Operations Management Flashcards
Customer expectations regarding quality have increased for two reasons:
- Automated manufacturing techniques
2. Adoption of international quality standards
Most commonly used measures of satisfaction are:
- Sales returns
- Warranty costs
- Customer complaints
Types of Quality: Quality of Design
Meeting or exceeding the needs and wants of customers.
Types of Quality: Quality of Conformance
Conforming to the design specifications
Execute product design and specified and appropriately.
Voluntary Costs of Quality: Prevention costs
The cost of prevention is the cost of any quality activity designed to help do the job right the first time.
Ex: Quality engineering, quality training, quality circles, statistical exposes control activities, supervision of prevention activities, quality data gathering, analysis, and reporting, quality improvement projects, technical support provided to suppliers, audits of the effectiveness of the quality system.
Voluntary Costs of Quality: Appraisal costs
The cost of quality control including testing and inspection. It involves any activity designed to appraise, test, or check for defective products.
Ex: testing and inspection of incoming materials, testing and inspection of in-process goods, final product testing and inspection, supplies used in testing and inspection, supervision of testing and inspection activities, depreciation of test equipment, maintenance of test equipment, plant utilities in the inspection area, field testing and appraisal at customer site.
Involuntary Costs of Quality: Internal Failure Costs
The costs incurred when substandard products are produced but discovered before shipment to the customer.
Ex: scrap, spoilage, rework, rework labor and overhead, reinspection of reworked products, retesting of reworked products, downtime caused by quality problems, disposal of defective products, analysis of the cause of defects in production, reentering data because of keying errors, debugging software errors.
Involuntary Costs of Quality: External Failure Costs
The cost incurred for products that do not meet requirements of the customer and have reached the customer.
Ex: cost of field servicing and handling complaints, warranty repairs and replacements, product recalls, liability arising from defective products, returns and allowances arising from quality problems, lost sales arising from reputation for poor quality.
Directional COQ Effects
- When the overall quality of conformance is low, more if the total cost of quality is typically related to cost of failure (which would be higher).
- Increases in the cost of prevention and the cost of appraisal are usually accompanied by decreases in the cost of failure and increases in the quality of conformance.
- The most effective method of reducing the overall cost of failure is to increase efforts to prevent failures.
- Increased spending on prevention portentously reduces both the cost of failure and increases the quality of conformance.
Six Sigma
Expresses how close (statistically) a product comes to its quality goal.
One Sigma = 68% of products are acceptable
Three Sigma = 99.7% “ “ “
Six-Sigma = 99.999997 perfect
Uses DMAIC (Define, Measure, Analyze, Improve, Control)
Pareto Charts
Ranks causes of Process variations by the degree of impact on quality.
Also know as 80/20 rule or low hanging fruit.
Balanced Scorecard
The balanced scorecard (BSC) is a performance management tool that helps an organization identify and evaluate critical success factors within the context of overall strategy.
•Integrates both financial and non financial measures to provide a comprehensive view of overall performance.
Balance Scorecard Categories: Financial
Focuses on specific measures of financial performance.
Balance Scorecard Categories: Customer
Specifies performance related to targeted customers and market segments.
Balance Scorecard Categories: Internal Business Processes
Depicts performance of internal operations that create value.
Ex: new product development, production, distribution, after sale customer service.
Balance Scorecard Categories: Learning, Innovation, and Growth
Specified performance characteristics of the companies personnel.
•ex: Skills, training, certification, moral.
Within each of the four Balance Scorecard classifications, the organization identifies its:
- Strategic goals
- Critical success factors
- Tactics
- Performance measures
Creating a Balanced Scorecard steps:
- Identify strategic objectives.
- Do SWOT analysis.
- Develop operational tactics.
- Develop performance measures for each tactic.
Features of a good balanced Scorecard:
*Articulates a company’s strategy by trying to map a sequence of cause-and-effect relationships through metrics.
•Assists in communicating the strategy to all members of the organization.
•Limits the number of measures used by identifying only the most critical ones
•Highlighting suboptimal trade-offs made by managers.
During creating a Balanced Scorecard - these 5 things should be avoided…
- Assuming the cause-and-effect linkages are precise.
- Seeking improvements across all measures all the time.
- Using only Objective measures on the Scorecard. (Use subjective measures also)
- Failing to consider both costs and benefits of initiatives.
- ignoring non financial metrics when evaluating employees.
Benchmarking Defined
A process in which organizations compare their own processes and performance with the processes and performances of business leaders within or across competing industries.
- Should be an ongoing process.
- Supports continuous learning and improvement.
Best Practices Defined
- The most efficient and effective means of accomplishing a task.
- To identify best practices, an organization observes the practices of leading companies.
- The organization compares best practices to its own processes and producers to identify potential for improvement.
Competitive Analysis includes:
- Conventional profitability / return analysis
- Value based management
- Target pricing markups
- Price elasticity
Focus of ROI
ROI is consistent with external financial analysis used to evaluate broad performance.
Weaknesses of ROI
•Suffers from accrual distortions
•Accrual accounting is often
arbitrary (Designed to fulfill
external reporting goals)
•Accounting conventions are concerned with compliance, not with economic performance.
• Suffers from the diluted hurdle Rate problem.
Residual Income (RI)
RI is designed to eliminate diluted hurdle rate problem.
RI is a general form of economic profit
RI recognizes the cost of capital and expressed answer in dollars (rather than a rate)
Value based Manamgement
Two most popular metrics:
EVA (Economic Value Added)* important*
•Is a specific form of RI that is often used for
incentive compensation and investor
relations.
CFROI (Cash Flow Return on Investment)
•Is a cash-based metric used for incentive
compensation, valuation, and capital
budgeting.
Strategic Risk
Addresses long-term, broad-based exposure related to the overall strategy of the organization.
*to achieve the organization’s mission.
Operational Risk AKA Business Risk
Short term in nature and includes process risk, shared services risk, foreign/off-shore risk, and credit/default risk.
*includes daily implementation issues to achieve the strategy of the company.
Market Risk Aka systematic risk
Associate with economic events of national disasters.
Beyond the companies control
Other Risk Management Approaches
- Structuring operating leverage to the company’s advantage.
- ex: lease assets
- Providing contingency planning for disaster Recovery and business continuity.
- ex: building in redundancy, insurance
- Using hedging and diversification to offset exposure.
- Using insurance for risk mitigation/elimination.
- Evaluating the level of uncertainty when estimating future costs and revenues.
Hedging Defined
Used to offset future uncertainty with options and futures contracts related to commodities, foreign currency, and other investment exposure to minimize price risk.
Diversification Defined
Reduces general unsystematic and portfolio risk but does not completely offset risk as hedging does.
(Uses investments with similar volatilities but in opposite directions)
Insurance is used to …
- Decrease exposure to specific, known hazards.
- Deals with pure risk (where there is only a risk of losing - best case would be to break even) as opposed to speculative risk where gain is also possible.
Evaluating Uncertainty
Involves estimating future costs and revenues and maintaining cost control as a risk management strategy.
Theory of Constraints
Determining where bottlenecks (constraints) exist and optimizing output by relaxing that constraint.
•Constraints result from a variety of different resources (e.g. Labor hours, machine hours, or square feet)
Optimization rule for product mix decisions:
•Maximize the contribution margin per unit of the constrained resource
Ex: contribution margin per direct labor hour or machine hour – by doing this the company will maximize profitability.
Lean Manufacturing
Blends the features of custom and mass production processes to make a small number of a high variety of products. Aka. Mass customization
Goals include: increasing quality, reducing waste, and minimizing resource consumption in the process.
TQM tools will be found in lean manufacturing.
Approach to Lean Manufacturing
- Identify the steps in the value stream
- Eliminate steps that do not increase customer value
- Streamline the process
- Continuously evaluate to reach for perfection (no waste)
Lean Manufacturing environment (pull-type):
- Flexible equipment
- Low setup times
- Highly-skilled laborers
The Demand Flow Approach
Is embedded in lean applications to manage the process based on continuous flow planning and customer demand.
Six Sigma
A continuous improvement approach to systematically reduce defects.
The name reflects a level of quality that is virtually perfect.
Six Sigma’s Five Steps
- Define the process (business goals)
- Measure the process (in terms of defects)
- Analyze the process (using TQM tools to determine the root cause of defects)
- Improve the process (based on results from analysis)
- Control the process (by using TQM tools to monitor and sustain quality)
Difference between manufacturing costs and operating expenses
Mfg costs: “factors of production”
Accounted for as assets in the form of inventory. These will eventually be expended through COGS.
Increases in assets increase income
Operating exp:
Increasing expenses decrease income
Three Factors of Production
- Direct Material: Significant raw materials and components that make up the finished product.
- Direct Labor: Wages for work that directly converts raw materials into finished products.
- Manufacturing Overhead: Cost of labor and supplies that support the production process but are not easily traceable to the finished product.
Prime Costs
Direct materials costs plus direct labor costs
Conversion Costs
Direct Labor costs plus factory overhead costs
Product costs are also known as
Inventoriable costs or manufacturing costs
They generally attach to physical product units and are expensed in the period in which the goods are sold.
Can be associated with the production of specific revenues.
If units are in inventory, the costs are assets. If the costs represent units that have been sold, then they are expensed through COGS
Period Costs
Operating costs
Period costs cannot be matched with specific revenues (i.e. Accountants salary) and are expenses in the period incurred.
Actual Costing
Simplest and most accurate method and waits until all the costs are known and then records them in the accounts.
AQ (actual quantity) x AP (actual price)
