysis,
which requires management to have a deep understanding of the business and evaluate value-added and non-
value-added activities. The cost analysis and the process understanding that is derived from an ABC system can
provide strong support for important managerial decisions, such as outsourcing, insourcing, capacity expansion,
and other important “what-if” issues.
Some argue that all manufacturing overhead cost should be allocated based on direct labor (or some other
arbitrary cost driver), even if the cost is not traceable to any production activity. However, most experts agree
that the sole purpose of an ABC system is to provide management with information that is helpful for decision
making. Arbitrary allocation of overhead cost does not support decision making in any way. Even with Activity
Based Costing, certain costs related to a business are included in overhead without being allocated to the product.
See absorption costing, burden rate, cost center, customer profitability, hidden factory, outsourcing,
overhead, product proliferation, standard cost, throughput accounting, variable costing, what-if analysis.
Activity Based Management (ABM) – See Activity Based Costing (ABC).
ad hoc committee – See committee.
addition principle – Combining two tasks and assigning them to one resource (person, machine, etc.).
Love (1979) defines the addition principle for improving a process as combining two or more process steps
so one resource (person, machine, contractor, etc.) does all of them. This strategy has many potential
advantages, including reducing cost, reducing cycle time, reducing the number of queues, reducing the number of
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ADKAR Model for Change − Advanced Planning and Scheduling (APS)
Page 21 The Encyclopedia of Operations Management
handoffs, reducing lost customer information, reducing customer waiting time, improving customer satisfaction,
improving quality, improving job design, accelerating learning, developing people, and improving accountability.
The addition principle is an application of job enlargement where a worker takes on some of a co-worker’s
job and job enrichment, where a worker takes on part of the boss’s job. This is closely related to the queuing
theory concept of pooling.
The application of the addition principle is particularly effective in the service context, where it can impact
customer waiting time and put more of a “face” on the service process. For example, many years ago, Citibank
reduced the number of handoffs in its international letter of credit operation from about 14 to 1. Instead of 14
different people handling 14 small steps, one person handled all 14 steps. This change dramatically reduced
customer leadtime, improved quality, and improved process visibility. Citibank required workers to be bilingual,
which also improved service quality. The visibility of the new process allowed them to further improve the
process and prepared the way for automating parts of the process. However, implementing this new process was
not without problems. Many of the people in the old process had to be replaced by people with broader skill sets
and the new process increased risk because it eliminated some of the checks and balances in the old process.
See customer leadtime, handoff, human resources, job design, job enlargement, multiplication principle,
pooling, subtraction principle.
ADKAR Model for Change – A five-step model designed to help organizations affect change.
ADKAR, developed by Prosci (Hiatt 2006), is similar to the Lewin/Schein Theory of Change. ADKAR
defines five stages that must be realized for an organization or an individual to successfully change:
Awareness – An individual or organization must know why the change is needed.
Desire – Either the individual or organizational members must have the motivation and desire to participate
in the proposed change or changes.
Knowledge – Knowing why one must change is not enough; an individual or organization must know how
to change.
Ability – Every individual and organization that truly wants to change must implement new skills and
behaviors to implement the necessary changes.
Reinforcement – Individuals and organizations must be reinforced to sustain the changes and the new
behaviors. Otherwise, the individuals and organization will likely revert to their old behaviors.
See change management, control plan, Lewin/Schein Theory of Change.
adoption curve – The major phases in the product life cycle that reflect the market’s acceptance of a new product
or technology.
According to the Product Development and Management Association (www.pdma.org), consumers move
from (a) a cognitive state (becoming aware of and knowledgeable about a product) to (b) an emotional state
(liking and then preferring the product) and finally into (c) a behavioral state (deciding on and then purchasing
the product). At the market level, the new product is first purchased by market innovators (roughly 2.5% of the
market), followed by early adopters (roughly 13.5% of the market), early majority (34%), late majority (34%),
and finally, laggards (16%).
See Bass Model, New Product Development (NPD), product life cycle management.
Advanced Planning and Scheduling (APS) – An information system used by manufacturers, distributors, and
retailers to assist in supply chain planning and scheduling.
Most APS systems augment ERP system functionality by providing forecasting, inventory planning,
scheduling, and optimization tools not historically found in ERP systems. For example, APS systems can
calculate optimal safety stocks, create detailed schedules that do not exceed available capacity (finite
scheduling), and find the near-optimal assignments of products to plants. In contrast, traditional ERP systems
were fundamentally transaction processing systems that implemented user-defined safety stocks, created plans
that regularly exceeded available capacity (infinite loading), and did not optimize anything.
The best-known dedicated APS software vendors were i2 Technologies and Manugistics, but they are both
now owned by JDA Software. SAP has an APS module called APO, which stands for Advanced Planning and
Optimization. According to SAP’s website, “SAP APO is a software solution that enables dynamic supply chain
management. It includes applications for detailed planning, optimization, and scheduling, allowing the supply
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Advanced Shipping Notification (ASN) – adverse event
The Encyclopedia of Operations Management Page 22
chain to be accurately and globally monitored even beyond enterprise boundaries. SAP APO is a component of
mySAP Supply Chain Management.”
The sales script for these APS systems in the past (exaggerated here for sake of emphasis) has been that the
big ERP systems (SAP, Oracle, etc.) were “brain dead” and had little intelligence built into them. These big ERP
systems were only transaction processing systems and did little in the way of creating detailed schedules,
forecasting, or optimization. The promise of the APS systems was that they were “smart” and could make the
ERP systems a lot smarter. In recent years, the lines have blurred and nearly all ERP systems offer add-on
products that do much of what only APS systems could do in the past.
Many APS users have found that several APS features were hard to implement and maintain, which has led
to some negative assessments of APS systems. The three main complaints that this author has heard are (1)
massive data requirements (capacity information on almost every workcenter for every hour in the day), (2)
complexity (few managers understand the mathematical algorithms used in APS applications), and (3) lack of
systems integration (the APS must work alongside the ERP system and must share a common database). The
finite scheduling entry discusses some of the needs that motivated the development of APS systems.
See algorithm, back scheduling, closed-loop MRP, Enterprise Resources Planning (ERP), finite scheduling,
I2, infinite loading, job shop scheduling, load, load leveling, Manugistics, Materials Requirements Planning
(MRP), optimization, SAP.
Advanced Shipping Notification (ASN) – An electronic file sent from a supplier to inform a customer when
incoming goods are expected to arrive.
An ASN may be a document, a fax, or electronic communication. However, electronic communication is
preferred. ASNs usually include PO numbers, SKU numbers, lot numbers, quantity, pallet or container number,
carton number, and other information related to the shipment and to each item in the shipment.
ASN files are typically sent electronically immediately when a trailer (destined for a given receiving facility)
leaves a DC. The ASN file should be received by the receiving facility well in advance of the time the trailer
arrives. When the trailer (or other shipping container) arrives, the contents of the trailer can be electronically
compared to the contents of the ASN file as the trailer is unloaded. Any missing items or unexpected items
would be highlighted on the OS&D report. The ASN is typically received and processed by the Transportation
Management System (TMS) or Warehouse Management System (WMS) at the receiving facility.
The ASN file serves three important purposes:
The receiving facility uses the ASN to plan inventory or load movement (interline hauls or ground-route
distribution) based on the expected inbound mix of goods. Such planning may include scheduling of other
resources (drivers, warehouse personnel) or even advance calls to customers to inform them of their expected
delivery time windows.
The TMS or WMS systems at the receiving facility may use the expected inbound mix of goods to prepare
warehouse employees to receive the goods by downloading the information to wireless barcode scanners or
alerting warehouse planning staff to the expected incoming volume of goods.
The TMS or WMS system may ultimately use the expected inbound goods to form the basis of an
Over/Short/Damaged (OS&D) report upon actual scanning of the inbound goods.
Although commonly used in over-the-road trucking, an ASN can be sent in relation to any shipment,
including air, rail, road, and sea shipments. An ASN file is often sent in the agreed-upon EDI 210 (“Advanced
Shipping Notification”) format. However, technically, an ASN could be any file format agreed upon by the
originating and receiving facilities.
See consignee, cross-docking, distribution center (DC), Electronic Data Interchange (EDI), incoming
inspection, manifest, Over/Short/Damaged Report, packing slip, receiving, trailer, Transportation Management
System (TMS), Warehouse Management System (WMS).
adverse event – A healthcare term used to describe any unintended and undesirable medical occurrence
experienced by a patient due to medical therapy or other intervention, regardless of the cause or degree of
severity.
The term “adverse event” is often used in the context of drug therapy and clinical trials. In the drug therapy
context, it is also called an adverse reaction or an adverse drug reaction.
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advertising allowance (ad allowance) − aggregate inventory management
Page 23 The Encyclopedia of Operations Management
Very serious adverse events are usually called sentinel events or never events. However, a few sources
treat the terms “adverse event” and “sentinel event” as synonyms. The term “near miss” is used to describe an
event that could have harmed the patient, but was avoided through planned or unplanned actions.
Barach and Small (2000) report lessons for healthcare organizations from non-medical near miss reporting
systems. This interesting report begins by emphasizing that most near misses and preventable adverse events are
not reported and that healthcare systems could be improved significantly if more of these events were reported.
The report further argues that healthcare could benefit from what has been learned in other industries. The
authors studied reporting systems in aviation, nuclear power technology, petrochemical processing, steel
production, military operations, and air transportation as well as in healthcare. They argue that reporting near
misses is better than reporting only adverse events, because the greater frequency enables better quantitative
analysis and provides more information to process improvement programs. Many of the non-medical industries
have developed incident reporting systems that focus on near misses, provide incentives for voluntary reporting
(e.g., limited liability, anonymous reporting, and confidentiality), bolster accountability, and implement systems
for data collection, analysis, and improvement.
The key to encouraging reporting of near misses and adverse events is to lower the disincentives (costs) of
reporting for workers. When people self-report an error or an event, they should not be “rewarded” with
disciplinary action or dismissal (at least not the first time). Many organizations allow for anonymous reporting
via a website, which makes it possible for the person reporting the event to keep his or her identity confidential.
It is also important to make the process easy to use.
See error proofing, Joint Commission, sentinel event.
advertising allowance (ad allowance) – See trade promotion allowance.
affinity diagram – A “bottoms-up” group brainstorming methodology designed to help groups generate and
organize a large number of ideas into related groups; also known as the KJ Method and KJ Analysis.
Affinity diagrams are a simple yet powerful way to extract qualitative data from a group, help the group
cluster similar ideas, and develop a consensus view on a subject. For example, an affinity diagram might be used
to clarify the question, “What are the root causes of our quality problems?”
Despite the name, affinity diagrams are not really diagrams. Occasionally, circles are drawn around clusters
of similar concepts and lines or trees are drawn to connect similar clusters, but these drawings are not central to
the affinity diagramming methodology.
For example, affinity diagrams are often used with Quality Function Development (QFD) to sort and
organize ideas on customer needs. To do this, the facilitator instructs each individual in a group to identify all
known customer needs and write them down on 3M Post-it Notes, with each need on an individual piece of
paper. The group then shares their ideas one idea at a time, organizes the notes into clusters, develops a heading
for each cluster, and then votes to assign importance to each group.
The steps for creating an affinity diagram are essentially the same as the used in the nominal group technique
and the KJ Method. See the Nominal Group Technique (NGT) entry for the specific steps. An affinity diagram
example can be found at http://syque.com/quality_tools/tools/TOOLS04.htm (April 7, 2011).
See brainstorming, causal map, cluster analysis, Kepner-Tregoe Model, KJ Method, Nominal Group
Technique (NGT), parking lot, Quality Function Deployment (QFD), Root Cause Analysis (RCA).
aftermarket – An adjective used to describe parts or products that are purchased to repair or enhance a product.
For example, many people buy cases for their cell phones as an aftermarket accessory.
See service parts.
aggregate inventory management – The analysis of a large set of items in an inventory system with a focus on
lotsizing and safety stock policies to study the trade-offs between carrying cost and service levels.
Inventories with thousands of items are difficult to manage because of the amount of data involved.
Aggregate inventory management tools allow managers to group items and explore opportunities to reduce
inventory and improve service levels by controlling the target service level, carrying charge, and setup cost
parameters for each group of items. Aggregate inventory analysis typically applies economic order quantity
logic and safety stock equations in light of warehouse space limitations, market requirements, and company
strategies. Aggregate inventory analysis often results in a simultaneous reduction in overall inventory and
improvement in overall service levels. This is accomplished by reducing the safety stock inventory for those
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The Encyclopedia of Operations Management Page 24
items that have unnecessarily high safety stocks and by increasing the safety stock inventory for those items that
have poor service levels.
The Sales and Operations Plan (S&OP), sometimes called the Sales, Inventory, and Operations Plan
(Si&OP), is similar to the aggregate inventory plan. However, unlike aggregate inventory management, S&OP
rarely uses mathematical models and focuses on building consensus in the organization.
See Economic Order Quantity (EOQ), inventory management, inventory turnover, lotsizing methods,
production planning, safety stock, Sales & Operations Planning (S&OP), service level, unit of measure,
warehouse.
aggregate plan – See production planning.
aggregate production planning – See production planning.
agile manufacturing – A business strategy for developing the processes, tools, training, and culture for increasing
flexibility to respond to customer needs and market changes while still controlling quality and cost.
The terms agile manufacturing, time-based competition, mass customization, and lean are closely related.
Some key strategies for agile manufacturing include commonality, lean thinking, modular design, postponement,
setup time reduction, and virtual organizations.
See Goldman, Nagel, and Preiss (1995) and Metes, Gundry, and Bradish (1997) for books on the subject.
See commonality, lean thinking, mass customization, modular design (modularity), operations strategy,
postponement, Quick Response Manufacturing, resilience, scalability, setup time reduction methods, time-based
competition, virtual organization.
agile software development – A software development methodology that promotes quick development of small
parts of a project to ensure that the developers meet user requirements; also known as agile modeling.
Agile software development promotes iterative software development with high stakeholder involvement and
open collaboration throughout the life of a software development project. It uses small increments with minimal
planning. Agile attempts to find the smallest workable piece of functionality, deliver it quickly, and then
continue to improve it throughout the life of the project as directed by the user community. This helps reduce the
risk that the project will fail to meet user requirements.
In contrast, the waterfall scheduling requires “gates” (approvals) for each step of the development process:
requirements, analysis, design, coding, and testing. Progress is measured by adherence to the schedule. The
waterfall approach, therefore, is not nearly as iterative as the agile process.
See beta test, catchball, cross-functional team, Fagan Defect-Free Process, lean thinking, prototype, scrum,
sprint burndown chart, stakeholder, waterfall scheduling.
AGV – See Automated Guided Vehicle.
AHP – See Analytic Hierarchy Process.
AI – See artificial intelligence.
alpha test – See prototype.
alignment – The degree to which people and organizational units share the same goals.
Two or more people or organizational units are said to be “aligned” when they are working together toward
the same goals. They are said to be “misaligned” when they are working toward conflicting goals. Alignment is
usually driven by recognition and reward systems.
For example, sales organizations often forecast demand higher than the actual demand because sales people
tend to be much more concerned about running out of stock (and losing sales) than having too much inventory.
In other words, they are prone to “add safety stock to the forecast.” Given that sales organizations are typically
rewarded only based on sales, this bias is completely logical. However, this behavior is generally not aligned
with the overall objectives of the firm.
See balanced scorecard, forecast bias, hoshin planning.
algorithm – A formal procedure for solving a problem.
An algorithm is usually expressed as a series of steps and implemented in a computer program. For example,
some algorithms for solving the Traveling Salesperson Problem can require thousands of lines of computer code.
Some algorithms are designed to guarantee an optimal (mathematically best) solution and are said to be exact or
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Page 25 The Encyclopedia of Operations Management
optimal algorithms. Other algorithms, known as heuristics or heuristic algorithms, seek to find the optimal
solution, but do not guarantee that the optimal solution will be found.
See Advanced Planning and Scheduling (APS), Artificial Intelligence (AI), assignment problem, check digit,
cluster analysis, Economic Lot Scheduling Problem (ELSP), gamma function, heuristic, job shop scheduling,
knapsack problem, linear programming (LP), lotsizing methods, network optimization, operations research
(OR), optimization, transportation problem, Traveling Salesperson Problem (TSP), Wagner-Whitin lotsizing
algorithm.
alliance – A formal cooperative arrangement with another firm, which could be for almost any purpose, such as new
product development, sharing information, entering a new market, etc. Alliances usually involve sharing both
risks and rewards.
allocated inventory – A term used by manufacturing and distribution firms to describe the quantity of an item
reserved but not yet withdrawn or issued from stock; also called allocated stock, allocated, allocations,
committed inventory, committed quantity, quantity allocated, or reserved stock.
The inventory position does not count allocated inventory as available for sale. Allocations do not normally
specify which units will go to an order. However, firm allocations will assign specific units to specific orders.
See allocation, backorder, inventory position, issue, Materials Requirements Planning (MRP), on-hand
inventory.
allocation – (1) Inventory reserved for a customer. See allocated inventory. (2) A set of rules used to determine
what portion of available stock to provide to each customer when demand exceeds supply.
See allocated inventory.
all-time demand – The total of all future requirements (demand) for an item; also called all-time requirement,
lifetime requirement, and all-time demand.
All-time demand is the sum of the demand until the product termination date or until the end of time.
Organizations need to forecast the all-time demand for a product or component in the following situations:
Determine the lotsize for a final purchase (“final buy”) – When an item is near the end of its useful life
and the organization needs to make one last purchase, it needs to forecast the all-time demand. Future
purchases will be expensive due to the supplier’s cost of finding tooling, skills, and components.
Determine the lotsize for a final manufacturing lot – When an item is near the end of its useful life and the
manufacturer needs to make one last run of the item, it needs to forecast the lifetime demand. Future
manufacturing will likely be very expensive.
Identify the amount of inventory to scrap – When an item is near the end of its useful life, a forecast of the
all-time demand can be used to help determine how many units should be scrapped and how many should be
kept (the keep stock).
Identify when to discontinue an item – A forecast of the lifetime demand can help determine the date when
an item will be discontinued.
Several empirical studies, such as Hill, Giard, and Mabert (1989), have found that the demand during the
end-of-life phase of the product life cycle often decays geometrically. The geometric progression suggests that
the demand in any period is a constant times the demand in the previous period (i.e.,
1t t
d d
), where
0 1
. The beta parameter is called the common ratio, because
1 0 1
/ ... /
t t
d d d d
. Given that
period 0 had demand of d
0
units, the forecasted demand for period 1 is
1 0
f
d
and for period 2 is
2
2 1 0
f
f d
. In general, given that period 0 demand is d
0
units, the forecasted demand t periods into the
future is
0
T
T
f
d
.
The cumulative forecasted demand through the next T periods after period 0 is the sum of the finite
geometric progression
2
1 2 0 0 0
... ...
T
T T
F f f f d d d
. Multiplying both sides of this equation by
yields
2 3 1
0 0 0
...
T
T
F d d d
and then subtracting this new equation from the first one yields
1
0 0
T
T T
F F d d
, which simplifies to
0
(1 ) (1 )
T
T
F d
. Given that
1
, it is clear that