Business Operations and Process Optimization Strategies

Chapter 4: Forecasting Accuracy

Mean Absolute Deviation (MAD)

Mean Absolute Deviation (MAD) is a metric used to evaluate the accuracy of forecasting. It represents the average of the absolute differences between forecasted values and actual values, providing a measure of overall forecast error.

Calculating MAD

Chapter 16: Operations Management

Production and Productivity

• Production: The process of creating goods and services. It is a measure of output, not efficiency.
• Productivity: The ratio of outputs (goods and services) to inputs (resources like labor and capital). It measures process improvement and reflects output relative to input. Productivity increases are essential for improving the standard of living.

Productivity = Units Produced / Labor-Hours Used

• Multifactor Productivity: Also known as total factor productivity, this metric considers multiple resource inputs.

Multifactor Productivity = Output / (Labor + Material + Energy + Capital + Miscellaneous)

Competitive Advantage

• Competitive Advantage: Strategies to achieve competitive advantage include:
  • Differentiation: Offering products or services that are perceived as superior or unique.
  • Cost Leadership: Providing products or services at a lower cost than competitors.
  • Responsiveness: Adapting quickly to market changes and customer needs.

Competing on Differentiation: Expanding beyond physical characteristics and service attributes to encompass everything impacting the customer’s perception of value.

Competing on Cost: Delivering maximum perceived value to the customer without compromising quality.

Competing on Response: Flexibility involves adapting to market changes in design and volume. Reliability entails meeting schedules. Timeliness means rapid design, production, and delivery.

Product Life Cycle

The product life cycle consists of four stages: introduction, growth, maturity, and decline. Forecasting needs are longer during introduction and growth compared to maturity and decline.

Outsourcing

Outsourcing involves transferring traditionally internal activities to external suppliers. This allows firms to concentrate on their core competencies. It’s accelerating due to increased technological expertise and specialized core competencies.

Project Management

• Critical Path: The longest path through a network diagram, determining the shortest time to complete a project.
• Project Manager: Responsible for ensuring all activities are completed on time and within budget, the project meets quality goals, and team members are motivated and informed. They should be effective communicators and organizers.
• Crash a Project: Shortening the duration of a project.

Forecasting Time Horizons

Different methodologies are used for different time horizons. Shorter-term forecasts are generally more accurate.

• Short Range: Up to 1 year, often less than 3 months. Used for purchasing, job scheduling, workforce levels, job assignments, and production levels.
• Medium Range: 3 months to 3 years. Used for sales and production planning, and budgeting.
• Long Range: 3+ years. Used for new product planning, facility location, and research and development.

Types of Forecasts

• Economic Forecast: Predicts business cycle indicators like inflation rates, money supply, and housing starts.
• Technological Forecast: Predicts the rate of technological progress and the development of new products.
• Demand Forecast: Predicts sales of existing products and services.

Stakeholders

Individuals or groups with a vested interest in an organization’s actions.

Total Quality Management (TQM)

Total Quality Management (TQM) is a comprehensive approach that involves the entire organization, from suppliers to customers. It emphasizes management’s commitment to continuous improvement in all aspects of products and services that are important to the customer.

Six Sigma

Six Sigma is a statistical definition of a process that is 99.9997% capable, resulting in 3.4 defects per million opportunities. It’s a program designed to reduce defects, lower costs, save time, and improve customer satisfaction. It’s a comprehensive system for achieving and sustaining business success. Key steps include: Define, Measure, Analyze, Improve, and Control.

7 Tools of TQM

Tools for generating ideas:

• Check Sheet: An organized method of recording data.
• Scatter Diagram: A graph showing the relationship between two variables.
• Cause-and-Effect Diagram (Fishbone Diagram): A tool that identifies process elements (causes) that might affect an outcome.

Tools to organize the data:

• Pareto Chart: A graph that identifies and plots problems or defects in descending order of frequency.
• Flowchart: A chart that describes the steps in a process.

Tools for identifying problems:

• Statistical Process Control (SPC) Chart: A chart with time on the horizontal axis to plot values of a statistic.
• Histogram: A distribution showing the frequency of occurrences of a variable.

Process Strategies

• Process Focus: Facilities organized around specific activities or processes, using general-purpose equipment and skilled personnel. They offer a high degree of product flexibility but typically have high costs and low equipment utilization.
• Repetitive Focus: Facilities organized as assembly lines, characterized by modules with previously made parts and assemblies. They offer less flexibility than process-focused facilities but are more efficient.

Business Structures

• Joint Venture: Formal collaboration between firms to enhance skills, secure supply, or reduce costs. The challenge is to cooperate without diluting the brand or conceding a competitive advantage.
• Keiretsu Network: A Japanese term describing a system where suppliers become part of a company coalition. Members expect long-term relationships and provide technical expertise and stable deliveries. South Korean chaebols are similar but more family-controlled.
• Virtual Companies: Companies that rely on a variety of supplier relationships to provide services on demand. They have fluid organizational boundaries, allowing them to adapt to changing market demands. They are known for lean performance, low capital investment, flexibility, and speed.

Bottleneck and Bullwhip Effect

• Bottleneck: A limiting factor or constraint with the lowest effective capacity in a system.
• Bullwhip Effect: The tendency for order size fluctuations to increase as orders are relayed through the supply chain. It creates unstable production schedules, expensive capacity changes, underutilization, longer lead times, and obsolescence. Supplier coordination and planning can minimize damage.

Inventory Management

• Functions of Inventory: To decouple or separate various parts of the production process, to decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers, to take advantage of quantity discounts, to hedge against inflation.
• Types of Inventory: Raw material, Work-in-process (WIP), Maintenance/repair/operating (MRO), Finished goods.

JIT, TPS, and Lean Operations

• JIT (Just-in-Time): A philosophy of continuous and forced problem solving via a focus on throughput and reduced inventory. Materials arrive where and when needed. It reduces costs, variability, and improves throughput.
• TPS (Toyota Production System): Emphasizes continuous improvement, respect for people, and standard work practices. Continuous Improvement involves building an organizational culture that stresses process improvement (Kaizen) as part of everyone’s job. Respect for People means treating people as knowledge workers, engaging their capabilities, and empowering employees. Process and Standard Work Practice means specifying work content, sequence, timing, and outcome, with direct internal and external customer-supplier connections. Process improvement must be made using the scientific method at the lowest possible organizational level. Stopping production because of a defect is called Jidoka.
• Lean Operations: Supply the customer with exactly what they want when they want it, without waste, through continuous improvement. It encompasses both JIT and TPS. It sustains competitive advantage and increases returns to stakeholders. Three fundamental issues are eliminating waste, removing variability, and improving throughput.

Japanese Terms

• Kanban: A Japanese word for”car” or”signal” A Kanban system moves parts through production via a”pul” from a signal. It provides direct control and a limit on work-in-process between cells.

• Andon: A visual signal, such as a board, that communicates abnormalities in a process.
• Kaizen: The ongoing process of unending improvement.
• Gemba: Going to the place where work is actually performed.
• Poka-Yoke: A Japanese term for”mistake-proofin” or”fail-safing” It refers to a warning or control designed into a product or process to improve quality.
• Takumi: A Japanese character symbolizing a broader dimension than quality, a deeper process than education, and a more perfect method than persistence.

Industry Acronyms

• 3PL (Third-Party Logistics): Outsourcing logistics to reduce inventory, costs, and improve delivery reliability and speed. 3PL providers may offer warehousing, assembly, testing, shipping, and customs services.
• JIT (Just-in-Time)
• TPS (Toyota Production System)
• COGS (Cost of Goods Sold)
• MRO (Maintenance, Repair, and Operating)
• SPC (Statistical Process Control)