Chapter

20
Operations
Control

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
After studying this chapter, you will be able to:
1. Understand the basic requirements for controlling
operating costs.
2. Define quality from the perspective of an operations
manager.
3. List the eight common dimensions of design
quality.
4. Explain the concept of quality assurance.
5. Explain the concept of total quality management
(TQM).
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Learning Objectives (contd)

After studying this chapter, you will be able to:
6.

Define the following terms: continuous improvement,

kaizen, six sigma, lean manufacturing, and quality at
the source.

7.

Describe the ISO 9000, ISO 14000, and the zerodefects approaches to quality.

8.

Identify and define the two major types of quality

control.

9.

Recount the major reasons for carrying inventories.

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Learning Objectives (contd)

After studying this chapter, you will be able to:
10. Explain the concept of just-in-time (JIT) inventory.
11. Describe the ABC classification system for
managing inventories.
12. Summarize the economic order quantity (EOQ)
concept.
13. Describe the basic purposes of material
requirements planning (MRP).

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Effective Operating Systems

Two aspects: design and control
Efficient operation includes:

Monitoring the system processes

Assurance of quality
Management of inventories
Management of inventories

Good operations control can be a substitute for

resources.
Effective inventory control can reduce investment
costs in inventories.

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Operating Costs

Source: N. Gaither, Production and Operations Management (Fort Worth: Dryden Press, 1980).
Figure 20.1

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Controlling Operations Cost

Variable overhead expenses
Expenses that change in proportion to the
level of production or service.

Fixed overhead
Expenses that do not change appreciably
with fluctuations in the level of
production or service.

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Dimensions of Design Quality

Source: Richard B. Chase, F. Robert Jacobs, and Nicholas J. Aquilano, Operations Management for
Competitive Advantage, 11th ed. (Burr Ridge, IL: McGraw-Hill/ Irwin, 2006), p. 322.
Figure 20.2
20-8

Quality Management
For the operations manager, quality is
determined in relation to the specifications or
standards set in the design stagesthe degree
or grade of excellence specified.
The quality of an organizations goods and
services can affect the organization in many
ways.

Loss of business
Liability
Costs
Productivity

Productivity and quality are often closely

related.
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Customer Response Programs

Develop a new attitude toward customers.
Reduce management layers so that managers
are in contact with customers.
Link quality and information systems to
customer needs and problems.
Train employees in customer responsiveness.
Integrate customer responsiveness throughout
the entire distribution channel.
Use customer responsiveness as a marketing
tool.

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Demings 14 Quality Elements

Source: From W. Edwards Deming, Out of the Crisis, 1986. Copyright 1986
by The MIT Press. Reprinted with permission.

Figure 20.3
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Total Quality Management

Essential steps:

Find out what customers want.

Design a product or service that will meet (or
exceed) what customers want.
Design a production process that facilitates doing
the job right the first time.
Keep track of results, and use those results to
guide improvement in the system.
Extend these concepts to suppliers and to
distribution.

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TQM vs. Traditional

Approaches

Source: From William J. Stevenson, Production and Operations Management 4th edition. Copyright 1993
The McGraw-Hill Companies, Inc. Reprinted with permission.
Figure 20.4

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Implementing TQM
Demonstrate top-down commitment and involvementpush.
Set tough improvement goals, not just stretch goals.
Provide appropriate training, resources, and human
resource backup.
Determine critical measurement factors; benchmark and
track progress.
Spread success stories, especially those about favorable
benchmarking; always share financial progress reports.
Identify the costs of quality and routes to improvement;
prove the case that quality costs decline with quality
progress.

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Implementing TQM (contd)

Rely on teamwork, involvement, and all-level
leadership.
Respect the gurus, but tailor every initiative for a
good local fit.
Allow time to see progress, analyze the systems
operation, reward contributions, and make needed
adjustments.
Finally, recognize that the key internal task is a
culture change and the key external task is a new set
of relationships with customers and suppliers.

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Barriers to Adopting TQM

A lack of consistency of purpose on
the part of management.
An emphasis on short-term profits.
An inability to modify personnel
review systems.
Mobility of management (job
hopping).
Lack of commitment to training and
failure to instill leadership that is
change oriented.
Excessive costs.
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Quality Improvement
Approaches
Continuous improvement
Refers to an ongoing effort to make
improvements in every part of the
organization relative to all of its products
and services.

Kaizen
Good change; continuous and relentless
improvement; views employees as most
valuable asset.

Quality at the source

Philosophy of making each employee
responsible for the quality of his or her own
work.
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Quality Improvement Approaches

(contd)
Lean manufacturing
Focuses on identifying and eliminating
waste and non-value-added activities.

Six sigma
Both a precise set of statistical tools and a
rallying cry for continuous improvement,
driven by what does the customer want
in the way of quality?

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Quality Improvement Approaches

(contd)
lean six sigma
A combination of lean methods and six
sigma; draws on the philosophies,
principles, and tools of both approaches.
Goal is growth and not just cost-cutting.

Reengineering
Searching for and implementing radical
change in business processes to achieve
breakthroughs in costs, speed, productivity,
and service.

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Lean Six Sigma Incorporates the

Key Methods, Tools, and
Techniques of Its Predecessors

Figure 20.5
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Other Quality Standards

ISO 9000
A set of quality standards for international
business.
ISO 14000
Addition to the ISO 9000 to control the impact of an
organizations activities and outputs on the environment.
This certification requires compliance in four
organizational areas:
Implementation of an environmental management system.
Assurance that procedures are in place to maintain
compliance with laws and regulations.
Commitment to continual improvement.
Commitment to waste minimization and prevention of
pollution.

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Other Quality Standards (contd)

Zero defects program
Increasing quality by increasing everyones
impact on quality.
Characteristics of successful zero-defects
programs:
Extensive communication regarding the importance
of quality.
Organization-wide recognition for high-quality
work.

Quality problem identification by employees.

Employee participation in goal setting.

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Malcolm Balridge National

Quality Award
Recognition of U.S. companies
achievements in quality.
Purpose of the award is to encourage efforts
to improve quality and to recognize the
quality achievements of U.S. companies.
A maximum of two awards may be given
annually in each of five categories:

Manufacturing.
Service.
Small business (500 or less employees).
Education.
Health care.

Bush signed legislation that expands the

Baldrige Award to include nonprofit and
government organizations.
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Types of Quality Control

Product quality control
Relates to inputs or outputs of the system.
Used to evaluate quality of a batch of existing
products or services.

Process control
Relates to equipment and processes used during the
production process.
Used to monitor quality while the product or service
is being produced.

Acceptance sampling
Statistical method of predicting quality through
inspection of a batch or large group of products.
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Acceptance Sampling
Used for one of the following reasons:
The potential losses or costs of passing defective
items are not great relative to the cost of inspection;
for example, it would not be appropriate to inspect
every match produced by a match factory.
Inspection of some items requires destruction of the
product being tested, as is the case when testing
flash bulbs.
Sampling usually produces results more rapidly
than does a census.

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Process Control Chart

Time-based graphic display that shows
whether a machine or a process is producing
items that meet preestablished specifications.
Mean charts (also called X-charts ) monitor the
mean or average value of some characteristic
(dimension, weight, etc.) of the items produced by a
machine or process.
Range charts (also called R-charts ) monitor the
range of variability of some characteristic
(dimension, weight, etc.) of the items produced by a
machine or process.

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Process Control Chart

Figure 20.6
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Inventory Control

Inventories are generally classified into one of three

categories, depending on their location within the
operating system: (1) raw material, (2) in process, or (3)
finished goods.
Inventories add flexibility and allow the organization to:

Purchase, produce, and ship in economic lot sizes rather

than in small jobs.
Produce on a smooth, continuous basis even if the demand
for the finished product or raw material fluctuates.
Prevent major problems when forecasts of demand are in
error or when unforeseen slowdowns or stoppages in supply
or production occur.

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Just-in-Time Inventory Control

Source: N. Gaither, Production and Operations Management (Fort Worth: Dryden Press, 1992).
Figure 20.7
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Tracking Inventory
Bar-code technology
A computer program recognizes the
information contained in the bar code and
automatically adds or subtracts the item
from inventory.

Physical Inventory
Counting the number of units of inventory a
company holds in stock.

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Independent versus Dependent

Demand Items
Independent demand items
Finished goods ready to be shipped out or
sold.

Dependent demand items

Subassembly or component parts used to
make a finished product; their demand is
based on the number of finished products
being produced.

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ABC Classification System

Method of managing inventories based
on their total value.
ABC method can be computerized and
categories can be monitored or changed
with greater skill and accuracy.
Computerizing the operation and control
of the classification system brings
power to the ordering cycles and stock
control.

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ABC Inventory Classification

Source: From Richard B. Chase, et al., Operation Management for Competitive Advantage with CD-ROM and
PowerWeb. Copyright 2004 The McGraw-Hill Companies, Inc. Reprinted with permission.
Figure 20.8
20-33

Safety Stocks
Inventory maintained to
accommodate unexpected changes in
demand and supply and allow for
variations in delivery time.
The cost of a stock-out of the item is
often difficult to estimate.

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The Order Quantity

The optimal number of units to order,
referred to as the economic order quantity
(EOQ), is determined by the point at which
ordering costs equal carrying costs, or
where total cost (ordering costs plus
carrying costs) is at a minimum.
Ordering costs
Includes the cost of preparing the order, shipping
costs, and setup costs etc.

Carrying costs
Includes storage costs, insurance, taxes,
obsolescence, and the opportunity costs of the
money invested in the inventory.

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Potential Advantages of Material

Requirements Planning (MRP)

Source: From James B. Dilworth, Production and Operations Management 4th ed., McGraw-Hill,
1989. Reprinted with permission of the author.
Figure 20.9
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Overall View of the Inputs

Source: From Richard B. Chase, et al., Operation Management for Competitive Advantage with CD-ROM and
PowerWeb. Copyright 2004 The McGraw-Hill Companies, Inc. Reprinted with permission.
Figure 20.10
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Differences between JIT and

MRP

Source: From Nicholas J. Aquilano and Richard B. Chase, Fundamentals of Operations Management.
Copyright 1991 The McGraw-Hill Companies, Inc. Reprinted with permission.
Figure 20.11
20-38