The Essence of Operational Management - Essay Example

The essence of Operations Management is the need to make rational decisions in difficult circumstances with limited, imperfect information. Name Instructors Name Course University Date of Submission The essence of Operations Management is the need to make rational decisions in difficult circumstances with limited, imperfect information. INTRODUCTION: Operational management deals with activities that help organization to achieve their goals. Operational management is usually termed as production management as well. At the most basic level, it is about getting day to day processes done efficiently, effectively and at low cost. Operating plans are derived out of the long term strategies and goals which are based on careful projections of demand for the product or service. When operation management is handled effectively, the system is unnoticeable. Basically it is design and control of systematic processes that convert inputs into products and services for internal or external customers. Operation management is found in all functions of businesses whether it be production, marketing, human resources or finance. (Shim, Jae K., Siegel, Joel G. 1999; Krajewski.2007; Young, Scott T. 2009) OPERATIONS MANAGEMENT: Operations management involves three basic stages management and strategy, planning and inventory and supply management. Each of this stage is crucial in conversion of inputs into outputs. Management and strategy deals with issues like improving productivity, improving the processes, effectiveness of operations, guiding human resource in the operations, measuring their performance in different perspectives and monitoring them and developing and implementing strategies to improve current operations and processes for higher productivity. The second stage is planning. This stage takes a futuristic approach for the business and deals in forecasting, estimations and predictions for the future in order to determine the demand for product and services and the utilization of resources accordingly. The third stage is inventory and supply chain management, the area on which many companies like Dell has focused in order to gain a competitive advantage. Supply chain management deals from transfer of raw material from supplier to transfer of final goods to the consumer. Inventory management is essential to avoid stock outs and timely delivery. Operations management in all is necessary for any organization whether it be manufacturing business or a service. (Young, Scott T. 2009) DECISION MAKING: Operation managers act as decision makers. They have many alternative choices and they need to make decisions on their analysis and best of knowledge. The quantitative approach to decision making or a quantitative analysis of a problem lays the basis of problem solving and improving techniques. The first step is to define the problem. In this step management needs to identify what are the areas of concern? What processes are the most important to a business in terms of its impacts on customers and profitability? Often at this stage the project team is also formed and basic outlines are set to get the work done. Once management concludes what the area of problem is, it should prepare an exact clear statement of the problem. (Young, Scott T. 2009; Shim, Jae K., Siegel, Joel G. 1999) The second step is measuring the problem or developing a model. This stage requires the problem to be quantified. This can be done by different charting method or simply by a flowchart. Quantitative methods are based on the analysis of historical data. There are many methods of charting for e.g. value stream mapping, SIPOC diagram, deployment flowchart, transportation diagram etc. The third step is to gather accurate information and facts to support the model which will lead to the fourth step of deriving an optimal solution. (The best example of this kind of modeling is linear programming). The fifth step is to test the optimal solution. Then come the analysis of the results and solution’s implications on the problem and determining the critical factors that can affect the solution adversely. The last stage is implementing the solution. (Young, Scott T. 2009; Shim, Jae K., Siegel, Joel G. 1999) Decision making is required in certain and uncertain situations. Certainty is easier to deal with as there is not much risk involved, however in uncertain situations there are risks which have to be dealt with. There are many models to deal with uncertain situations. Although each situation is different from other the three basic steps in decision making remains the same which are identifying and defining the problem, analyzing alternatives by collecting information and choosing and implementing the most feasible alternative. All decision making revolves around these three processes. (Shim, Jae K., Siegel, Joel G. 1999; Krajewski.2007) DECISION MAKING TECHNIQUES AND TOOLS: There are many decision making techniques and tools which allow the decision maker to choose a solution from different alternatives. The decision theory provides a standard framework of guidelines to make a decision in uncertain situation. This framework provides seven steps to be taken. First, being the identification of problem and making a specific statement about the existence of the problem. The second step is to establish goals and measuring the gap between the current position and the desired goal. Identifying any constraints in achieving that goal is the third step, any financial, legal or other constraints should be clearly identified. The fourth step is to identify alternative courses of action. The fifth step is to analyze the environment in reference to the identified alternative course of actions, many techniques and model like PESTEL can be used for the analysis. The sixth step is to determine potential outcomes for identified alternative course of actions, many techniques like decision matrix, payoff tables can be used for the purpose. The last step is to apply the decision rules (the basis on which company takes decision) and select the option which maximizes company’s objectives. Other systematic techniques used in the process of decision making include decision matrix, decision trees, break-even analysis, preference matrix, use of probabilities and expected values, graphical methods, linear programming etc. (Shim, Jae K., Siegel, Joel G. 1999; Krajewski.2007) FORECASTING: Forecasting is crucial for any business, big names like Wall mart has established a market-basket analysis which is used for forecasting demand and seasonal sales profile for individual item in individual store. Similarly Unilever has the world’s best forecasting system which takes into account historical shipment data, promotional data and current order information. With the blend of this past and present information Unilever is able to derive some valuable information which has made a very positive influence over its overall operation of supply chain management and inventory systems. (Krajewski.2007; Chase.2006) Forecasting is the basis of every planning in any organization. It is the process developing a view about what future demand, technology, competitors, expenditures, sales etc. will be. Forecasting is usually the first step of any planning, whether it is long run or short run, after forecasting plans regarding the deployment of resources and future actions are developed. Forecasting lies in the basis of all the functions in the organization. It serves as the starting of budgets and cost planning. In marketing it provides basis for sales forecasts and demands for the future. Production and processes make estimations about capacity planning, scheduling and inventory management etc based on the forecasts. (Krajewski.2007; Chase.2006) IMPORTANCE OF FORECASTING FOR OPERATIONS MANGERS: Forecasting is necessary for managers in any organization. It serves as an important tool for looking into future and taking preventive actions today. Forecasting is used most by the managers in operations and marketing functions. At the end of the year no company wants to be stuck with unsold, obsolete inventory. The marketing managers are involved in predicting the sales for the next period. The forecasts produced by them serve as the basis of production plan for the production and operations department. Production plan based on forecast decides what and how much will be produced for the next period. The finance department during the budgetary process will allocate the resources required for the production department on the basis of forecasts. Additionally, the human resource function will match the required staff with production capacity. In this way forecasts serves as the basis of all the operations in the organization. Forecasting can even help in identifying future competitors, promoting organization, makes planning possible, acts as a source of coordination between different departments, acts as a control mechanism for the organization, helps in enhancing the exactness of managerial designs and developing an effective just-in-time inventory system by providing a greater insight about the market trends and consumption patterns. Managers need to emphasize on developing accurate forecasts in order to maximize the utilization of resources. (Young, Scott T. 2009) PROCESS OF FORECASTING: A traditional forecasting method is usually made up of six steps. The first step is to determine what is to be forecasted and why it to be forecasted? What will be level of resources required in order to forecast. The second step is to decide about the time periods for which forecasting are to be done. Forecasting can be on monthly basis or for a long term period of 5 years. The third step is to select a forecasting method; many methods of forecasting are available which includes quantitative and qualitative methods of forecasting. The fourth step is to gather the data, apply it in a model and after the analysis develop a forecast. The fifth step is the identification of any assumptions that were made in order to develop a forecast. The last step is to monitor the forecast for errors and whether the forecast fulfills the required purpose. If the forecasting results are not satisfactory start the process again. Forecasting is a process that should be reviewed constantly for further improvements. (Shim, Jae K., Siegel, Joel G. 1999) METHODS OF FORECASTING: There are many methods available for forecasting, which can broadly be divided into quantitative forecasting and qualitative forecasting. QUANTITATIVE MODELS: Quantitative models are mathematical models and techniques for forecasting. Quantitative models work well if the operating environment remains constant, where there are drastic changes in the environment these models can be of limited use. The most important thing in order to adopt the approach is to know the pattern of data and availability of historical information. (Shim, Jae K., Siegel, Joel G. 1999; Chase.2006; Krajewski.2007) There are many models used for quantitative analysis widely. These can broadly be divided into two categories: 1. Casual Methods: These methods use historical data on independent variables to make predictions. These are used when the relationship between factors to be forecasted and other internal and external factors can be established. These methods include: a. Linear Regression Analysis: In this method a dependant variable is related to one or more independent variable by a linear equation. This method is used when it is believed that a casual variable can predict the outcome. 2. Time Series Analysis: Is a systematic statistical approach that relies heavily on historical patters of demand to predict future demands. It takes into account trends and seasonal variations. It simply forecasts on the basis of past. These methods include: a. Naïve forecast: This is the simplest method of forecasting where forecast for the next period equals the current period. It ignores the underlying casual relationships that produce the variable being forecast. b. Moving Averages: This method is used in predicting demands usually for products whose demand is neither rapidly growing nor falling and isn’t affected by seasonal fluctuation. In this method most updated information can be incorporated easily for a better forecast. c. Exponential Smoothing: This is a wider used method of forecasting due to its simplicity, small amount of data to be input and as it takes into account seasonal variations and trends unlike moving averages. It calculates average of a time series, where it gives more weight age to recent trends and data rather than historical ones. (Shim, Jae K., Siegel, Joel G. 1999; Chase.2006; Krajewski.2007; Young, Scott T. 2009) QUALITATIVE MODELS: Qualitative models forecast base on judgments and opinions. They are based on manager’s opinions, consumer surveys, sales force estimates etc. Since they are based on human judgments and observation of existing trends, they inherent certain problems too. (Shim, Jae K., Siegel, Joel G. 1999; Chase.2006; Krajewski.2007) The widely used methods and models for qualitative analysis are described precisely below: a. Sales Forecast estimates/ Sales force polling: The idea is that the best estimate of future demand can be provided by people who work closely with it and can have significant insight about the state of future markets. b. Delphi Model: It’s a method where consensus is gained of the experts but their identity is hidden so that no one member can influence the decision. Procedurally a moderator prepares a questionnaire and sent it to each member of outside experts while no member knows who all are participating. Their responses are summed up and given back to the entire group for another round of questions until a consensus aren’t achieved. c. Consumer Surveys/ Market Research: This approach is a systematic approach to gain an insight about the external customer’s demands interests and needs. Surveys maybe conducted to gather such information for forecasts. d. Executive opinion: When a new product is launched usually the sales force isn’t able to make a forecast regarding the demand of that product. An executive, by his opinions, experience and technical knowledge can provide a basis of forecast. (Shim, Jae K., Siegel, Joel G. 1999; Chase.2006; Krajewski.2007) SELECTION OF FORECASTING METHOD: The selection of forecasting method depends upon the product’s life cycle or the type of firm or industry. The objective is to develop a useful forecast from available information which serves different patterns of demand. Another factor influencing the choice of forecasting method is time horizon for the decision requiring forecasts for e.g. they could be for long term, medium term or short term etc. (Shim, Jae K., Siegel, Joel G. 1999; Krajewski.2007) FORECAST ERRORS: Since forecasting is for future it can never be perfect and will always contain some errors. Error is referred to as the difference between the forecasts and actual results. They can be classified as bias errors and random errors. Bias errors happen due to negligence or inaccurately estimating patterns and rends or by ignoring seasonal variations. They are the result of consistent mistakes. Random errors are caused by unpredictable factors that make the forecast deviate from the actual results. Mean Absolute Deviation (MAD) is often used to forecast errors. (Chase.2006; Krajewski.2007) CONCLUSION: Operations management is fundamental to any organization. Smoothly run operations ensure more efficient and effective use of resources. The operation managers need to plan and strategize their activities in order to achieve their targets. Planning and decision making are important tools for an operation manager and are fundamental to any organization. Planning cannot be done without forecasting. Accurate forecasting is to look into future and preparing to fulfill the demands of tomorrow. Many quantitative and qualitative techniques are available for operation managers to base their forecasts on. In the long run forecasting provides the guidelines for strategic changes to an organization. Bibliography CHASE. 2006. Operations Management for Competitive Advantage KRAJEWSKI. 2007. Operations Management: Processes And Value Chains, 8/E SHIM, JAE K., SIEGEL, JOEL G. 1999. Operations Management YOUNG, SCOTT T. 2009. Essentials of Operations Management Read More