1.4 Operations—Where Customer Value Is Created

Believe it or not, you have a lot of experience with managing operations. Where did you get this experience? You made something. In fact, you’ve made a lot of things in your life. Consider three popular hobbies: art, cooking, and do-it-yourself (DIY) projects. They have a lot in common—at least when it comes to illustrating today’s operating context.

Let’s do a simple thought exercise. Think about a picture you’ve painted, a meal you’ve cooked, or a DIY project you’ve done. Describe the processes by filling in the table below. As you look at the filled-in table, you’ll note that art, cooking, and DIY projects are all transformation processes. That is, they take a set of inputs and make something that possesses greater value out of them. Operations is all about creating value.

Operations Is an Open System

Figure 1.1 models your firm as a simple input-output model within the context of an open system.

What does this mean? Let’s emphasize a few key points.

Open Systems

All businesses, including yours, compete to survive in an open system. Each change in the environment—e.g., a new rival starts up, a new technology emerges, or an external shock occurs—impacts your strategy and your ability to survive. To win, you need to recognize opportunities and threats, be quick to respond, and create more value than rivals.

Resource Access

Everyone—including your toughest rivals—has pretty much the same access to inputs.

Empowered Customers

On the output side, you need to remember that your customers have information and options. They can buy from someone else—and will—if you don’t meet their needs.

How, Not What

In the marketplace described by the previous three points, success is driven more by how you use resources than by what you make. Rivals can, and will, copy products and services. It is much harder to copy processes and culture. This is the secret of the Toyota Production System (better known today as Lean Six Sigma).

The bottom line: You need to take ownership of what takes place within the operations black box. If you cultivate the right culture and provide the right structure, you can bring people and technology together to create value rivals can’t copy. A disciplined, creative decision-making methodology is the key to enduring prosperity!

You need to know one more thing before we investigate today’s basic operating context. There is no such thing as “the perfect” way to make things. The things we make—and customers are willing to pay for—are too distinct and novel for a single process to handle efficiently. That said, if you stay relentlessly customer focused and employ a Lean Six Sigma methodology, you will be able to achieve operational excellence.

Core Value-added Decisions

Now, let’s take a quick look at a set of core decisions where you will likely implement Lean Six Sigma practices to enhance operational excellence. Figure 1.2 classifies these core decisions into two groups: design decisions and control decisions.

Design Decisions

Design decisions determine where and how you deploy your assets—especially plant and equipment (i.e., your infrastructure)—to create value over the long haul. These decisions are resource-intensive, hard to change in the short term, and have a long-term impact on your firm’s competitiveness. You want to make these decisions very carefully.

Product Design

What should you make? What you need to remember here is that you need to identify and develop products that meet customers’ unmet needs. To produce these products efficiently—i.e., at a competitive cost—you need to consider product and process design at the same time. You want to design products so that they can be easily and inexpensively made. We call this design for manufacturability (DFM). You also want to design products so that you can switch production from one model or product to another quickly, helping you be more responsive to customer needs and shifts in market demand.

Process Design

How should you make things? Part I: Process design focuses on the technology and work design you use to make things. Think about your kitchen. When it is time to cook something, you can bake, broil, boil, fry, or microwave. To clean up, you can wash by hand in the sink or use the dishwasher. To cook an entire dinner, you might use a variety of other technologies, including blenders, mixers, or toasters (and we are just scratching the service of technology choice). The same is true in a factory. You choose technology based on several things:

• Production volumes

• Financial resources

• Labor cost

• The inter-changeability of capital and labor

• The technology used by competitors

Your choice of technology will affect work design, especially how you group different tasks to promote efficiency and quality. Your goal in work design is to increase process efficiency and worker motivation. Poorly designed jobs—comprised of tedious, narrowly defined tasks—alienate workers, reduce productivity, and stifle learning. To remedy this, you may emphasize job enlargement, job enrichment, and employee involvement programs.

Facility Layout

How should you make things? Part II: Facility layout focuses on how you will use your plant and equipment to make things efficiently. Again, think about your kitchen. When you are cooking, where you place everything determines how easy and efficient it is to prepare a meal or a delicious dessert. Ideally, you want to have everything within reach to minimize movement. This is the idea behind the U-shaped efficiency kitchen.

The same principles apply in a manufacturing facility. Where you position equipment defines the flow of materials and the number of times you must handle each item. The ideal layout minimizes movement and handling, creating a simple and smooth flow of materials through the facility. Unfortunately, over time, once-efficient layouts become circuitous as the products you produce and the technologies used to produce them change. Simply put, you need to reevaluate facility design from time to time to make sure your layout still makes sense.

Facility Location

Where should you make things? You want to locate your operations in places that give you access to either factor inputs (e.g., low-cost labor or materials) or consumer markets. For example, companies locate in China for both. Labor rates are comparatively low, and the Chinese market has over 1.4 billion potential consumers, a fact that makes it hard for companies to ignore China as a production location.

As you evaluate potential locations, you will probably focus primarily on labor costs and other resource proximity. Almost every company does. However, you really need to take a broader, total-cost focus and consider all of the following:

• The cost of land, construction, and energy

• Tax rates

• Transportation availability and rates

• Labor availability and productivity

• Materials cost

• The location of customers and competitors

• Lifestyle considerations

If you work for a service company, you will pay more attention to where your customers are located.

Control Decisions

Control decisions are the day-to-day decisions you make that define how you make things. Your focus is to have the materials you need, move them efficiently through the production process, and assure that your transformation processes deliver exceptional quality.

Forecasting

Will you have the right materials when you need them? Forecasting helps you estimate what products you need to produce and when you need to produce them. Forecasting is your tool for guessing what products are going to sell. If your guesses are accurate, you can make sure you produce the right products in the right quantities to meet customer needs. You use forecasts to determine capacity needs, plan production, refine workforce plans, and determine inventory levels.

You need to be familiar with a range of forecasting techniques, from simple moving averages to advanced econometric models. Most techniques use historical data, looking specifically at the sales trends. One point you want to remember is that forecasts are almost always wrong. To remedy this flaw, you want to obtain the best, most recent information possible. You also want to build flexible operations. Flexibility helps you compensate if demand exceeds your forecast.

Inventory Control

Will you have enough materials when you need them? Inventory decisions help you decide how much and when to make specific products. You answer the question of how much to produce by calculating an economic order quantity. The economic order quantity balances the cost of setting up production with the cost of storing goods. Larger production runs yield lower unit costs, but increase your holding costs. Your goal is often to reduce inventories.

Remember, however, that if your inventories are too low, you stock out, missing out on sales and frustrating customers. In other words, inventory fits the Goldilocks rule: You don’t want too much or too little. You want just the right amount.

You answer the question of when to produce by calculating a reorder point, which compares the amount of inventory currently available to the rate of demand.

Scheduling

How will you use your resources? Scheduling helps you prioritize what you will produce. You schedule at two levels. First, you use aggregate planning to decide what needs to be produced and more or less when you need to produce it. To develop your aggregate plan, you need the following:

• Knowledge regarding your production capacity

• A demand forecast

• Cost data for different resources

Second, you schedule the work to be done at any point in time. In other words, you assign different priorities to each job/product/project. You will use different tools depending on the type of product you make. For example, consider the following.

• Low-volume Job Shop. In a low-volume setting where multiple jobs might be waiting to be processed at a workstation, you sequence jobs based on customer demand and production efficiencies.

• High-volume Assembly. For high-volume assembly operations, you define product routing when you design your assembly line. You will mix products based on customer demand.

• Project Management. In one-of-a-kind projects such as the construction of an apartment complex, you use project-planning tools to schedule resources and activities.

What you need to remember now is that how you schedule will determine your costs and your ability to deliver what your customers want—when they want it!

Quality Control

Will your product meet customer expectations? Quality control helps you design, build, and inspect quality into both the process and the product. You need to remember two points:

1. Quality has many definitions. Three common definitions follow below:

   • Fitness for use

   • Conformance to specifications

   • Meeting customer expectations

   Ultimately, quality really is nothing more or less than meeting customer expectations!

2. No amount of inspection can make a bad product into a good one.

Your goal is to make things right the first time, every time. You can use a variety of statistical tools to guide product design, monitor process quality, and evaluate the quality of finished products. Remember, quality control is equally important in the delivery of services. However, you may find measurement to be more difficult. After all, service quality is often viewed from the perspective of customer satisfaction.

Now, a key point: You will only achieve true operational excellence as you execute Lean Six Sigma principles across all of these decision areas that define your operating context.