Motorola's cellular phones and wrisrwatch-sized pagers utilize cutting-edge technology and are manufactured to the world's most exacting standards. n the mid-1980s, Motorola was in trouble.1 Japanese companies such as NEC, Toshiba, and Hitachi were 1 gobbling up the company's markets in pagers, cellular phones, and semiconductor chips. Something had to be done, and fast. Motorola's management responded with a bold plan that included rapid product development, sharply upgraded quality, and a focused determination to reduce costs through fine-tuning manufacturing processes. A key element in this plan is a statistical way of measuring quality called "Six Sigma." Launched in 1987, Motorola's Six Sigma (99-99966% perfect) program seeks to slash defects clown to 3.4 per million components. To put that in perspective, in 1986 Motorola's components had 6,000 defects per million! By 1991, the company had improved 150-fold—to an impressive 40 per million. Yet when your goal is perfection, which it now is at Motorola, 40 defects per million is deemed to be still unacceptable. Today, Motorola is number one in semiconductor chip sales in the United States, number three in Southeast Asia, and number four worldwide. Its pocket-size cellular phone, MicroTac, has become the industry's top seller. And the company has achieved impressive improvements in production efficiency. It has cut the time it takes two-way radios to go from order to shipment from thirty days to three. Cellular phone development—from design to start of production—was slashed from three years to fifteen months. The assembly time for portable cellular phones has gone from forty hours to two! How did Motorola's management do it? There are no simple explanations. The company reassessed and reworked dozens of its operating practices. For example, it launched an education drive to reach all of its 105,000 employees. Motorola is now spending more than $60 million a year to teach its employees about global competition, risk taking, statistical process control, and techniques for reducing product cycle times. The company's CEO and all top executives began a series of regular visits to key customers in order to learn, first hand, how customers were reacting to Motorola's products. And structurally, Motorola has expanded spans of control, flattened the organization, integrated departments to break down artificial functional barriers, redesigned work around teams, and made quality the key component of performance reviews, compensation, and reward programs. Thi 1178 Q > 1179 CC 03 ^ 1180 \ V V \ \ \ \ \ \ \ 0 10 0 15 0 10 0 10 0 5 10 0 10 0 5 0 15 0 10 0 \ j 5 August 6 7 8 \ \ \ X \ \ \ \ \ \ 0 0 20 0 0 5 10 0 0 15 0 10 10 15 0 0 20 0 0 20 i i Total 100 Total 125 CHAPTER 21 Operations Management 639 material requirements planning (MRP) A system that dissects products into the materials and parts necessary for purchasing, inventorying, and priority-planning purposes. Material Requirements Planning After the specific products have been decided upon, each should be dissected to determine the precise materials and parts that it requires. Material requirements planning (MRP) is a system that uses this data for purchasing, inventorying, and priority-planning purposes. With the assistance of a computer, product design specifications can be used to identify all the materials and parts necessary to produce the product. By merging this information with computerized inventory records, management will know the quantities of each part in inventory and when each is likely to be used up. When lead times and safety stock requirements are established and entered into the computer, MRP ensures that the right materials are available when needed. Controlling Operations Once the operating system has been designed and implemented, its key elements must be monitored. The following discussion offers guidance for controlling costs, purchasing, maintenance, and quality. cost center A unit in which managers are held responsible for all associated costs. direct costs Costs incurred in proportion to the output of a particular good or service. indirect costs Costs that are largely unaffected by changes in output. Cost Control An automobile industry analyst has compared the U.S. and Japanese approaches to cost control: "The Japanese regard cost control as something you wake up every morning and do. Americans have always thought of it as a project. You cut costs 20 percent and say: 'Whew! That's over.' We can't afford to think that way anymore."20 U.S. managers have often treated cost control as an occasional crusade that is initiated and controlled by the accounting staff. Accountants establish cost standards per unit, and if deviations occur, management looks for the cause. Have material prices increased? Is labor being used efficiently? Do employees need additional training? However, as the previous annotation implies, cost control needs to play a central part in the design of an operating system, and it needs to be a continuing concern of every manager. Many organizations have adopted the cost-center approach to controlling costs. Work areas, departments, or plants are identified as distinct cost centers, and their managers are held responsible for the cost performance of these units. Any unit's total costs are made up of two types of costs: direct and indirect. Direct costs are costs incurred in proportion to the output of a particular good or service. Labor and materials typically fall into this category. On the other hand, indirect costs are largely unaffected by changes in output. Insurance expenses and the salaries of staff personnel are examples of typical indirect costs. This direct-indirect distinction is important. While cost-center managers are held responsible for all direct costs in their units, indirect costs are not necessarily within their control. However, because all costs are controllable at some level in the organization, top managers should identify where the control lies and hold lower managers accountable for costs under their control.21 Purchasing Control It has been said that human beings are what they eat. Metaphorically, the same applies to organizations. Their processes and outputs depend on the inputs they "eat." It's difficult to make quality products out of inferior inputs. Highly skilled leather workers need quality cowhides if they are going to produce high-quality wallets. Gas station operators depend on a regular and dependable inflow of certain 640 PÁRT SIX Controlling octane-rated gasolines from their suppliers in order to meet their customer's demands. If the gas isn't there, they can't sell it. If the gasoline is below the specified octane rating, customers may be dissatisifed and take their business somewhere else. Management must therefore monitor the delivery, performance, quality, quantity, and price of inputs from suppliers. Purchasing control seeks to ensure availability, acceptable quality, continued reliable sources, and, at the same time, reduced costs. What can managers do to facilitate control of inputs? They need to gather information on the dates and conditions in which supplies arrive. They need to gather data about the quality of supplies and the compatibility of those supplies with operations processes. Finally, they need to obtain data on supplier price performance. Are the prices of the delivered goods the same as those quoted when the order was placed? This information can be used to rate suppliers, identify problem suppliers, and guide management in choosing future suppliers. Trends can be detected. Suppliers can be evaluated, for instance, on responsiveness, service, reliability, and competitiveness. Building Close Links with Suppliers A rapidly growing trend in manufacturing is turning suppliers into partners.22 Instead of using ten or twelve vendors and forcing them to compete against each other to gain the firm's business, manufacturers are using only two or three vendors and working closely with them to improve efficiency and quality. Motorola, for instance, sends its design-and-manufacturing engineers to suppliers to help with any problem.23 Other firms now routinely send inspection teams to rate suppliers' operations. They're assessing these suppliers' manufacturing and delivery techniques, statistical process controls that identify causes of defects, and ability to handle data electronically. Companies in the United States and around the world are doing what has long been a tradition in Japan—that is, they are developing long-term relationships with suppliers. As collaborators and partners, rather than adversaries, firms are finding that they can achieve better quality of inputs, fewer defects, and lower costs. Furthermore, when problems arise with suppliers, open communication channels facilitate quick resolutions. economic order quantity model (EOQ) A technique for balancing purchase, ordering, carrying, and stockout costs to derive the optimum quantity for a purchase order. Economic Order Quantity Model One of the best-known techniques for mathematically deriving the optimum quantity for a purchase order is the economic order quantity model (EOQ). The EOQ model seeks to balance four costs involved in ordering and carrying inventory: the purchase costs (purchase price plus delivery charges less discounts); the ordering costs (paperwork, follow-up, inspection when the item arrives, and other processing costs); carrying costs (money tied up in inventory, storage, insurance, taxes, and so forth); and stockout costs (profits forgone from orders lost, the cost of reestablishing goodwill, and additional expenses incurred to expedite late shipments). The objective of the EOQ model, as shown in Figure 21-6, is to minimize the total costs of two of these four costs—carrying costs and ordering costs. As the amount ordered gets larger and larger, average inventory increases and so do carrying costs. But placing larger orders means fewer orders and thus lowers ordering costs. For example, if annual demand for an inventory item is 26,000 units, and we order 500 each time, we will place 52 (26,000/500) orders per year. This gives us an average inventory of 250 (500/2) units. However, if the order quantity is increased to 2,000 units, there will be fewer orders placed, 13 (26,000/2,000), but the average inventory on hand will increase to 1,000 (2,000/2) units. Thus as holding costs go up, ordering costs go down, and vice versa. As depicted in Figure 21-6, the lowest total cost—and thus the most economic order quantity—is reached at the lowest point on the total FIGURE 21-6 Determining the Most Economic Order Quantity CHAPTER 21 Operations Management 641 N Carrying costs Ordering costs ŕ Most economic order size X Quantity of order cost curve. That is the point at which ordering cost equals carrying cost. It is called the economic order quantity. To compute this optimal order quantity, you need the following data: forecasted demand for the item during the period (D), the cost of placing each order (OCT), the value or purchase price of the item ( V), and the carrying cost of maintaining the total inventoiy expressed as a percentage (CO,, We can now present the standard EOQ formula and demonstrate its use: EOQ 2 x D x OCT Vx CC As an example, Playback Electronics, a retailer of high-quality sound and video equipment, is tiying to ascertain its economic order quantities. The item in question is a Yamaha compact sound system. The company forecasts sales of 4,000 units a year. Purchasing believes that the cost of each system will be $500. The accountants estimate the cost of placing an order for the sound system at $75 per order and annual insurance, taxes, and other carrying costs at 20 percent of the system's worth. Using the EOQ formula and the information above, we find EOQ = 2 x 4,000 x 75 500 x 0.20 = V6.000 = 77.45 units s 78 units The inventory model suggests to Playback's management that it is most economic to order in quantities or lots of approximately 78 units; stated differently, they should order about 52 (4,000/78) times a year. What would happen if Yamaha offered Playback a 5 percent discount on purchases if Playback buys in minimum quantitites of 120 units? Should Playback's management now purchase in quantities of 78 or 120? Without the discount, and therefore ordering 78 each time, Playback's annual costs for this sound system would be as follows: 642 PART SIX Controlling fixed-point reordering system A system that "flags" the fact that inventory needs to be replenished when it reaches a certain level. Purchase cost: $500 x 4,000 78 Carrying cost: y x $500 x 0.20 $2,000,000 3,900 (average inventory units) x (value of item) x (percentage) Ordering cost: 52 x 75 = 3,900 (Number of orders) x (cost to place order) -------------- Total cost: $2,007,800 With the 5 percent discount for ordering 120 units, the item cost would be $475. The annual inventory costs would be as follows: Purchase cost: $475 x 4,000 120 2 Carrying cost: -^ x 475 x 0.20 = = $1,900,000 5,700 _ A . 4,000 ^c Ordering cost: ___x 75 120 2,500 Total cost: $1,908,200 These computations suggest to Playback's management that it should take the 5 percent discount. Even though it has to stock larger quantities, the savings are almost $100,000 a year. A word of caution should be added. The EOQ model assumes that demand and lead time are known and constant. If these conditions cannot be met, the model should not be used. For example, it generally should not be used for manufactured component inventory, because the components are taken out of stock all at once or in lumps or in lots rather than at a constant rate. Does this mean that the EOQ model is useless when demand is variable? No. The model can still be of some use in demonstrating trade-offs in costs and the need to control lot sizes. However, there are more sophisticated lot-sizing models for handling lumpy demand and special situations. Inventory Ordering Systems In many checkbooks, after you use up about 95 percent of the checks, you find a reorder form included among the few that remain; it reminds you that it's time to reorder. This is an example of a fixed-point reordering system. At some preestablished point in the operations process, the system is designed to "flag" the fact that the inventory needs to be replenished. The flag is triggered when the inventory reaches a certain point or level. The goal of a fixed-point reordering system is to minimize inventory carrying costs and to ensure a reasonable level of customer service (limiting the probability of an item running out—a stockoui). Therefore the reorder point should be established to equate the time remaining before a stockout and the lead time to receive delivery of the reordered quantity. In such cases, the newly ordered items would arrive at the same time as the last item in inventory was used up. More realistically, management does not usually allow the inventory to fall below some safety stock level. (See Figure 21-7). By using certain statistical procedures, one can set a reorder point at a level that gives an organization enough inventory to get through the lead-time period and some reasonable insurance against a stockout. This buffer, or safety stock, gives protection against greater usage than expected during the lead time or an unexpected delay in receiving new stock. As a simple example, to determine a check reorder point let's assume that the lead time averages three weeks and that we write about twenty checks a week. We would need sixty checks to get us through a "normal" reordering lead time. If we feel, on the basis of history, that a one-week safety stock would be sufficient to get us through most lead-time periods, the order should be placed when there are 80 (60 + 20) checks left. This is the reorder point. Another word of caution: The more safety stock, CHAPTER 21 Operafions Management 643 FIGURE 21-7 Inventory Cycle with Safety Stock 300 250 200 150 o ■£ loo a 50 Reorder \ points. i i' ' i i i i i i i..............i i i i i i i i i i J_L 12 16 20 24 28 32 36 40 Time (in weeks) 44 48 52 fixed-interval reordering system A system that uses time as the determining factor for reviewing and reordering inventoiy items. the less the risk of stockout. But the additional inventory will add to the carrying costs. Thus we again face a cost-benefit decision. At times it may be prudent (cost-wise) to run out of stock. One of the most primitive but certainly effective uses of the fixed-point reordering system is to keep the item—for example, pens and duplicating paper in an office or boxes of shoes in a retail shoe store—in two separate containers. Inventory is drawn from one until it is empty. At that point, a reorder is placed, and items are drawn from the second container. If demand for an item has been estimated properly, the replacement order to replenish the stock should arrive before the second container is used up. Another, more recent, version of the fixed-point reorder system relies on computer control. Sales are automatically recorded by a central computer that has been programmed to initiate a purchase order for an item when its inventory reaches some critical fixed point. A number of retail stores have such systems. The cash registers are actually computers, and each sale automatically adjusts the store's inventory record. When the inventory of an item hits the critical point, the computer tells management to reorder or, in some systems, actually prints out the purchase order requisition. Another common inventory system is the fixed-interval reordering system. The fixed-interval system uses time as the determining factor for inventory control. At a predetermined time—say, once a week or every ninety days—the inventoiy is counted, and an order is placed for the number of items necessary to bring the inventory back to the desired level. The desired level is established so that if demand and ordering lead time are average, consumption will draw the inventoiy down to zero (or some safety lead time can be added) just as the next order arrives. This system may have some transportation economies and quantity discount economies over the fixed-point system. For example, it may allow us to consolidate orders from one supplier if we review all the items we purchase from this source at the same time. This is not possible in the other system. In the 1800s, economist Vilfredo Pareto found that 80 percent of the wealth was controlled by only 20 percent of the population. College instructors typically find that a few students cause most of their problems, and students have probably similarly found that a few instructors cause most of their problems. This concept, the vital few and the trivial many, can be applied to inventory control. 644 PÁRT SIX Controlling It might take a men's store three weeks to get an order for Levis 501 jeans filled by the manufacturer. If the store typically sells ten pairs of size 30-30 jeans a week, the store manager could set up two containers, keep thirty pairs of jeans in the second container, and initiate reorders whenever the first container is empty. This would be an application of the fixed-point reordering system. ABC system A priority system for monitoring inventory items. It is not unusual for a company to have thousands of items in inventory. However, evidence indicates that roughly 10 percent of the items in most organizations' inventory account for 50 percent of the annual dollar inventoiy value. Another 20 percent of the items account for 30 percent of the value. The remaining 70 percent of the items appear to account for only 20 percent of the value. These have been labeled as A, B, and C categories, respectively. Thus we have the name ABC system. (See Figure 21-8.) Cost-benefit analysis would justify that A items receive the tightest control, B items moderate control, and C items the least control. This can be accomplished because there are so few A items and they represent a large dollar investment. Similarly, there are so many C items, but so little dollar investment, that tight control would not be justified. A items, for example, might be monitored weekly, B items monthly, and C items quarterly because they account for so little dollar value. Or C items might be controlled by using a simple form of order point. preventive maintenance Maintenance performed before a breakdown occurs. remedial maintenance Maintenance that calls for the overhaul, replacement, or repair of equipment when it breaks down. conditional maintenance Maintenance that calls for an overhaul or repair in response to an inspection. Maintenance Control Delivering goods or services in an efficient and effective manner requires operating systems with high equipment utilization and a minimum amount of downtime. Therefore managers need to be concerned with maintenance control. The importance of maintenance control, however, depends on the process technology used. For example, if a standardized assembly-line process breaks down, it can affect hundreds of employees. On an automobile or dishwasher assembly line, it's not unusual for a serious breakdown on one machine to bring an entire plant to a halt. In contrast, most systems using more general-purpose and redundant processes have less interdependency between activities, therefore a machine breakdown is likely to have less of an impact. Nevertheless, an equipment breakdown—like an inventory stockout—may mean higher costs, delayed deliveries, or lost sales. There are three approaches to maintenance control.24 Preventive maintenance is performed before a breakdown occurs. Remedial maintenance is a complete overhaul, replacement, or repair of the equipment when it breaks down. Conditional maintenance refers to overhaul or repair in response to an inspection and CHAPTER 21 Operations Management 645 FIGURE 21-8 Example of an ABC Inventory System 100 10 20 30 40 50 60 70 Total number of items (%) 80 90 100 measurement of the equipment's state. When American Airlines tears down its planes' engines every 1,000 hours, it is engaging in preventive maintenance. When it inspects the planes' tires every twenty-four hours and changes them when conditions warrant it, it is performing conditional maintenance. Finally, if American Airlines' operations policy is to repair lavatory equipment on board its planes only after the equipment breaks down, then it is using remedial maintenance practices. The American Airlines example points out that the type of maintenance control depends on the costs of a breakdown. The greater the cost in terms of money, time, liability, and goodwill, the greater the benefits from preventive maintenance. That is, the benefits can justify the costs. Maintenance control should also be considered in the design of equipment. If downtime is highly inconvenient or costly, reliability can be increased by designing redundancy into the equipment. Nuclear power plants, for example, have elaborate backup systems built in. Similarly, equipment can be designed to facilitate fast or low-cost maintenance. Equipment that has fewer parts has fewer things to go wrong. High-failure items can also be placed in locations that are easily accessible or in independent modular units that can be quickly removed and replaced. Cable television operators follow these guidelines. Breakdowns infuriate customers, so when they occur management wants to be able to correct them quickly. Speed is facilitated by centralizing equipment in easy-access locations and making extensive use of modular units. If a piece of equipment fails, the whole module of which it is a part can be pulled or replaced in just a few minutes. Television service is resumed rapidly, and the pulled modular unit can be taken to the shop and repaired without time pressures. 646 PART SIX Controlling acceptance sampling A quality control procedure in which a sample is taken and a decision to accept or reject a whole lot is based on a calculation of sample risk error. process control A quality control procedure in which sampling is done during the transformation process to determine whether the process itself is under control. attribute sampling A quality control technique that classifies items as acceptable or unacceptable on the basis of a comparison to a standard. variable sampling A quality control technique in which a measurement is taken to determine how much an item varies from the standard. Quality Control We've discussed Total Quality Management throughout this book. We've described it as a comprehensive, customer-focused program to continuously improve the quality of the organization's processes, products, and services. In this section, we present the more limited and traditional approach to quality by focusing on its control. While TQM emphasizes actions to prevent mistakes, quality control emphasizes identifying mistakes that may have already occurred. So what do we mean by quality control? It refers to monitoring quality—weight, strength, consistency, color, taste, reliability, finish, or any one of a myriad of characteristics—to ensure that it meets some preestablished standard. Quality control will probably be needed at one or more points beginning with the receipt of inputs. It will continue with work in process and all steps up to the final product. Assessments at intermediate stages of the transformation process typically are part of quality control. Early detection of a defective part or process can save the cost of further work on the item. In imposing quality control, managers should begin by asking whether they expect to examine 100 percent of the items or whether a sample can be used. The inspection of each and every item makes sense if the cost of continuous evaluation is very low or if the consequences of a statistical error are very high (as in the manufacture of a drug used in open-heart surgery). Statistical samples are usually less costly, and sometimes they are the only viable option. For example, if the quality test destroys the product— as happens with bombs or flash bulbs—then sampling has to be utilized. There are two categories of statistical quality control procedures: acceptance sampling and process control. Acceptance sampling refers to the evaluation of purchased or manufactured materials or products that already exist. A sample is taken, then the decision to accept or reject the whole lot is based on a calculation of sample risk error. Process control refers to sampling items during the transformation process to see whether the transformation process itself is under control. For example, a process control procedure at Coca-Cola would be able to detect if a bottling machine was out of adjustment because it was filling twenty-six ounce bottles with only twenty-three ounces of soda. Managers could then stop the process and readjust the machine. A final consideration in quality control relates to whether the test is done by examining attributes or variables. The inspection and classification of items as acceptable or unacceptable is called attribute sampling. This is the way paint color and potato chips are evaluated. An inspector compares the items against some standard and rates their quality as acceptable or not acceptable. In contrast, variable sampling involves taking a measurement to determine how much an item varies from the standard. It involves a range rather than a dichotomy. Management typically identifies the standard and an acceptable deviation. Any sample that measures within the range is accepted, and those outside are rejected. Inland Steel might test some steel bar to see whether the average breaking strength is between 120 and 140 pounds per square inch. If it is not, the cause is investigated, and corrective action is initiated. Current Issues in Operations Management Capitalizing on new technology! Successfully implementing TQM! Reducing inventories! Utilizing flexibility and speed as competitive advantages! These issues currently top management's list for improving operations productivity. Because managers consider them to be essential for making products and services competitive in world markets, we review each of them in this section. CHAPTER 21 Operations Management 647 computer-integrated manufacturing (CIM) Combines the organization's strategic business plan and manufacturing plan with state-of-the-art computer applications. Technology and Product Development Today's competitive marketplace has put tremendous pressure on manufacturers to deliver products with high quality and low cost and to significantly reduce time to market. Even if you have the proverbial "better mousetrap," customers won't be beating a path to your door if your competitor develops a mousetrap that is almost as good but is in stores a year or two ahead of yours. Two key ingredients to successfully accelerating the product-development process are organizational commitment to improving the development cycle and investment in the technology to make it happen. One of the most effective tools that manufacturers have in meeting the time-to-market challenge is computer-integrated manufacturing (CIM). This brings together the organization's stratgic business plan and manufacturing plan with state-of-the-art computer applications.25 The technologies of computer-aided design (CAD) and computer-aided manufacturing (CAM) typically are the basis for CIM. CAD essentially has made manual drafting obsolete. Using computers to visually display graphics, CAD enables engineers to develop new product designs in about half the time required for manual drafting. Eagle Engine Manufacturing, for instance, used its CAD system to design a new race-car engine in nine months instead of the traditional two-plus years.26 CAM relies on computers to guide and control the manufacturing process. Numerically controlled programs can direct machines to cut patterns, shape parts, assemble units, and perform other complicated tasks. In the not-too-distant future, CIM will permit the entire manufacturing process to be viewed as a continuum. Every step—from order entry to order shipping—will be expressed as data and computerized. It will allow management to respond rapidly to changing markets. It will give firms the ability to test hundreds of design changes in hours rather than months and then provide the flexibility to produce multiple variations of products efficiently in lot sizes as small as one or two. When manufacturing is computer-integrated, for example, it is no longer necessary to stop the assembly line and spend valuable time changing dies and equipment in order to produce a new or nonstandard product. A single change in the computer program—which can be done in seconds—immediately realigns the manufacturing process. In the textile industry, computer-aided design (CAD) allows manufacturers to create and view cloth patterns in a fraction of the time it would have taken to prepare a preproduction sample for customer inspection. 648 PART SIX Controlling mmmwšä: -'Wr-^ Small is Beautiful "Bigger is better" was the rallying cry of management in the 1970s and 1980s. In the 1990s, that has been replaced by "small is beautiful."27 Managers long assumed that increases in size led to lower costs. This is what economists call "economies of scale." Larger size, the theory states, allows for an organization to distribute its fixed costs over more units of production, hence larger organizations have lower average costs. This belief led to the creation of large banks, huge steel mills, one-stop-shopping retail stores, and even mega-universities. But in recent years, something seemed to go wrong with the economies-of-scale argument. Big banks such as Citicorp and BankAmerica have been outperformed by smaller regional banks. Mini steel mills, run by companies such as Nucor and Chaparral, have become more efficient than the big ones operated by Bethlehem and U.S. Steel. Small niche retailers are grabbing market share from Sears and J.C. Penneys. And taxpayers are increasingly questioning whether small state colleges aren't doing a better job teaching students than the large research universities. Why are smaller organizations increasingly able to outperform their larger rivals? They're flatter and often have less overhead. Smaller organizations are often more responsive and can react more quickly to changes in the market. Because they target narrower market segments, they can gain economies through specialization. Most importantly, however, technology now allows the little guys to do what only the big guys could do before. For an investment of less than $25,000, small firms can do computer-aided design. Similarly, use of computer-linked networks allows small companies to instantaneously coordinate with outside suppliers who provide the small firm with design, manufacturing, and sales services. Implementing TQM Successfully The list of organizations that have implemented TQM is long and impressive. It includes firms such as Motorola, Federal Express, Xerox, and IBM. In addition, public-sector organizations have recently gotten the message. Beginning with the class of '94, each high school graduate of the Los Angeles Unified School District will come with a written warranty assuring companies that he or she has the basic skills needed to enter the work force.28 If an employer is not satisfied, the school district will provide remedial training at the district's expense. The governor of Ohio has created a statewide quality council to put TQM concepts to work throughout all state agencies.29 Even the U.S. federal government is beginning to implement TQM.30 A recent General Accounting Office study reports that 68 percent of the government's 2800 installations now use TQM. Unfortunately, not all TQM efforts have been successful. A study of 584 companies in the United States, Canada, Germany, and Japan provides some important insights into factors that may hinder TQM effectiveness.31 Consistent with the contingency approach to management, the survey found that the successful application of certain TQM concepts—including teams, benchmarking, training efforts, and empowering employees—depends on the company's current performance. The following suggestions highlight the study's recommendations for lower-, medium-, and higher-performing firms:32 CHAPTER 21 Operations Management 649 The Stew Leonards, Jr. and Sr., understand that quality begins and ends with satisfying the customer. This five-ton piece of granite, with the company's motto, stands outside their monstrous Norwalk, Connecticut, food store. By listening to the customer, the Leonards have sales of $115 million a year and employ 650 people at this one store alone. For lower-Performing Firms Increase training of all types. Emphasize teams across and within departments. The formation of teams to help identify and solve small problems can help lower-performing companies as they begin their quality-improvement efforts. But teams lose their value and can distract from broader strategic issues once corporate performance improves. Don't use benchmarking because it tends to create unreasonable goals and thus can frustrate quality efforts. And don't empower employees yet because they usually don't have the training to make empowerment work. For Medium-Performing Firms focus training on problem solving. Simplify corporate processes such as design and For Higher-Performing Firms Use benchmarking to identify new processes, product, and services. Encourage companywide quality meetings. Actively disburse decision-making power by empowering employees. Don't increase departmental teams because this tends to inhibit cooperation across functions. While the above contingency suggestions provide important limitations for the implementation of TQM, the survey also found some practices that tended to be universally effective. These included explaining the organization's strategy to all employees, customers, and suppliers; improving and simplifying operations and development processes; and shortening the time it takes from the design to the delivery of a product. just-in-time (JIT) inventory system A system in which inventory items arrive when they are needed in the production process instead of being stored in stock. kanban The Japanese name for a just-in-time inventory system. Reducing Inventories A major portion of many companies' assets is tied up in inventories. For instance, General Electric recently reported its inventory assets at $7.4 billion and Boeing's inventory exceeds $13 billion.33 Firms that can significantly cut their inventories of raw materials and of in-process and finished goods can reduce costs and improve their efficiency. This fact has not been lost on management. In recent years, U.S. managers have been seeking ways to manage inventories better. On the output side, managers have been improving the information link between internal manufacturing schedules and forecasted customer demand. Marketing personnel are being increasingly relied on to provide accurate, up-to-date information on future sales. This is then being coordinated with operating systems data to get a better match between what is produced and what the customers want. Manufacturing resource planning systems are particularly well suited to this function. On the input side, they have been experimenting with another technique widely used in Japan: just-in-time (JIT) inventory systems.34 This is a system in which inventory items arrive when they are needed in the production process instead of being stored in stock. In Japan, JIT systems are called kanban. The derivation of the word gets to the essence of the just-in-time concept. Kanban is Japanese for "card" or "sign." Japanese suppliers ship parts to manufacturers in containers. Each container has a card, or kanban, slipped into a side pocket. When a production worker opens a container,'he or she takes out the card and sends it back to the supplier. That initiates the shipping of a second container of parts that, ideally, reaches the production worker just as the last part in the first container is being used up. The ultimate goal of a JIT inventory system is to eliminate raw material inventories by coordinating production and supply deliveries precisely. When the system works as designed, it results in a number of positive benefits for a manufacturer: reduced inventories, reduced setup time, better work flow, shorter manufacturing time, less space consumption, and even higher quality. Of course, suppliers who can be depended on to deliver quality 650 PART SIX Controlling mü» . , JIT: Cost-Savings for Whom? Just-m-time inventory systems reduce costs and increase efficiency for organiza-I^K'^ŠÁI-tíf.^^' < tions that apply them. But what about the effect of these systems on suppliers? If _ , Firestone builds a tire plant in the Detroit area to serve Chrysler better and to per- '2\\ / / ' mit just-in-time deliveries to Chrysler, does Firestone benefit? Not if it has to ,,\ /yý^/f. ! stockpile an extensive tire inventory to meet Chrysler's needs. ,v /' ' ^' ///',-, , An often overlooked side-effect of a JIT system is the burden it can place on jV ' ', "'/ suppliers. At the extreme, it can be argued that a JIT system is a self-serving . , ",' device that merely pushes the costs and inefficiencies of carrying inventory back . x , onto suppliers. If Chrysler's management demands that, to keep Chrysler as a cus- V,/ „ , , v tomer, Firestone must be able to make daily deliveries of precisely the number ',' ' , and type of tires that Chrysler needs for each day's production, what options does '-/-', '- ^'\ Firestone have? It can impose JIT requirements on its own suppliers or it can man- ufacture for inventory and draw on those inventories, as needed, to meet Chrysler's demands. One way out of this conundrum is for all firms in the supply chain to practice JIT. But that's unusual. In practice, companies that use JIT merely load their inventory problems onto the backs of their suppliers. Is that ethical? Are large companies that practice JIT abusing their power by exploiting suppliers who want and need their business? What do you think? materials on time must be found. Because there are no inventories, there is no slack in the system to absorb defective materials or delays in shipment. An illustration of JIT s benefits can be seen at Walgreen Laboratories, a manufacturer of health and beauty products for the Walgreen drugstore chain.35 The firm calculated the cost of carrying and managing its inventory at about 25 percent of its total inventory costs. By introducing JIT, it cut its inventory levels by about $8 million. Of course, these benefits required additional work on the part of Walgreen's management. For instance, to allow its suppliers to plan their own production schedules, Walgreen had to project its supply needs six months in advance and commit itself to firm delivery dates weeks ahead of time. A JIT system isn't for every manufacturer.36 It requires that suppliers be located in close proximity to the manufacturer's production facility and that suppliers be capable of providing consistently defect-free materials. Such a system also requires reliable transportation links between suppliers and manufacturer; efficient receiving, handling, and distribution of materials; and precisely tuned production planning. Where these conditions can be met, JIT can help management to reduce inventory costs. Flexibility as a Competitive Advantage In today's changing world of business, firms that can't adjust rapidly won't survive. This is putting a premium on developing manufacturing flexibility.37 As a result, many organizations are developing flexible manufacturing systems.38 They look like something out of a science-fiction movie in which remote-controlled carts deliver a basic casting to a computerized machining center. With CHAPTER 21 Operations Management 651 robots positioning and repositioning the casting, the machining center calls upon its hundreds of tools to perform varying operations that turn the casting into a finished part. Completed parts, each a bit different from the others, are finished at a rate of one every ninety seconds. Neither skilled machinists nor conventional machine tools are used. Nor are there any costly delays for changing dies or tools in this factory. A single machine can make dozens or even hundreds of different parts in any order management wants. The unique characteristic of flexible manufacturing systems is that by integrating computer-aided design, engineering, and manufacturing, they can produce low-volume, custom products at a cost comparable to what had been possible only through mass production. Flexible manufacturing systems are repealing the laws of economies of scale. Management no longer has to mass produce thousands of identical products to achieve low per-unit production costs. With a flexible manufacturing system, when management wants to produce a new part, it doesn't change machines—it just changes the computer program. Some automated plants can build a wide variety of flawless products and switch from one product to another on cue from a central computer. John Deere, for instance, has a $1.5 billion automated factoiy that can turn out ten basic tractor models with as many as 3,000 options without plant shutdowns for retooling. These new flexible-factories are also proving to be cost effective. IBM's automated plant in Austin, Texas, can produce a laptop computer in less than two minutes without the help of a single worker. IBM's management has found the automated plant to be 75 percent more efficient than a conventional system.39 National Bicycle Industrial Co., which sells its bikes under the Panasonic brand, uses flexible manufacturing to produce any of 11,231,862 variations on eighteen models of racing, road, and mountain bikes in 199 color patterns and an almost unlimited number of sizes.40 Speed as a Competitive Advantage For years we have heard that on the highway, speed kills. Managers are now learning that the same principle works in business: Speed kills, only this time it's the competition's speed.41 By quickly developing, making, and distributing products and services, organizations can gain a competitive advantage. Just as customers may select one organization over another because its products or services are less expensive, uniquely designed, or of superior quality, customers also choose organizations because they can get the product or service they want fast. In essence, Domino's has created a billion-dollar business by using speed as a competitive advantage, guaranteeing delivery of its pizzas in thirty minutes or less. A number of companies have made incredible improvements in the time it takes them to design and produce their products.42 AT&T used to need two years to design a new phone. Now it does the job in one year. General Electric used to take three weeks after an order to deliver a custom-made industrial circuit-breaker box. They've cut that down to three days. Kingston Technology Corp., founded in 1987, has become one of the fastest-growing companies in America by capitalizing on speed. The firm designs and manufactures memory upgrades for computers. In a market where customers want their upgrades yesterday, Kingston has achieved a remarkable 45 percent market share by being able to fill orders the same day they are received while its competitors continue to take four to six weeks. These firms and many others are cutting red tape; flattening their organization structures; adding cross-functional teams; redesigning their distribution chains; and using JIT, CIM, and flexible manufacturing systems to speed up their operations and put increased pressure on their competitors. Ó52 PART SIX Controlling Summary This summary is organized 1. The transformation process is the essence of operations management. Operations by the chapter-opening learn- management takes inputs, including people and materials, and then acts on them ing objectives found on by transforming them into finished goods and services. This applies in service page 625. organizations as well as in manufacturing firms. 2. United States managers are increasingly concerned with improving productivity. How people are integrated into the overall operations system determines how productive an organization will be. Factors such as the size and layout of operating facilities, capacity utilization, inventory usage, and maintenance controls are operations management concepts that have a critical bearing on overall productivity. 3. A manufacturing focus to strategy pushes important production decisions to the top of the organization. It recognizes that an organization's overall strategy should directly reflect its manufacturing capabilities and limitations and should include operations objectives and strategies. 4. Four key decisions—capacity, location, process, and layout—provide the long-term strategic direction for operations planning. They determine the proper size of an operating system, the location of physical facilities, the best methods for transforming inputs into outputs, and the most efficient layout of equipment and work stations. 5. The three decisions that make up the tactical operations plans are the aggregate plan, the master schedule, and the material requirements plan. The aggregate plan determines the overall production plan, the master schedule determines how many units of each product will be produced, and the material requirements plan determines what materials are needed to satisfy the master schedule. 6. The economic order quantity model balances the costs of ordering and carrying inventory. To calculate the optimal order quantity, you need to know the forecasted demand for an item during a specific period, the cost of placing each order, the value or purchase price of the item, and the carrying cost of maintaining the total inventory. 7. The three types of maintenance control are preventive, remedial, and conditional. Preventive maintenance is performed before a breakdown occurs. Remedial maintenance is performed when the equipment breaks down. Conditional maintenance is a response to an inspection. 8. Evidence demonstrates that the application of certain TQM concepts should reflect whether the organization is a low, medium, or high performer. Low-performing firms, for instance, should emphasize team creation and downplay benchmarking and empowerment. High-performing firms, on the other hand, should encourage benchmarking and empowerment and deemphasize departmental teams. 9. Just-in-time inventory systems seek to reduce inventories, reduce setup time, improve work flow, cut manufacturing time, reduce space consumption, and raise the quality of production by coordinating the arrival of inventory items to their demand in the production process. However, they require precise coordination; if this is lacking, they can threaten the smooth, continuous operation of a production system. 10. A flexible manufacturing system can give an organization a competitive advantage by allowing it to produce a wider variety of products, at a lower cost, and in considerably less time than the competition. CHAPTER 21 Operations Management 653 Review Questions 1. What is the operations system? 2. What does W. Edwards Deming have to say about increasing productivity? 3- What is the role of critical contingencies in facilities location planning? 4. Contrast process, product, and fixed-position layouts. 5. How is cost control transferred from accountants to managers? 6. Contrast acceptance sampling and process control. 7. What is the ABC system? Why is it a contingency approach to inventory control? 8. How do CAD and CAM speed the product-development process? 9. Explain why benchmarking is inappropriate in low-performing firms. 10. What TQM practices are universally effective despite contingencies? Discussion Questions 1. How might operations management apply to other managerial functions besides control? Discuss. 2. Demonstrate how capacity, facilities location, process, and facilities layout planning concepts can apply to a service organization. 3- Would you see any potential problems with implementing both CIM and TQM in the same organization? Discuss. 4. We have seen that increasing productivity is a concern of service organizations, but what about individuals? In what ways could you improve your own productivity? SELF-ASSESSMENT EXERCISE How's Your Knowledge of Japanese Manufacturing? The following questions test your awareness of Japanese business and manufacturing practices: 1. In the typical large Japanese company, how many employee suggestions for improvement of operations would there be in a year? a. 1000 - d. a million b. 10,000 e. 10 million c. 100,000 2. Compared to the United States, Japan has_______as many industrial robots in operation. a. half d. five times b. the same number e. ten times c. twice 654 PÁRT SIX Controlling 3. The term kaizen refers to: a. an inventory control system b. continuous improvement c. highest quality d. a decision-making process e. ethnocentric policies 4. The term kanban refers to: a. an inventory control system b. continuous improvement c. highest quality d. a decision-making process e. ethnocentric policies 5. Which group is discriminated against in Japanese companies? a. Younger workers b. All workers with children c. Elderly workers d. Women e. None of the above 6. A fishbone diagram most directly addresses: a. causes of problems b. cost controls c. scrap reduction planning d. process planning e. facilities layout planning 7. The typical career path in a Japanese manufacturing company emphasizes: a. finance experience d. any specialization b. manufacturing experience e. generalization c. sales experience 8. A new hiree in a Japanese company would typically expect to receive his or her first promotion in: a. six months d. five years b. one year e. ten years c. two years 9. Which one of the following best describes Japanese decision making? a. the manager makes the decision and tells his subordinates b. the manager makes the decision and then gets input from all employees affected by the decision before implementing it c. the manager asks for input from all affected employees before making a decision d. the manager and his employees share in making the decision equally e. the manager delegates the decision completely to his or her employees 10. Which of the following statements is true about the Japanese government's role in business: a. it pursues a laissez faire policy b. it owns most of the major industries c. it provides subsidies and incentives to certain firms d. the key executives in most Japanese corporations are political appointees e. it regularly appropriates the assets of companies that make too much profit Turn to page SK-8 for scoring directions and key. CHAPTER 21 Operations Management 655 To: Ron Crawford, Director of Operations From: Anne Mendales, President Subject: Applying TQM to our travel business I just finished reading a fascinating book, Total Quality Management in the Department of Defense (by Jack Strickland and Peter Angiola; U.S. Government Printing Office, 1989). It made me realize that everything we read about TQM in manufacturing industries such as autos and computers should be applicable to service businesses like ours. As you know, we've gone from one small agency to five offices and nearly forty employees by responding to the needs of the business traveler. However, in the last six months, we've lost several valuable clients to more aggressive competitors. Our competition, especially Chapman Travel and the American Express agency, are doing a better job at meeting customers' needs. TQM might be able to help us. I'd like you to think about how we might be able to implement TQM in our travel agencies. Please prepare an analysis describing how we could apply the concepts of continuous process improvement, customer focus, benchmarking, training, teamwork, and empowerment to our travel business to make us more competitive. This is a fictionalized account of a potentially real management issue. It is meant for academic purposes only and is not meani '.<> reflect either positively or negatively on Westwood Travel Services or any of its employees.