Operation Management and Decision Making - Essay Example

Operation Management and Decision Making Every company relies on its internal resources and capabilities aimed to support and improve market positionand profitability. The key success factor is the unity of strategy and strategic experience employed and developed to counter a widespread error. Capacity management helps organizations to plan and control resources. Following Slack et al (2003) "the sharing of capacity and inventory information helps to alleviate customers' anxiety and, consequently, lessen their need to engage in gaming" (p. 50). Usually, organization tries to determine whether to pursue one strategy as opposed to another, an assessment of the possible risks and benefits of each strategy is important. This is an area of some uncertainty in the capacity planning process. Hitachi Ltd is one of the companies used capacity management as the main tool to plan and control its production processes and improve performance. Hitachi Ltd. is a global leader on the electronic market specialized in Electronic Devices, Power & Industrial Systems, Digital Media & Consumer Products, High Functional Materials & Components, Logistics and Financial Services. The paper and analysis will concentrate only on one sphere of its activity: Electronic Devices. These are represented by the following types of products: power tools, measurements tools, electronic devices, semiconductors, etc. A special attention will be given to one product, semiconductors. In this segment, the efforts of executives to improve the management process have resulted in an influx of technological advances. Semiconductors are manufactured in Japan and Asia (Hitachi semiconductors 2008). For Hitachi Ltd, capacity planning is not visionary or futuristic thinking, but an example of process versus substance. Capacity management for semiconductors is the process that creates a balance between what is desired and what is possible. Capacity management enables managers to distinguish truly important decisions from less important ones and to build a strategic agenda. It is a process that deals with interdepartmental issues and allows the organization to develop synergy among functional components. It is a process that helps managers deal with turbulent, complex, and influential environments. It helps to identify critical success factors or key result areas, to avoid incremental thinking, and to effectively deal with change. The main products for semiconductors are Interlayer Dielectric Materials, High Heat resistance Photopolymers, die bonding paste, different types of bonding films, Epoxy Molding Compounds, liquid encapsulants, a high heat resistant coating. The product purity is strongly affected by many upstream variations (Hitachi semiconductors 2008). Local engineering systems help stabilize the columns to insure that the product meets minimum market specifications. These variations result in higher energy consumption and lower production capacity. At times, large variations disrupt the column operation to such an extent that it is necessary to shut down and restart. The fundamental source of such variation is easily traced to variations in the rates and concentrations of the many feeds that are pumped to the tank farm. In this case, as a recycle facility, it is not practical to negotiate with the suppliers for more consistency in the raw materials. There is little choice but to take the recycled acid as it comes, variation and all. There is a possibility, however, of reducing the magnitude of the problem by modifying the process and control system designs to be less sensitive to such unavoidable upstream variations. The plumbing of the tank is changed to make better use of the capacity of the inventory to reduce the magnitude and the frequency of the variations seen by the columns (Chase & Jacobs 2003). The main outputs are power semiconductors (high voltage, diodes), semiconductors for communication systems, and SDRAM for electronic technology (Hitachi semiconductors 2008).. "Improvements in production and inventory control translate directly into customer value through better product quality, cost, and delivery" (Chase & Jacobs 2003, p. 77). This impact dictates that the production and inventory control system must be a focal point in a manufacturing firm's strategy to compete through customer value. The inability of many firms to achieve good production and inventory control stems from fundamental deficiencies in certain organizational systems. The role of management must be that of identifying and improving those systems. Unless management accepts this role, implementation of MRP technique for coordinating production will, at best, result in marginal improvements (Dow, 1999). At Hitachi semiconductors, capacity planning is not the latest fad or technique recommended by consultants. In order to improve its capacity management, the organization uses forecasts focused on trends that will continue into the future and are inputs to the planning process. Plans do not eliminate risks. Instead, good plans highlight risks and spell out options for minimizing their effects on the organization (Chase & Jacobs 2003; Daghfous, 2004). The purpose of capacity management is to provide management with a framework in which decisions can be made which will have an impact on the organization. A conscious effort to systematize the effort and to manage its evolution is preferable to an unmanaged and haphazard evolution. The basic capacity problem is how to allocate the organization's limited resources. The major benefits to be expected from planning include an improved sense of direction for the organization, better performance, increased understanding of the organization and its purpose, earlier awareness of problems, and more effective decisions (Hitachi semiconductors 2008; Daghfous, 2004). "Introduction Inter-firm networking is increasingly important in economic life, because of its capacity for regulating complex transactional interdependence" (Slack et al 2003, p. 89). In general, capacity is defined as the degree to which the firm intends to provide the best net value with its products/services. "Capacity issues include the volume, timing and location of capacity provision" (Greasley 2005, p. 12). Capacity reflects a firm's drive and motivation to fulfill its commitments to customers. Capacity assessment involves a review of the intensity and tenacity that currently exist or that might be required of the organization for each opportunity. Capability refers to the resourcefulness of an organization, the degree to which the firm successfully acquires and manages the inputs required to make an offering that is valued by customers. Capability assessment involves comparing existing resources to the resourcefulness required to improve value or reduce sacrifice for customers (Chase & Jacobs 2003). "By improving their management of capacity, companies can smooth out the business cycle and moderate its impact on returns. To do so, they will need financial muscle and the courage not to follow the pack" (Achi et al 1996, p. 59). Good capacity management is characterized by a synchronized flow of materials through the production process with a minimum of idle inventory (Chase & Jacobs 2003). It is also characterized by short manufacturing lead times and productive use of the available work capacity and materials. Improvements in production and inventory control translate directly into customer value through better product quality, cost, and delivery. The purpose of inventory is to insulate each step of the production process from the other steps and to protect the production process from the suppliers and the customers (Calingo, 1996). Although this protective barrier may make life easier in the short run, it is an obstacle to understanding and improving the systems involved. If an easy method of achieving good production and inventory control existed, it would be like the philosopher's stone -- capable of creating gold from base metal. Unfortunately, there is no quick fix (Daghfous, 2004). Traditional models for inventory overestimate the benefits of inventory (Achi et al 1998). The assumed benefit of work-in-progress inventory is that it provides protection against idle work center capacity. Long production runs of similar items and the resulting inventories reduce the frequency of downtime for setups (Greasley 2005). At Hitachi, buffer stock inventories between work centers protect each work center from the variation at other steps that could cause downtime owing to starvation and blockages in the work flow (Hitachi semiconductors 2008). This variation may be due to unpredictable yields, unscheduled downtime, unreliable vendors, unpredictable run times, unpredictable quality, inaccurate inventory records or absenteeism. The assumption of such benefits ignores two important facts. First, the production system is amenable to improvements that can reduce the time required for setups and reduce the sources of variation. Following Naylo (2002) there are alternative means of eliminating wasted capacity. For Hitachi, lost capacity will necessarily result in lost productivity only if a work center is a bottleneck (i.e., an operation that restricts the production rate of the process) needed at 100 percent capacity (Naylor 2002). For example, the time saved by eliminating a setup at a work center that is not needed at full capacity becomes either idle time or, even worse, time used to produce unneeded inventory. Since most manufacturing organizations do not have a policy of intentionally holding excessive inventories, there is an obvious question as to why high inventories consistently evolve (Hitachi semiconductors 2008). There obviously must be organizational biases toward higher inventories. The most fundamental reason, discussed in the following section, relates to the way managers perceive their role in organizations. Inventory control is typically viewed as a process that makes tradeoffs between high inventory costs and low utilization of capacity (Greasley 2005). This tradeoff is an important aspect of all production scheduling techniques. For example, material requirements planning relies on long predetermined lead times between operations that create buffer stocks as cushions against variation. Just-in-Time systems use less-than-capacity scheduling of equipment (in conjunction with worker flexibility) (Naylor 2002; Greasley 2005). In Hitachi semiconductors, the slack capacity and the ability of the workers to do more than one job serve as a cushion against variation. The problem of inventory control should not be viewed as one of simply making a tradeoff between the evils of wasted capacity and the evils of excess inventory. For Hitachi, this tradeoff is necessary because of variation in the process. Inventories can be reduced and capacity utilization can be improved simultaneously through a reduction in variation. The horizontal axis shows the utilization factor for the work center, that is, the amount of work scheduled through the work center as a fraction of the total capacity of the work center (Naylor 2002). The vertical axis represents the upstream buffer stock required to achieve this level of utilization. The solid line illustrates that, in the presence of high variation, low levels of buffer stock and high utilization of capacity are mutually exclusive. No production scheduling system will in itself solve the problems of inventory control. For example, variation will result in either large inventories, wasted capacity, or both, regardless of the production scheduling mechanism used. If the performance measurement system is biased toward high inventories, then there will be high inventories (Naylor 2002). However, the production scheduling mechanism used will have an impact on the ability to locate systemic problems and implement improvements at Hitachi. It can be instrumental in exposing the sources of variation or the bias in the performance measurement system (Greasley 2005). Although tradeoffs on the various dimensions are inevitable, final selection should be based on the anticipated reciprocity from customers (Johnston 2003). Short- and long-term gains to customers should be reviewed carefully. The form, timing, and volume of reciprocity must be conceptualized, operational descriptions decided and documented, measurement systems developed and validated. Methods for testing critical assumptions must be developed and thresholds established to justify the organization's continued pursuit of each value opportunity. The main problem for Hitachi is that without methods, financial projections lack credibility and market opportunity estimates are hollow (Hitachi semiconductors 2008; Slack et al 2003). Changes in the process design that improve the operation by decreasing the need for engineering control systems are not always so inexpensive and impressive. It is important, however, that an organization committed to improving quality look for such opportunities. In its new role, engineering process control needs to work closely with process design. All control studies should review the basic process design and consider both simple and far-reaching changes that could improve the control problem (Johnston 2003). This can only be done by a healthy liaison between engineering process control and engineering process design. If used properly, it should play an important future role in the efforts to monitor and improve manufacturing quality. In most companies there is already an active relationship between engineering process control and management information systems (Johnston 2003). In the continuous process industries the process control computer often provides the interface for all the on-line process data and is itself an integral part of the total management information system. The two groups have already had to form a liaison to address problems such as networking the process control computers to the central management information computer, integrating their separate databases, and providing reliable security for both computer systems (Johnston 2003). These concerns have more to do with hardware and software issues than with managing variation. It is time for that liaison to move to a more mature focus -- one that is more concerned with the use of the historical database than with the details of the design of the system in which they are stored. Using the management information platforms to help Hitachi semiconductors requires the presence of a well-focused perspective in the database. This focus generally cannot be adequately addressed by a database that includes only the primary process variables and only one sampling frequency (Slack et al 2003). The database should include obscure process variables (such as valve positions) as well as variables that are calculated to represent some specific aspect of process performance. Furthermore, the database should be structured to represent adequately the frequency at which variation originates and propagates through the process. This can be done either by selecting the proper sampling frequency for the study or by including the results of a routine frequency analysis as calculated data in the standard low frequency log (Hitachi semiconductors 2008). Hitachi semiconductors use the capacity process control in order to ensure effective allocation of resources and sustain high productivity. The perspective of capacity process control should be broadened to include programs designed to identify and remove sources of variation. It is not likely, however, that such long-term programs would ever eliminate the need for engineering control systems (Daghfous, 2004). Such systems provide a short-term focus on variation that is usually necessary for safe, reliable operations. In most cases, correcting problems that cause variation simply improves the regulatory performance of the engineering control systems already on the process. In its broader quality-oriented perspective the traditional role of designing automatic control systems is still the most important function of engineering process control. This traditional role, however, needs to be reviewed and updated (Dow 1999). By better managing local variation, advanced control strategies can dramatically assist the pursuit of quality improvement. Their applications, however, need to be well selected. Complexities in a control strategy have both direct and indirect costs that can be justified only in terms of significant improvements in operations. Today, the biggest indirect costs are the personal impacts on the operators and engineers who must use the system. The more complex the design, the more difficult it is for these personnel to understand the strategy well enough to assume responsibility for the system. It only takes a few surprises before an advanced control strategy (as well as the engineer who designed it) can lose all credibility with the operator responsible for the unit. These tools reflect an attitude that the manager's role is to optimize the performance of the existing system, rather than to improve the system (Daghfous, 2004). For example, there is a major focus on tools for coping with variation, such as safety stock formulas (or, equivalently, safety lead time formulas), input and output control systems, and closed loop material requirements planning systems. These tools are designed to provide a cushion against variation or to make continual corrections to compensate for variation. There is little focus on reducing the variation. Similarly, lot sizing has focused on determining the best lot size, given a setup time required, rather than on reducing the time required for setups (Daghfous, 2004). There has been a similar focus on developing long-term forecasts of demand (a typically futile undertaking) rather than on reducing lead time so that production can be, planned from customers' orders. Few manufacturing organizations deliberately plan a competitive strategy based on excessive inventory levels and long customer lead times. Yet many end up with these results. These problems stem from deficiencies in the organizational systems and can be solved only through a process of systems improvement (Hitachi semiconductors 2008). Without this improvement effort that removes the fundamental causes of high inventory levels, improved scheduling approaches will at best achieve only marginal improvement (Johnston 2003). New scheduling techniques are particularly doomed if they are applied as a tool to improve the results (inventory levels, lead times, and production rate), rather than as a mechanism for improving the means to those results, for example, exposure and resolution of deficiencies in the system (Johnston 2003). The capacity management helps Hitachi semiconductors understand its service techniques and processes, how it is financed, and who its managers are. The latter point may be less often considered, but it is crucial. Hitachi semiconductors populated with long-tenured, solid, and dependable "technical types" may want to think twice before embarking on a highly innovative entrepreneurial venture requiring creativity and flexibility. An opportunity to provide a new service may not really be an opportunity to an organization unable to finance the initial capital investment required (Johnston 2003). It is certainly easier for a college to expand into job skills training activities, however different from the mainstream classroom education it offers, than to take on social service delivery, or for a local government to modify its recreation program than to build a housing project. The opportunities, therefore, should be close to the current service delivery capability of the organization. In addition, an understanding and consideration of the underlying values of an organization and its organizational culture are essential to a successful strategic planning effort. There must be congruence between the organization's values and its strategic plan (Johnston 2003). In sum, these basic operations methods, capacity analysis and priority setting implications for operations constitute the foundation for a learning revolution in the workplace. Lacking the fundamentals of operations methodology, renewal in the workplace cannot go forward. Competitive flexibility cannot be achieved without them. But they have the power to change the face of industry when used in judicious combination with supporting operations methods to manage inventory, simulate work flow patterns, statistically analyze quality issues and are arranged around sound organization change methodology. Bibliography 1. Achi, Z., Hausen, J., Pfeffer, J-L., Verhaeghe, P. 1996, Managing Capacity in Basic Materials. The McKinsey Quarterly, 1, pp. 59-69. 2. Calingo, L. M. 1996, The evolution of Strategic Quality Management." International Journal of Quality & Management, 13 (9), pp. 19-37. 3. Chase R.B., Jacobs R.F. 2003, Operations Management for Competitive Advantage, Hill/Irwin; 10 edition. 4. Daghfous, A. 2004, Absorptive Capacity and the Implementation of Knowledge-Intensive Best Practices. SAM Advanced Management Journal, 69 (1), 21. 5. Dow, D. 1999, "Exploding the Myth: Do All Quality Management Practices Contribute to Superior Quality Performance" Production and Operations Management, 8 (1), Spring pp. 1-25. 6. Greasley, A. 2005, Operations Management. John Wiley & Sons. 7. Hitachi semiconductors. 2008, Available at: http://www.hitachi-eu.com/ 8. Naylor J. 2002, Introduction to Operations Management, 2nd Edition Pearson Education. 9. Johnston R. 2003, Cases in Operations Management, 3rd Edition Pearson Education Limited. 10. Slack N., Chambers S. Johnston R. 2003, Operations ManagementFT Prentice Hall. Read More