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The concept of responsiveness


Responsiveness is the ability of a system or process to complete tasks within a given time frame. E.g. how quick can a business respond to customer demands? If customers are made to wait, they are turned into inventory, potentially resulting in a unpleasant customer experience. Any customer waiting time is also an indicator of a mismatch between supply and demand.

Concepts for solving waiting time problems can include increasing the capacity of the resource at the bottleneck as well as increasing process flexibility in order to ensure, that capacity is available at the right time. It has, however, to be kept in mind that waiting times are most often not driven by either the capacity or the flexibility of a process but rather by variability. Variability in the process flow (e.g. customers arriving at random) can lead to unwanted waiting times even when the implied utilization is clearly below 100%. If analysis builds solely on averages and fails to consider process variability, it can thus be wrongfully concluded that there is no waiting time, when, in fact, there is.

To solve this problem, new analysis methods are needed when dealing with process variability. It is noteworthy, that those methods are only requisite when a process has more capacity than demand – if demand exceeds capacity, it can be safely concluded that there will be waiting time even without looking at the process variability.

These lecture notes were taken during 2013 installment of the MOOC “An Introduction to Operations Management” taught by Prof. Dr. Christian Terwiesch of the Wharton Business School of the University of Pennsylvania at Coursera.org.
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Optimizing the design of business processes


Since the design phase of a process largely determines the later production costs, the question of how to reduce the negative effects of variety on process performance by clever process design is becoming more and more important.

One successful method of improving process design is the so-called delayed differentiation. This method allots keeping as many process steps identical as possible for all products before splitting the production process up. The decision, which variant of a certain product is actually produced is thus delayed until the very last possible point in the process. This process design is optimal for products that differ only mildly (e.g. t-shirts of different colour). Delayed differentiation is made easy, if variable elements of the product can be isolated (the so-called moduled product design).

An interesting example for delayed differentiation is the casing around the (otherwise completely identical) iPhones. The hype over the iPhone also shows, that even hugely successful products do not necessarily need to offer a lot of variation. The reason for this is, that customers can also be overwhelmed by too much choice. To understand this, one has to understand that most customers only care about the characteristics e.g. of a computer that provide utility for them – not about the actual technical specifications (e.g. gaming performance compared to the actual graphic card of a computer). Companies thus might want to think about limiting their product variety in order to not make customers nervous by offering too much choice and keeping them from purchasing a product.

These lecture notes were taken during 2013 installment of the MOOC “An Introduction to Operations Management” taught by Prof. Dr. Christian Terwiesch of the Wharton Business School of the University of Pennsylvania at Coursera.org.

Re-definition of the batch size in accordance with demand


The batch size was previously defined as the number of flow units that are produced between two set-ups. While this definition is correct, it does not take into account the actual demand for the flow units. If a process is able to produce multiple flow units (e.g. cheeseburgers and veggie sandwiches) with one set-up time in between, a batch in a mixed-model production is re-defined as a number of mixed flow units produced during a certain amount of time (before the used pattern of production is repeated). The additional set-up times for switching between the flow units during the production of the batch have, of course, to be recognized.

This brings us to the following formula:

target flow = batch size / (set-up time + batch size * processing rate)

Here, the target flow is defined as the number of flow units needed per time frame in order to stay on top of the demand (e.g. 100 units per hour). The processing rate is determined by the bottleneck of the process or by the demand while set-up time and batch size have previously been defined.

If the goal is determining the ideal batch size, the formula can be resolved for the batch size. The result has to be set in ratio to the demand for the various flow units within the batch in order to find out, how many flow units of each type are produced within the ideal batch size. Note, that the set-up time needed to start the production pattern at the beginning is part of the overall set-up time and thus needs to be included in the total sum of set-up times needed for this calculation.

Obviously, the batches will become larger and the inventory will become bigger the more set-ups are necessary as long as the overall demand does not change (but is simply spread out over more offered product choices). Variety thus leads to more set-ups and thus to more inventory, which is one of the biggest problems associated with offering more variety.

These lecture notes were taken during 2013 installment of the MOOC “An Introduction to Operations Management” taught by Prof. Dr. Christian Terwiesch of the Wharton Business School of the University of Pennsylvania at Coursera.org.

Basic forms of product variety


There are three different basic forms of product variety:

(1) Fit variety: Customers need to be able to buy different versions (sizes, shapes etc.) of a product if the product is to be of use for them (personal utility maximization). The more the characteristics of a product move away from the customer specifications, the less use it has for that customer. This kind of variability is also known as horizontal differentiation. Examples are different sizes of shoes or t-shirts, different locations of shops or airports and different departure times of trains or planes.

(2) Performance-based variety: Companies might sometimes offer products of more or less quality (e.g. a “high end” product and a “standard” product), so that customers can buy according to their quality needs and / or their financial abilities (price discrimination). This kind of variability is also known as vertical differentiation. Examples are computers with different processor speeds, mobile phones with different weights and diamond earrings with different diamond sizes.

(3) Taste-based variety: Customers also want products to come in different versions appealing to their personal taste in colour, design, sapidity etc. This kind of variability is the outcome of rather “rugged” individualistic utility functions with local optima and no clear common thread.

A company may therefore choose to aim for more variety for one of the following reasons:

  • Their heterogeneous customer base does not accept “one size fits all”-products (taste-based variety)
  • They want to make use of price discrimination mechanisms and offer different quality versions for different income groups (performance-based variety, market segmentation)
  • Their customers actively demand more variety (e.g. by wanting to be offered a broad range of foods in a restaurant as opposed to being offered the same food every day)
  • Saturating a niche and thus preventing competitors from being active in that niche
  • Avoiding a direct price competition with competitors by product differentiation
These lecture notes were taken during 2013 installment of the MOOC “An Introduction to Operations Management” taught by Prof. Dr. Christian Terwiesch of the Wharton Business School of the University of Pennsylvania at Coursera.org.

The four levels of performance


A look at various types of business operations – from a sandwich restaurant to a hospital – reveals, that the typical customer evaluates business processes based on four basic levels of performance.

(1) Cost

How efficiently can the business operation deliver goods and / or services?
(More efficient businesses can offer goods and / or services at lower prices)

(2) Variety

Can the business fulfil the specific wishes of their heterogenous customer base?
(Most customers do not care about variety itself, but want their wishes to be met)

(3) Quality

Performance quality = How good is the product and / or service offered?
Conformance quality = Is the product and / or service as good as advertised?

(4) Time / Responsiveness

How fast can the wishes of the customer be fulfilled?

There are trade-offs between the four dimensions of performance, e.g. the fastest service with the highest quality can usually not be offered at the lowest price in comparison to competitors. These trade-offs can be used by businesses to create unique business strategies (e.g. cost leadership) as well as to distinguish themselves from their competitors.

The tools of Operations Management can be used to help businesses to reach decisions about such trade-offs and to evaluate measures to overcome inefficiencies. One way to detect such inefficiencies is to compare your own business with those of your competitors – and especially those competitors, who are positioned on the efficiency frontier with no other company being pareto-dominant on a combination of two out of the four dimensions (e.g. no other company is cheaper and faster or faster and offering more variability).

These lecture notes were taken during 2013 installment of the MOOC “An Introduction to Operations Management” taught by Prof. Dr. Christian Terwiesch of the Wharton Business School of the University of Pennsylvania at Coursera.org.
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