1 OMG Operations Management Spring 1997 CLASS 1: INTRODUCTION Harry Groenevelt

2 Agenda What is Operations Management? Why do we study it? Getting started: Process Analysis –process diagrams –first definitions and a fundamental relationship OMG 402 format and logistics

3 INPUTS: -Labor -Management -Equipment -Materials -Energy -Information -Customer Participation PRODUCTION PROCESS OUTPUTS: -Physical Products -Services What is Operations Management? Definition 1: the study of processes which convert inputs into outputs

4 What is Operations Management? Definition 2: A set of quantitative tools to –purchase and manage materials –schedule resources –distribute goods –design production processes –locate facilities –monitor and control quality –and more...

5 What is Operations Management? Definition 3: A set of quantitative and qualitative tools to –understand the ‘physics’ of service and manufacturing systems –measure operational performance –manage for competitiveness (cost, quality, flexibility, time)

6 Why Do We Need to Understand Operations Management? Because the function of operations is to implement firm strategy. Example 1: The Custom Foot shoe store, “custom footwear at off-the-rack prices” (see NYT article, 3/20/96) An example of mass customization.

7 in-store computer scans customer foot data transmitted to factories in Italy shoe produced to specifications customer receives shoe within a guaranteed time. shoes delivered directly to customer Why Do We Need to Understand Operations Management? Example: Custom Foot

8 Operations at Custom Foot A burning question for investors, executives and managers of Custom Foot: What should be the promised lead time from customer order to delivery?

9 Firm Strategy Operations Operations at Custom Foot lead time is crucial to strategy. lead time interacts with: –capacity –inventory –cost Custom Foot promised a two week lead time. Sounds good. But will they deliver?

10 Why Do We Need to Understand Operations Management? Other examples in your packet: American Standard: streamlining manufacturing operations and increasing flexibility brings enormous growth. American Airlines: preserving service quality in the face of massive system disruptions.

11 7 Why Do We Need to Understand Operations Management? A final example from Boeing: “By early 1998 Boeing aims to double monthly production … ” (Business Week, 9/30/96) We will discuss the consequences of this.

12 we’ll use aircraft assembly as an example: Getting started: Process Analysis 1. defining a process - flow of materials and information. 2. a few definitions and a fundamental relationship in process flow.

13 task: value added flow: geographical or virtual movement storage: time spent doing neither of the above cockpit install note: level of detail will depend on the purpose of the diagram! Process Diagram: Define Material Flow buffer

14 information conveys who, what, where, when, how.. Examples: Information storage: routing slip order form CAD data credit history database Process Diagram: Information Flow

15 Process Analysis: A Few Definitions throughput: the output of a production process per unit time (in aircraft/month, patients/hour, $/year). Sometimes also called flow or ‘ ’. stock: the inventory between the start and end of the process (in aircraft, patients, dollars). Sometimes also called number in system or work in process (WIP) or ‘L’.

16 Process Analysis: A Few Definitions lead time: time from entry into the system until exit from the system (in months, hours, years). Sometimes also called time in system or flow time or cycle time or ‘W’. raw process time: time necessary to complete actual work. Or, time for one unit of the product to traverse an otherwise empty system.

17 throughput = aircraft/month parts for one aircraft stock = number of aircraft in process lead time = months from entrance to exit processing movement storage question: will raw processing time = lead time? The Boeing Production Line

18 John D.C. Little at MIT gave the first mathematical proof of the ‘law’ in Process Analysis A Fundamental Relationship Little’s Law: (average stock) = (average throughput)*(average lead time) Warning: Little’s Law will apply to any process as long as: –consistent units are used. –long-term averages are used (during the observation period we take a large ‘sample’ and most of what has come in has also gone out). –consistent flows are measured (more on this later).

19 Process Analysis: Little’s Law Example (average stock) = (average throughput)*(average lead time) At Boeing, avg. throughput = 5 aircraft/month, avg. lead time = 2 months avg. stock = ______

20 Little’s Law and Boeing aircraft assembly (average stock) = (average throughput)*(average lead time) This time, measure ‘stock’ as the value of materials instead of aircraft. Given:- $100 million/month cost of materials in aircraft sold - 2 months production/aircraft Question: What should be the current value of material WIP? Will it be exactly this?

21 Little’s Law and Boeing aircraft assembly Boeing plans to double throughput. What happens to WIP if lead time stays constant? What are the consequences? Can Boeing expect to hold lead time constant?

22 credit check loan approval outstanding requests ($) = _________________________ x ________________________ produce contract & sign loan applications ($/month) loans signed ($/month) loans refused ($/month) Little’s Law, A loan processing example

23 Other applications of Little’s Law stock=throughput*lead time Loan processing Outstanding. Requests ($) =* Bond trading=* Order-to- confirm time (minutes) Correctional facility # inmates=* Supply chain= Annual cost of goods sold ($/yr) *

24 Final Words on Little’s Law Given two of the fundamental quantities (stock, throughput, lead time), can always find the third. Little’s Law is a valuable ‘back-of-the- envelope’ tool for estimating and fact- checking.

25 Final Words on Little’s Law Some questions: –How do we predict system performance? Given one fundamental quantity, how do we find the other two? –How do we improve system performance? Can we increase throughput while decreasing WIP and lead times? To answer, we’ll need to discuss capacity and variability.

26 Structure of OMG 402 The ‘physics’ and measurement of production and service systems (weeks 1-3) Managing production (weeks 4-7) Logistics and supply chain management (weeks 7-8) Developing and distributing new products and services (weeks 8-9)

27 Course Logistics Cases Packet Handouts – many on the Simon fileserver or Course web site The Goal – used throughout the next few weeks “K&R” – suggested reading Labs – a time for careful problem-solving Teaching Assistants and Office Hours Feedback

28 Course Logistics Class requirements –Team exercises (20%) –Individual exercises (20%)* –Case discussion (ungraded, but…) –Midterm exam (25%) –Final exam (35%) * for each individual exercise, a subset of the problems will be selected randomly for grading.

29 Course Logistics First Written Assignment is a Field Study –Short description (1/2 page maximum) –process flow diagram –statistics gathered –questions answered

30 Conclusion The Goals of OMG402 Understand relationships between operations and firm success, operations and other functional areas; Acquire the knowledge and skills that are vital to the operations manager; Apply knowledge and skills to cutting-edge problems in services and manufacturing.