Application of Operations Management Principles
Operations management offers a number of measures that could significantly contribute into the development of any business by using available resources and allocating them effectively. The main goal of operations management is to satisfy customer demand. Operations management can provide several advantages to any business, for example, reduction of production costs, improvement of costs efficiency, increase of revenues, increase of customer satisfaction, reduction of investment required, and providing a basement for future innovation (Stevenson, 2008).
The objective of this paper is to analyze the opportunities of operations management using an example of one of the medium-sized US supermarkets. The situation that occurred at one of the retail stores – Save Mart - is taken into consideration. The management of the company seeks the opportunity to reduce logistics costs and to improve quality of goods and customer service. Thus, there is a need to optimize the supply chain of the company implementing one or several operations management approaches.
Brief Description of the Company
Save Market Supermarkets (Save Mart) is a fast growing medium-sized grocery retailer which currently has 132 stores. The company locates in California and Nevada. It takes its well-deserved position in grocery business of the states. It offers a wide assortment of food products and nonessentials (garden supplies, gift items, fresh flowers, plants, etc.). The company customers are mostly end-users of the products. The retailer is working in a partnership with Mid-Valley Dairy (a producer of Sunnyside Farms products). The company owns a warehouse food division called Food Maxx which has 45 locations. It also operates under the names of S-Mart and Lucky. The company recommended itself as customer friendly retailer. It has many loyal customers within the country.
The Nature of the Problem
Save Mart buys its stock from contracted suppliers rather than on the open market that ensures long-term relations between the company and its suppliers. Save Mart has its own meat-factory. The company possesses the main competitive advantage over its rivals which is an excellent quality of goods. In addition, it provides customers with quality services. To ensure quality of goods and service satisfaction the company provides its staff with training. The company takes the responsibility of planning and control of sub-contractors because the quality of goods it provides is the main competitive advantage. Also, the company has its own department of quality which sends merchandise of poor quality back to the suppliers. The main strategy of the company is to reduce the percentage of waste.
Several steps should be taken to determine the principle which would improve the situation. First, the main goal of the company should be determined. Second, a system to which the principle will be applied should be identified. Third, a strategy, tactics and operational plans should be outlined as well. Thus, the operations management principles are to be identified for the whole supply chain and to the meat-factory.
There are several operations management principles that can be implemented in different situations, among them: Materials Requirements Planning (MRP), Lean Manufacturing, Six Sigma, and Theory of Constraints (TOC). The methods listed above can be used in various situations (Appendix 1).
Five Steps Decision Making Model
The Five Steps Decision Making Model consists of the following steps: stating the problem, identification of alternatives, evaluation of alternatives, making a decision and implementation of a decision (Appendix 2). Stating the problem is the most important stage in decision making process. The decision cannot be made until the problem is clearly outlined. In this case the problem is supply chain optimization (Goldratt, 2004).
The second stage is to identify alternatives. In this case the alternatives are as follows: Materials Requirements Planning (MRP), Lean Manufacturing, Six Sigma, and Theory of Constraints (TOC). Each of the methods or their combination can be helpful in various situations (Stevenson, 2008).
Material Requirements Planning (MRP) aims at scheduling the whole process – when the product should be ordered and the quantity of the product that must be ordered. However, this approach is costly.
Lean Manufacturing is focused on system flow. The method id based on the theory of waste removal. As Save Mart deals with perishable goods, this method perfectly suits for making improvements in the system. Implementation of Lean Manufacturing results in high quality products. Product spends minimum of time in the process, thus, the risk of being damaged is very low (Stevenson, 2008).
Six Sigma approach is based on the theory of reduction of variation. An outcome can be predicted due to the use of statistics. The process can be improved by reduction of variations of multiple elements.
Theory of constraints (TOC) is focused on managing constraints. The method concentrates on the bottle necks of the process and is aimed at optimization of the main constraints to achieve better productivity.
The fourth stage is called Making a Decision when the alternatives are evaluated and two or more alternatives are to be chosen for solving the problem in a particular situation. Low ranked alternatives should be eliminated. A choice should be made in favor of several high ranked alternatives or their combination. In this case a combination of two alternatives was chosen.
The fifth stage is the last stage in the decision making process is called Implementation of a Decision. A decision becomes valuable when it is implemented. The quality of the decision that was made can be evaluated after a decision was implemented.
Analysis and Discussion
The main goal of the company is to sell goods of an excellent quality keeping costs low. As the company is a retail store, it can be considered a distribution system. Typically, the main focus of distribution systems is on logistics and inventory. Logistics expenses are associated with shipping products from suppliers to the stores. Inventory management is tied to quality, inspection, scheduling and packaging. Thus, the main strategy is to save money on each stage of the distribution process providing acceptable level of quality of goods (Goldratt, 2004).
Lean Manufacturing consists of several steps, namely: identification of features that create value, value stream identification, making activities flow, letting the demand to pull the product inside a system, improvement of the process. First there is a need to identify customer needs with key characteristics of the product and processes. The second step if to measure a process and collect necessary data.
Characteristics and measurements must be confirmed. An analysis of the information collected will help identify the nature of the problem. On the fourth stage a solution of the problem is identified. Also, solutions of the problem are implemented. The fifth stage is control. Only due to continuous control and monitoring the process can be improved (Stevenson, 2008).
Six Sigma approach is focused on the problem. The five steps of this approach include defining the problem, measuring it, analysis of consequences, improvement steps and control.
The first step is connected with identification of customer need. There is a need to eliminate products which are not necessary on the market. Then a sequence of activities aimed at production should be determined. Wasteful processes must be eliminated. The activities that add value must be kept. The impact of non-value-creating activities should be minimized or eliminated. Then a flow must be optimized on the third stage. The process should flow without interruptions. The fourth stage concerns product optimization: quantity of a product in a system must be equal to customer demand. Further perfection of the process consists in minimization and elimination of non-value-creating activities.
Lean Manufacturing helps reduce percentage of waste and manufacturing costs due to simplification of the process (Stevenson, 2008).
Taking into account all said above, a decision was made in favor of Lean Distribution – an approach which was based on the principle of Lean Manufacturing and adjusted for distribution systems. A principle of Six Sigma was chosen as an additional method to resolve the issue.
Lean Distribution was chosen because of several reasons, namely:
It gives an opportunity to take into consideration total logistics costs rather than considering them as separated processes;
It helps eliminate bottle necks in distribution network;
The overall productivity can be increased through an increase in flow of the distribution network;
Incorporation of Six Sigma into the system helps reduction of variation resulting in a stable distribution flow;
It helps saving money through reduction of waste without quality compromising, thus helping achieve the goal of the company (Stevenson, 2008).
The difference between traditional and Lean approach can be seen in the Appendix 3.
Solutions and Recommendations
Taking into account an analysis that was carried out, there were several recommendations that were outlined in the Table 1 below. Also, shortcomings of each improvement were also specified to give the company management an opportunity to examine the problem in details.
Maintenance of Inventory for Service.
Placing inventory in warehouses to be able to satisfy immediate customer demand.
Inventory accounting becomes more complex as new stores are opened.
Improvement of Forecasting.
Collaboration with customers and Sales Department gives an opportunity to make accurate forecasts.
Forecasts can be wrong and require significant revisions. Operating schedules are not stable or do not respond to customers’ demand.
Automation of Warehouse Labor
Implementation of new technologies and installation of new equipment designed for material handling can speed up the flow of materials.
The changes in distribution network are difficult to make because of capital investments made. Besides, market conditions are changing quickly as well as operating conditions.
Reduction of Freight
Negotiating comfortable rates with carriers, shipping fully loaded trucks, elimination of expedited delivery.
Usually flexibility of freight is limited that may hamper the attempts to reduce total supply chain costs.
Data Entry Automation
Implementation of wireless terminals, RFID and bar codes help increase accuracy of data collected.
Increased volume of data analyzed makes planning process more complicated and requires more control.
Accordingly to the measures proposed the following outcomes were achieved within 1 year:
960,000 US dollars (20%) was generated with the help of inventory and waste reduction (Appendix 6);
Profitability is improved by 15% per month;
Lead times were cut by 40%;
Total waste of meet was reduced by 0.82%;
A 25% of economy was achieved due to freight reduction (Appendix 7);
On-time delivery increased from 45% to 90%;
Customer complaints significantly dropped (30%).
In general, a combination of two approaches was chosen in accordance with the needs of the company. However, further improvement would require permanent control over the process and monitoring of employees activities.
Save Mart Supermarkets had encountered a problem connected with supply chain management. Since the company is interested in its good name, the management of the company pondered over the improvement of supply chain as well as customer service. Quality of goods and excellent customer service were considered the main competitive advantages of the company. As a result of Five Steps Decision Making Process there were two approaches chosen to help in the situation. Lean Manufacturing and Six Sigma were the two approaches supposed to improve the situation. Implementation of combination of two approaches helps achieve significant results in goods quality as well as customer service. Based on the two approaches a number of measures were implemented in the company designed to improve supply chain and customer service. The measures that were implemented led to significant improvement of the company processes.
Goldratt, E. (2004). The goal. (3rd ed.). New York: North River Press.
Stevenson, W. J. (2008). Operations management. New York: McGraw-Hill/Irwin.