C HAPTER 11 M ANAGEMENT O PERATIONS

C ONTROL OF

CREATED BY: YANANTO MIHADI P.

M ANAGEMENT C ONTROL OF O PERATIONS

In this chapter we will discuss:

Information Used in Control of Operations Just-in-Time Techniques Total Quality Management Computer Integrated Manufacturing

Decision Support System

CREATED BY: YANANTO MIHADI P.

INFORMATION USED IN CONTROL OF OPERATIONS

Informal Information
INFORMATION USED IN CONTROL OF OPERATIONS

Formal Information

Non Financial Information

CREATED BY: YANANTO MIHADI P.

I NFORMAL I NFORMATION

Information that managers receive in organizations is mostly informal in nature. It is obtained through observation, face-to-face conversations, telephonic conversations, and meetings.

Management by walking around (MBWA) has gained a lot of importance in the present day business world indicating the importance of informal information. By walking around, the manager tries to understand the problems of the workers. The information received through this process is informal and cannot be categorized.

CREATED BY: YANANTO MIHADI P.

F ORMAL I NFORMATION
In formal information, the manager relies principally on the formal reports. This includes:

Task control information,

Budget reports,
Budget signals and Internal audit.

CREATED BY: YANANTO MIHADI P.

TASK CONTROL
INFORMATION

Task control information constitutes most of the formal information that flows through an organization in its daily operations (production or other activities). A production control system is one that schedules the flow of material, labor and other resources to ensure that both quality and productivity are maintained. An organization also has systems that control procurement, payroll, storage and other activities. Management control information is nothing but a summary of task control information.

The emergence of technology has made it easier for managers to acquire day-to-day information. However, the main issue is not of acquiring the information but deciding what information is really useful for them.

CREATED BY: YANANTO MIHADI P.

B UDGET

REPORTS

Approved budget is a financial tool which helps in controlling the activities of the managers and comparing actual expenses with budgeted amounts. The budget report serves as an important guide for the manager. The manager is expected to operate in accordance with the budget to get a clear idea of the financial position of the responsibility centers. However, the manager is free to depart from the budget if he feels there is a better way of achieving the objectives of the organization.

CREATED BY: YANANTO MIHADI P.

B UDGET

SIGNALS

Budget signals help the operating manager to determine the amount of money that has to be spent on various activities. These activities can be grouped under Ceilings and Floors. Ceiling includes activities such as advertising, entertainment expenses on which no more than the budgeted amount should be spent. Floors include activities like training and the manager is expected to spend the amount assigned for a particular activity. Though the expenses are stated in the budget, the manager should be in a position to decide the amount that has to be spent on each activity based on the requirement of the department.

CREATED BY: YANANTO MIHADI P.

I NTERNAL

AUDIT

The internal audit reports help detect such behavior while the audit committee activities ensures that appropriate action is taken on internal audit reports and that there are adequate controls to minimize theft and defalcation. As these activities generally involve high level managers it becomes difficult as well as sensitive task.

CREATED BY: YANANTO MIHADI P.

N ON F INANCIAL I NFORMATION

For management control systems to be effective in controlling operations, there is a need for non-financial information. It is reported as a supplement to the financial information. Non financial information includes the identification of key variables and the steps that have to be taken to achieve competency in these key variables. While financial performance shows the end result of an organization's performance, non financial information shows the means to achieve the ends. The relationship between financial and non-financial information in an organization is illustrated in Figure 11.1.

The exhibit illustrates that at the lower levels of organizational hierarchy, non financial measures are given greater importance. The emphasis on financial measures is likely to increase with hierarchical levels.

CREATED BY: YANANTO MIHADI P.

H IERARCHICAL L EVELS AND T YPES OF P ERFORMANCE M EASURES

CREATED BY: YANANTO MIHADI P.

JUST-IN-TIME TECHNIQUES

Just-in-time is a Japanese philosophy that is used for managing all types of inventory, purchase and production functions in an organization.

The main purpose of this philosophy is to reduce inefficiency and unproductive time in the production process.

CREATED BY: YANANTO MIHADI P.

A DVANTAGES OF J UST - IN T IME T ECHNIQUES

Reduces buffer inventory Decreases set-up costs
Advantages of Justin-Time Techniques

Decreasing procurement costs Relationship with customers

CREATED BY: YANANTO MIHADI P.

R EDUCES BUFFER
INVENTORY

The main aim of just-in-time is to ensure the delivery of raw materials at the right time and in the right quantity and reduce buffer inventory. The need for buffer inventory arises when machines break down or they produce defective parts.

The amount of buffer inventory can be reduced if steps are taken to minimize machine breakdown and improvise quality of the inventory. The need for buffer inventory also arises because of bottlenecks in the workplace. These problems can be minimized by taking immediate action whenever a problem arises.

CREATED BY: YANANTO MIHADI P.

D ECREASES

SET - UP COSTS

The amount spent on set-up costs is reduced with the introduction of numerically controlled machine tools. Traditionally when a machine was discontinued a sizable production of each part became obsolete and these awaited replacements. With numerically controlled machine tools, the need for this inventory is greatly reduced and orders for obsolete parts can be filled by simply inserting a proper computer program.
CREATED BY: YANANTO MIHADI P.

D ECREASING PROCUREMENT
COSTS

Traditionally, procurement involved a long process of first inviting bids, then analyzing these bids, and placing an order with the best vendor, followed by an inspection of the incoming goods. This process was time consuming as well as expensive. To avoid this, companies are now establishing relationship with one or two vendors who are expected to inspect the quality of the incoming goods before delivering them. Moreover, with the advent of information technology, orders are being transmitted electronically in many companies. This can help companies to curtail procurement.

CREATED BY: YANANTO MIHADI P.

R ELATIONSHIP WITH
CUSTOMERS

Manufacturers use systems through which sales persons can automatically place orders from retailers or other customers.

These systems help in providing fast and accurate information to managers and also build strong relationship between the customer and manufacturer.

CREATED BY: YANANTO MIHADI P.

I MPLICATIONS FOR M ANAGEMENT C ONTROL

Before implementing just-in-time systems a manager has to understand the following aspects. Work-in-process inventory becomes insignificant because of just-in-time systems and can be disregarded. In such cases inventories exist only for raw materials and finished goods, therefore reducing record keeping considerably. In addition to the traditional focus on cost, a just-in-time system focuses management attention on time. A reduction in cycle time may result in reduction of costs. The progress of justin-time systems can be effectively monitored through the following ratio: Processing time Cycle time

CREATED BY: YANANTO MIHADI P.

TOTAL QUALITY MANAGEMENT

Total quality management (TQM) is a management concept that directs the collective efforts of all managers and employees towards satisfying customer expectations by continually improving operations management processes and products. TQM emphasizes three important aspects: customer satisfaction, employee involvement and quality improvement. The Japanese have set an example for other countries paying considerable attention to quality. Quality efforts initiated by the Japanese have now been adopted by several American companies.

CREATED BY: YANANTO MIHADI P.

C ONSEQUENCES OF P OOR Q UALITY

The quality of a product can be decided either on the basis of design or its conformance to customer requirements. Design quality can be described as the value that the consumer places on the product. A product is said to achieve conformance quality, if it adheres to the specification of manufacturing the product. If a product does not meet the specifications, than it implies nonconformance to quality. This nonconformance is measured by the number of defective products. Total quality management emphasizes manufacturing products with zero defects. Emphasis is also laid on detecting the problem at the initial stage because if the defect is detected at a later stage, then it results in cost penalty for the organization, which at times can damage the reputation of the firm. Therefore, the earlier a defect is detected; the lower will be the cost penalty.

CREATED BY: YANANTO MIHADI P.

TOTAL Q UALITY M ANAGEMENT A PPROACH

The total quality management approach can be looked at from three aspects:

Responsibility for quality,

Product design and

Relationship with suppliers.

CREATED BY: YANANTO MIHADI P.

R ESPONSIBILITY FOR
QUALITY

The traditional view held that most defects occurred at the factory floor and that workers were primarily responsible for them. Hence, the quality control in the traditional method involved inspecting the quality of the products. This was a tedious process and entailed setting up a quality control department. This led to a frequent conflict between the manufacturing department and the quality control department. The main objective of the manufacturing department was to maximize output; the quality control department was responsible for detecting problems.

The total quality management approach thus, emphasizes ensuring quality while the product is being manufactured rather than inspecting it for quality after it has been manufactured.
CREATED BY: YANANTO MIHADI P.

P RODUCT

DESIGN

Most of the quality problems arise in the early stages mainly during the designing of the product. These problems occur when the designers do not work closely with the production people, who are familiar with manufacturing problems. Under total quality control, there is an effort to coordinate the activities of designers and the production engineers. While designing a product, the preference of the customers should be given due consideration. For this it is important that the marketing department and design department work in close coordination.

CREATED BY: YANANTO MIHADI P.

R ELATIONSHIP WITH
SUPPLIERS

In the traditional method, contracts were awarded to those suppliers who placed the lowest bid. But in total quality management, the supplier is selected not just on the basis price but also the quality, and its timely delivery of the product. Thus, instead of having many suppliers, one or two suppliers are selected and a long term relationship is established with them.

CREATED BY: YANANTO MIHADI P.

I MPLICATIONS FOR M ANAGEMENT C ONTROL

The management can ensure the quality of its products by focusing on two aspects

The financial and

Non financial.

CREATED BY: YANANTO MIHADI P.

F INANCIAL

MEASURES

In the financial measures, the costs of doing things wrong are estimated and aggregated. There are certain costs associated with quality management: prevention, appraisal, internal failure costs and external failure costs. The total cost of quality for a firm is the sum of the four costs described below:

Preventive costs Appraisal costs Internal failure costs External failure costs

CREATED BY: YANANTO MIHADI P.

F INANCIAL

MEASURES

Preventive costs
These are costs incurred to make products defect free the first time they are manufactured. It includes quality engineering, receiving inspection, preventive maintenance, the estimated fraction of manufacturing engineering and design engineering. All these ensure prevention of defects and encourage quality training.

Appraisal costs

These are costs incurred in assessing the level of quality in the manufacturing system. It includes technical services laboratory, design analysis and actual inspection costs.
CREATED BY: YANANTO MIHADI P.

F INANCIAL

MEASURES

Internal failure costs They fall into two major categories: yield losses (if a defective item has to be scrapped) and rework costs (if an item is routed to previous operations).

External failure costs These arise when a defect is discovered after a customer has received a product or service. The costs include cost of returns, marketing expenses dealing with returns, repair costs etc.,
CREATED BY: YANANTO MIHADI P.

N ONFINANCIAL

MEASURES

These relate to collecting nonfinancial information about the number of defective units delivered by each supplier, number and frequency of late deliveries, number of customer complaints, warranty claims, machine breakdowns, number and frequency of product returns. The major advantages of non financial measures are:

They can be reported on a daily basis Corrective actions can be taken everyday.

CREATED BY: YANANTO MIHADI P.

COMPUTER INTEGRATED MANUFACTURING

It is a term used for the total integration of product design and engineering, process planning and manufacturing by means of complex computer systems.

Expensive computer systems are used to link various stages of production.

These systems automatically schedule manufacturing tasks, and keep track of the availability labor. Then they send instructions to computer screens at various workstations along the assembly line.

CREATED BY: YANANTO MIHADI P.

COMPUTER INTEGRATED MANUFACTURING

The implications of such systems for management control are:

They increase the task control for managers as these systems convert certain production activities that once required management control to task control. The information provided by these systems is accurate and detailed. Some systems are built around work teams that are responsible for all operations. In team approaches, the business unit controller is primarily responsible for assisting the business unit manager in planning and controlling the unit's operations.

CREATED BY: YANANTO MIHADI P.

DECISION SUPPORT SYSTEMS

DECISION SUPPORT SYSTEMS

Nature of Decision Support Systems Implications for Management Control

CREATED BY: YANANTO MIHADI P.

N ATURE OF D ECISION S UPPORT S YSTEMS

If-then rules or decision rules that show how an expert in the area would solve a problem, given a certain set of facts, make up a decision support system. The relevant information is provided by a series of questions answered by the decision maker. These questions are asked in plain English and does not require any knowledge of computer programming. That is why they are called natural language programs. A course of action is then suggested by the computer. Decision support systems are so called because they help the decision maker to arrive at a decision. The decision maker, however, is free to reject the computers recommendation, or to modify it.

CREATED BY: YANANTO MIHADI P.

I MPLICATIONS FOR M ANAGEMENT C ONTROL

With the use of decision support systems, the need for managers may be reduced as they can convert management control activities into task control activities. Managers may also be able to spend a larger fraction of their time on other problems.

On the one hand, decision support systems can increase the quality of decisions and reduce (or even eliminate, in some cases) the time that is required to take them. On the other hand, they permit many types of decisions to be made by the computer or by lower-level personnel. Decision support systems thus, reduce the level of expertise required and, in some cases, eliminate jobs entirely.

CREATED BY: YANANTO MIHADI P.

SUMMARY

Operations management is being increasingly recognized, at the strategic level, as a potentially rich source from which competitive advantage may be leveraged. To control such a process and make it work effectively, managers use various types of information. The simplest is management by walking around.
Formal methods through which a manager controls performance include task control information, budget reports and signals. Internal audit is an important method to assess whether the manager is performing as expected by the organization. Apart from financial information, a manager should also have an idea about the non-financial information that is necessary to achieve the organizational goals. Recent developments in operations management have helped companies to increase quality at lower costs. Just-in-time is one philosophy that is used to reduce inefficiency and unproductive time in the production process.

Total quality management is a management concept that has gained tremendous importance in continually improving operations management processes and products. The other developments include computer integrated manufacturing and decision support systems

CREATED BY: YANANTO MIHADI P.