Operations Management 101: Introduction to Operations Management Operations Strategy Competitive Priorities Cost Quality Time Flexibility

What This Is

Operations Strategy is a plan that outlines how a company will compete in the market by prioritizing its operations goals. These goals are typically categorized into four competitive priorities: Cost, Quality, Time, and Flexibility. For example, Toyota prioritizes Quality and Time, focusing on producing high-quality vehicles quickly, while Amazon prioritizes Time and Flexibility, offering fast and flexible shipping options.

Key Formulas & Frameworks

• Productivity = Output / Input (partial: labor productivity = units per labor hour): Measures the efficiency of a process by dividing the output by the input. Labor productivity is a specific type of productivity that measures the output per labor hour.
• Little's Law: WIP = Throughput × Cycle Time: Describes the relationship between work-in-progress (WIP), throughput, and cycle time. It helps to understand the inventory levels and lead times in a production system.
• EOQ = √(2DS/H) where D = annual demand, S = ordering cost, H = holding cost per unit per year: Calculates the Economic Order Quantity (EOQ) that minimizes the total inventory cost.
• Takt Time = Total Demand / Required Production Rate: Calculates the takt time, which is the time available to produce each unit of a product.
• Lead Time = Processing Time + Inspection Time + Transportation Time: Calculates the total lead time, which is the time it takes for a product to move from raw materials to finished goods.
• Batch Size = √(2DS/H) where D = annual demand, S = setup cost, H = holding cost per unit per year: Calculates the optimal batch size that minimizes the total inventory cost and setup cost.
• VSM (Value Stream Mapping): A visual representation of the production process that helps to identify waste and opportunities for improvement.
• Pareto Analysis: A method to identify the most common causes of a problem by ranking them in order of frequency or impact.
• Six Thinking Hats: A decision-making method that involves considering different perspectives or "hats" to make a decision.

Step-by-Step Application

1. Calculate the Economic Order Quantity (EOQ):
2. Determine the annual demand (D)
3. Determine the ordering cost (S)
4. Determine the holding cost per unit per year (H)

5. Use the formula EOQ = √(2DS/H) to calculate the optimal order quantity.

6. Determine the Takt Time:

7. Determine the total demand (Total Demand)
8. Determine the required production rate (Required Production Rate)

9. Use the formula Takt Time = Total Demand / Required Production Rate to calculate the takt time.

10. Calculate the Lead Time:

11. Determine the processing time
12. Determine the inspection time
13. Determine the transportation time

14. Add the processing time, inspection time, and transportation time to calculate the total lead time.

15. Identify Waste using VSM:

16. Create a visual representation of the production process using VSM
17. Identify areas of waste, such as overproduction, waiting, or transportation

18. Develop a plan to eliminate or reduce the waste.

19. Conduct a Pareto Analysis:

20. Collect data on the causes of a problem
21. Rank the causes in order of frequency or impact
22. Identify the most common causes and develop a plan to address them.

Common Mistakes

• Mistake: Confusing productivity with efficiency.
• Correction: Productivity measures output per input, while efficiency measures actual output per effective capacity.
• Mistake: Not considering all the costs when calculating the EOQ.
• Correction: Make sure to include all the relevant costs, such as ordering cost, holding cost, and transportation cost.
• Mistake: Not using the correct formula for calculating the takt time.
• Correction: Use the formula Takt Time = Total Demand / Required Production Rate to calculate the takt time.

Exam / Certification Tips

• Tricky Distinction: Push vs. Pull systems. Push systems produce products based on forecasts, while pull systems produce products based on customer demand.
• APICS Terminology Trap: Make sure to understand the difference between planned vs. actual capacity. Planned capacity is the maximum capacity that can be achieved, while actual capacity is the actual output achieved.
• Six Sigma Terminology Trap: Make sure to understand the difference between Cp and Cpk. Cp measures the process capability, while Cpk measures the process capability with respect to the specification limits.

Quick Practice Problem

Problem: A company produces 100 units per day and wants to determine the takt time. If the required production rate is 120 units per hour, what is the takt time?

Answer: 0.83 hours (or 50 minutes)

Explanation: Use the formula Takt Time = Total Demand / Required Production Rate to calculate the takt time.

Last-Minute Cram Sheet

• Productivity = Output / Input
• Little's Law: WIP = Throughput × Cycle Time
• EOQ = √(2DS/H)
• Takt Time = Total Demand / Required Production Rate
• Lead Time = Processing Time + Inspection Time + Transportation Time
• Batch Size = √(2DS/H)
• VSM (Value Stream Mapping)
• Pareto Analysis
• Six Thinking Hats
• ⚠️ Efficiency is actual output / effective capacity; Utilization is actual output / design capacity – don't confuse them
• ⚠️ Push vs. Pull systems: Push produces based on forecasts, while Pull produces based on customer demand
• ⚠️ Planned vs. Actual capacity: Planned is maximum capacity, while Actual is actual output achieved
• ⚠️ Cp measures process capability, while Cpk measures process capability with respect to specification limits