Chapter 3 Performance Measures [Autosaved].ppt

Performance Measures

1. Performance Measures

2. Course Objectives
(What this course is all about?)
•How to design and operate contemporary production
systems (and more…)
–A systematic exposition of the design, planning and control
problems that arise in the context of the aforementioned facilities.
–A systematic introduction to inventory control theory and its
application in contemporary production and distribution networks.
–A formal analysis of the dynamics of production processes, based
on queueing theoretic concepts and models.
–The integration of the results developed in Step 3 to the prevailing
production planning and control framework(s).

3. Our abstraction of the Production System
•Production System: A transformation process (physical,
locational, physiological, intellectual, etc.)
Organization
Inputs Outputs
•Materials
•Capital
•Labor
•Manag. Res.
•Goods
•Services
• The production system as a process network
Stage 5
Stage 4
Stage 3
Stage 2Stage 1
Suppliers Customers

4. Productivity:
Basic Organizational Performance Measure
Productivity = Value produced / Input used
= Output / (Labor + Material + Capital + Energy + Miscellaneous)
Remarks:
• Typically both the numerator and the denominator are measured in INR or $$
$. If the output corresponds to actual sales, then productivity measures both
effectiveness (doing the right thing) and efficiency (in the right way).
•From an economic standpoint, major emphasis is placed on the annual
percentage change (hopefully increase) of productivity.
• For the entire economy, the annual increase in productivity is higher than
2.5% (38% of this increase is due to capital improvements, 10% to labor
improvements and 52% to management improvements).

5. Major Productivity Variables and their
contribution to productivity increase
•Labor
–Better basic education
–Better diet
–Better social infrastructure like transportation and sanitation
–Better labor utilization and motivation
•Capital
–Steady and well-planned investments on equipment and its timely maintenance
–Research & Development
–Controlling of the cost of capital
•Management
–Exploitation of new (information) technologies
–Utilization of accumulated knowledge
–Education
Knowledge
Society

6. Operations Management (OM)
Definition: The study and improvement / optimization of the set of
activities that create goods and services in an organization.
Typical issues addressed:
• Service and product selection and design
• Quality Management
• Process and capacity design
• Facility design
• Facility Location
• Human resources and job design
• Inventory management
• Production planning and control
• Maintenance
• Supply-chain management

7. The major functional units of a modern
organization
Strategic Planning:
defining the organization’s mission and
the required/perceived core competencies
Production/
Operations:
product/service
creation
Finance/
Accounting:
monitoring of
the organization
cash-flows
Marketing:
demand
generation
and
order taking

8. Examples (borrowed from Heizer & Render)

9. Fit Between Corporate and Functional
Strategies (Chopra & Meindl)
Corporate Competitive Strategy
Supply Chain
or Operations
Strategy
Product
Development
Strategy
Marketing
and Sales
Strategy
Information Technology Strategy
Finance Strategy
Human Resources Strategy

10. Corporate Mission
•The mission of the organization
–defines its purpose, i.e., what it contributes to society
–states the rationale for its existence
–provides boundaries and focus
–defines the concept(s) around which the company can rally
•Functional areas and business processes define their
missions such that they support the overall corporate
mission in a cooperative and synergistic manner.

11. Corporate Mission Examples
•Merck: The mission of Merck is to provide society with superior products
and services-innovations and solutions that improve the quality of life and
satisfy customer needs-to provide employees with meaningful work and
advancement opportunities and investors with a superior rate of return.
•FedEx: FedEx is committed to our People-Service-Profit philosophy. We
will produce outstanding financial returns by providing totally reliable,
competitively superior, global air-ground transportation of high-priority
goods and documents that require rapid, time-certain delivery. Equally
important, positive control of each package will be maintained utilizing
real time electronic tracking and tracing systems. A complete record of
each shipment and delivery will be presented with our request for
payment. We will be helpful, courteous, and professional for each other,
and the public. We will strive to have a completely satisfied customer at
the end of each transaction.

12. Defining the Corporate Strategy
Differentiation (Quality; Uniqueness;
e.g., Luxury cars, Fashion Industry,
Brand Name Drugs)
Cost Leadership (Price;
e.g., Wal-Mart, Southwest
Airlines, Generic Drugs)
Responsiveness (Reliability; Quickness; Flexibility;
e.g., Dell, Overnight Delivery Services)
Competitive Advantage through which
the company market share is attracted

13. Defining the Corporate Strategy
•Corporate Strategy: The organization’s positioning in terms of
–responsiveness,
–cost leadership and
–product differentiation
requirements, i.e., the sought competitive advantage(s).
•The corporate strategy dictates the detailed strategies for each functional
area (i.e., Operations, Finance, Marketing) but it is also affected by
those areas.
•Collectively, all these strategies seek to exploit (external) opportunities
and (internal) strengths, neutralize (external) threats, and address
(internal) weaknesses

14. The operations frontier, trade-offs,
and the operational effectiveness
Differentiation
Cost Leadership
Responsiveness

15. Factors affecting Corporate Strategy
•External
–Emerging strengths and weaknesses of competitors => new threats and
opportunities, respectively
–New industry entrants
–Development of substitute products
–Development of new technologies
–Legal developments (e.g., environmental concerns and regulations)
–Economic and political developments (e.g., new international agreements,
political crises)
•Internal
–Company politics and restructuring
–Modified relationships with customers and suppliers
–Product Life Cycle

16. Strategy and Issues during a Product’s Life
(J. Heizer & B. Render, “Operations Management”, Prentice Hall)
Introduction Growth Maturity Decline
Time
Sales
• Best period to
increase market
share
•R&D engineering
critical
• Frequent product
and process changes
•Short production
runs
•High production
costs
•Limited models
•Attention to quality
•Practical to
change price or
quality image
•Strengthen
niche
•Forecasting
critical
•Products and
process reliability
•Increase capacity
•Shift towards
product focus
•Enhance
distribution
•Poor time to change
image, price or
quality
•Competitive costs
become critical
•Defend market
position
•Standardization - minor
product changes
•Optimum capacity
•Process stability
•Long production runs
•Cost control
critical
•Little product
differentiation
•Overcapacity in the
industry
•Reduce capacity
and eventually prune
line to eliminate
items not returning
good margin

17. The primary “drivers” for achieving
strategic fit in Operations Strategy
(adapted from Chopra & Meindl)
Corporate Strategy
Operations Strategy
Efficiency Responsiveness
FacilitiesInventory TransportationInformation
Market
Segmentation

18. The role of Facilities
•Facilities: The locations where inventory is
–processed and transformed into another state (manufacturing) or
–staged before being shipped to the next stage (warehousing)
•In general, centralization boosts efficiency, while decentralization boosts responsiveness
•Primary decisions:
–Location
•Proximity to the customer
•Proximity to resources
•Access to markets (ability to circumvent quotas and tariffs)
•Infrastructure
•Operational costs and tax incentives
–Capacity
•Capital cost vs. responsiveness
–Operations Methodology for Manufacturing Facilities
•Product vs. functional focus
•Flexible vs. dedicated capacity
–Warehousing methodology
•Storage modes and material flow organization
•Cross-docking

19. The role of Inventory
•Primary inventory components:
–Raw Material
–Work In Process (WIP)
–Finished Goods
•It exists because of the finiteness of the production and transportation rates
(Little’s Law: I=TH*T)
•Types of Inventory
–Safety Inventory: It is used to deal with the randomness in the experienced
demand; it is set so that it helps the supply chain meet some “service level” (i.e.,
control the probability that no stock-out will be experienced at any replenishment
cycle).
–Seasonal Inventory: It is used to help the supply chain deal with predictable
variability in demand.
–Cycle Inventory: It is incurred in an effort to control the impact of “fixed”
ordering and set-up costs.
–Opportunistic Inventory: Takes advantage of “bargains”.
•Sourcing: Determine the set of suppliers / subcontractors to be used, and
develop the contracts that will govern the relationship.

20. The role of Transportation
•Transportation: The SC element that moves product between its different
stages.
•Primary decisions:
–Mode(s) of Transportation
•Air: fastest but most expensive
•Truck: Relatively quick, inexpensive and very flexible mode
•Rail: Inexpensive mode to be used for large quantities
•Ship: Slowest but often the most economical choice for large overseas shipments
•Pipeline: Used (primarily) for oil and gas
•Electronic transportation: for goods as music and movies
–Route and Network Selection
–In-house or Outsource to some 3PL provider

21. The role of Information
•Information exchange is necessary for the most extensive modes of
coordination sought in contemporary supply chains. It allows the supply chain
to improve simultaneously its efficiency and responsiveness.
•Information-related decisions
–Push vs. pull
–Extent and modes of information sharing and coordination
–Forecasting and Aggregate Planning schemes
–Pricing and revenue management policies
–Enabling Technologies:
•Electronic Data Interchange (EDI): Enables paperless transactions, primarily for
“backend” operations of the SC.
•The Internet and the WWW.
•Enterprise Resource Planning (ERP): enables transactional tracking and global visibility
of information in the SC.
•Supply Chain Management (SCM) software: decision support tools.

22. The role of Market Segmentation
•Need to develop different strategies for different geographical or market
segments that align to the preferences and attitudes of the corresponding
customer bases.
•Need to align the provided products and services, as well as the deployed
production and business functions, to the local culture and ethics.
•Supporting practices
–broader product lines
–globalized operations
–(mass-)customization
•Need to manage the resulting complexity.
–Modularity
–Combinatorial customization
–Design for postponement