Copyright ©2003 Professor Arthur V. Hill, Carlson School of Management, University of Minnesota
The Encyclopedia of
Operations Management
by
Professor Arthur V. Hill
Curtis L. Carlson School of Management
321-19th Avenue South
University of Minnesota
Minneapolis, MN 55455-0413 USA
ahill@umn.edu
Revised January 9, 2003
This encyclopedia includes definitions and discussion of a wide range of operations management terms. Extensive explanations are
provided for many terms and concepts. Many new service management, strategic management, manufacturing management, and e-
business terms are included here that are not found in other dictionaries and encyclopedia.
This document is provided free of charge under the conditions that (1) you send corrections and additions to ahill@umn.edu and (2) it
not be used for commercial purposes of any kind.
Essential terms for business and engineering students are marked with an asterisk (*) in front of the term.
Copyright ©2003 Professor Arthur V. Hill, Carlson School of Management, University of Minnesota
5S concept – See the five S concept.
*ABC classification – A method for prioritizing items based on the product of the annual demand and the unit cost. The high “annual
dollar volume” items are classified as “A” item. The low annual dollar volume items are classified as “C” items. Based on
Pareto's Law, the ABC classification system drives us to manage “A” items more carefully. This means that these item should
be ordered more often, counted more often, located closer to the door, and be forecasted more carefully. Conversely, “C”
items are not very important from an investment point of view, and therefore should be ordered rarely and not counted often.
Some firms use other methods for defining the ABC classification -- such as the stockout cost or the medical criticality of the
item. This has nothing to do with Activity Based Costing. See Pareto’s Law.
Acceptable Quality Level (AQL) – The maximum percentage or proportion of nonconformities in a lot or batch that can be considered
satisfactory as a process average. (Source: FreeQuality.Org Glossary by S. Thomas Foster, Jr., Prentice Hall,
www.freequality.org/beta%20freequal/fq%20web%20site/documents/GLOSSARY.doc.)
*acceptance sampling – Acceptance sampling plans are used to make accept/reject decisions for each lot. With attribute sampling
plans, these decisions are based on a count of the number of defects and defectives; with variable sampling plans these
decisions are based on measurements. Plans requiring only a single sample set are known as single sampling plans; double
and multiple sampling plans may require additional samples sets. For example, an attribute single sampling plan with a
sample size n=50 and an accept number a=1 requires that a sample of 50 units be inspected. If the number of defectives in
that sample is one or zero, the lot is accepted. Otherwise it is rejected. Ideally, when a sampling plan is used, all bad lots will
be rejected and all good lots accepted. However, because accept/reject decisions are based on a sample of the lot, there is
always a chance of making an incorrect decision. So what protection does a sampling plan offer? The behavior of a sampling
plan can be described by its operating characteristic (OC) curve, which plots percent defectives versus the corresponding
probabilities of acceptance. Excerpted from Dr. Wayne Taylor, http://www.variation.com/techlib/as-9.html. See inspection.
*Activity Based Cost (ABC) – Activity-based costing (ABC) is an information system that maintains and processes data on a firm's
activities and products. It identifies the activities performed, traces cost to these activities, and then uses various cost drivers
to trace the cost of activities to products. These cost drivers, such as the number of persons performing work or the number of
setups required per product reflect the consumption of activities by the products. By costing the various activities performed,
it is easy to see how you might easily pinpoint changes in resource requirements for each activity if you changed your process
or procedure. If you operated under a traditional costing system, pinpointing changes in resource requirements would be
virtually impossible because it accumulated cost under budgetary line items (such as salaries) or functions (such as
engineering). Activity-base management (ABM) is merely the use of the activity-based costing tool by process owners to
control and improve their operations. Because process analysis is conducted in the building of an activity-based cost model,
management knows its business much better and can consequently evaluate value added and non-value added activities.
Because all of the costs for processes are known, outsourcing and privatization questions can easily be evaluated. Because a
certain volume of work produces a certain outcome, “what if” analysis can be conducted to determine what resources are
required if operations are scaled back or expanded. The potential of the activity-based costing tool to assist management in
daily operational decisions is powerful. (Source: http://www.acq-ref.navy.mil/wcp/abc.html)
active item – Any inventory item that has been used or sold within a given period (say last year). It is common for some retailers to
have 200,000 items in their item master, but only 20,000 “active” items.
A-plant – In this type of manufacturing process, we have many components that are “assembled” into just a few end items. We master
schedule this plant at the finished products level. (The term “A-plant” is probably not the best term. This is more of a
description of the bill-of-material than it is of the plant.)
*Advanced Planning and Scheduling (APS) – A manufacturing planning and scheduling system that is often used to supplement
“infinite planning” systems based on MRP (ERP) logic. An APS can create detailed schedules for orders, whereas traditional
MRP systems create very crude plans based on fixed planned leadtimes. Currently, the two best known APS software vendors
include i2 Technologies and Manugistics. See MRP, ERP, finite scheduling.
affinity diagram – A group decision-making technique designed to sort a large number of ideas, process variables, concepts, and
opinions into naturally related groups. These groups are connected by a simple concept. Groups use Affinity Diagrams to
clarify complex issues and reach a consensus on the definition of a problem. It answers a “What” question; for example, it
might be used to clarify the question, “What are the root causes of events that determined or impacted the quality of our
product?”
aggregate inventory management – Inventories with thousands or even hundreds of thousands of items are difficult to manage at an
item level. Aggregate inventory management tools allow managers to group items and manage each group with policies, key
performance indicators, targets and reports. For example, a particular group of items might share carrying charge parameters,
turnover goals, and have a fixed space allocation.
*aggregate planning (aggregate plan) – The process of translating the annual business and marketing plans into a production plan. In
academic circles, the result of the aggregate planning process is called the “aggregate plan,” whereas in APICS circles it is
known as the “production plan.” Aggregate planning is particularly difficult for firms with seasonal products -- firms such as
Polaris (snowmobiles and personal watercraft) and Toro (snow blowers and lawnmowers). Whereas the business plan is
usually defined in dollars (profit, revenue, and cost), the production plan is defined by units produced or by an aggregate
output (or input) measure, such as shop hours worked, gallons produced, etc. An aggregate measure is particularly useful if
The Encyclopedia of Operations Management Terms
Copyright ©2003 Professor Arthur V. Hill, Carlson School of Management, University of Minnesota Page 2
the production plan includes many dissimilar products. Costs relevant to the aggregate planning decisions include: inventory
carrying costs, capacity change costs (hiring, training, firing, facility expansion or contraction, equipment expansion or
reduction), and possibly the opportunity costs of lost sales.
agile manufacturing – Agility is an integrated set of business strategies for competitiveness in a turbulent business environment, based
on four cardinal principles: (1) Enrich the customer, (2) Master change and uncertainty, (3) Leverage resources, and (4) Co-
operate to compete. Companies that successfully embrace Agility profit from:
· New markets for niche, customized products and services
· Long-term relationships with customers
· Faster concept to cash time
· Turning change into market opportunity
· Greater bottom-line impact of people, information and technology
· Multiple win/win partnerships
A company that knows how to be Agile …
· Strategizes to fragment mass markets into niche markets
· Competes on the basis of customer-perceived value
· Produces multiple products and services in market-determined quantities
· Designs solutions interactively with customers
· Organizes for proficiency at change and rapid response
· Manages through leadership, motivation, support and trust
· Exploits information and communication technologies to the full
· Leverages all its capabilities, resources and assets regardless of location
· Works in entrepreneurial and empowered teams
· Partners with other companies as a strategy of choice, not of last resort
· Thrives and is widely imitated
Sources: http://www.agility.co.uk/ai.html
Agile Competitors and Virtual Organizations by S.L. Goldman, R.N. Nagel and K. Preiss; New York, Van Nostrand
Reinhold, 1995.
Agile Networking: Competing Through the Internet and Intranets by G. Metes, J. Gundry and P. Bradish; Upper Saddle
River New Jersey, Prentice-Hall PTR, 1997.
See agile work force.
all-time order – The last order for a particular product in the last phase of its life cycle. This order should be large enough that the
stock provided will satisfy all expected future demand for the product concerned. Sometime called a “life-time” buy.
all-time demand – The total future requirements for an item. This is the sum of the demand until the product termination date or until
the end of the world. This is used to determine the requirements for the final purchase or production run. This is sometimes
called the “all-time” or the “lifetime” requirement. See geometric decay.
allocated stock – A quantity of an item that has been reserved, but not yet withdrawn or issued from stock. Allocated inventory is not
available for other purposes.
andon – A Japanese term that refers to the warning lights on an assembly line that light up when a defect occurs. When the lights go
on, the assembly line is usually stopped until the problem is diagnosed and corrected. See Jidoka.
anticipation stock – Inventory held in order to (a) satisfy seasonal demand; (b) cope with expected reduced capacity due to
maintenance or anticipated strike; or (c) store seasonal supply for a level demand throughout the year (for example, a crop
that is harvested only once per year).
appraisal cost – The expenses associated with the direct costs of measuring quality through inspection and testing.
*Assemble-to-Order (ATO) – A customer interface strategy that responds to a customer order by putting together standard components
and modules for the customer. Customer leadtime is sum of the assembly, packing, and shipping time. This approach allows
for a large variety of final products within a relatively short customer lead-time. Examples include Burger King, which
assembles hamburgers with many options while the customer waits, and Dell Computer, which assembles and ships a wide
variety of computers on short notice. ATO systems have no finished goods inventory, but usually stock major components.
Pack-to-Order and Configure-to-Order systems are special cases of ATO. See respond-to-order, make-to-stock.
attribute – A term used by quality professionals that deals with a binomial state of being.
autonomation – Stopping a line automatically when a defective part is detected. See Jidoka.
autonomous maintenance – A TPM principle of having each worker responsible for both maintaining and operating a machine.
Maintenance activities include cleaning, lubricating, adjusting, inspecting, and repair. See Total Productive Maintenance.
Available-to-Promise (ATP) – Uncommitted inventory and planned production in master scheduling to support customer order
promises. (Source: http://gartner4.gartnerweb.com/public/static/hotc/hc00088697.html, updated October 27, 2000) The
uncommitted portion of a company’s inventory and planned production, maintained in the master schedule to support
The Encyclopedia of Operations Management Terms
Copyright ©2003 Professor Arthur V. Hill, Carlson School of Management, University of Minnesota Page 3
customer order promising. The ATP quantity is the uncommitted inventory balance in the first period and is normally
calculated for each period in which an MPS receipt is scheduled. In the first period, ATP includes on-hand inventory less
customer orders that are due and overdue. (http://www.iolt.org.uk/sig/scimglossary.htm, January 26, 2001)
*B2B – Business-to-business. A business selling to other businesses.
*B2C – Business-to-consumer. A business selling directly to consumers.
backflushing – A means of reducing the number of inventory transactions by relieving (reducing) the inventory count for parts only
when the final product is shipped. For example, instead of counting the number of letter “A”s that issued to assembly, we
simply count the number of keyboards that we ship and reduce the letter “A” inventory count accordingly. Backflushing gives
us an imprecise inventory count because of the delay -- but it can reduce the transaction cost significantly. A concept of
measurement used to periodically explode an end item’s BOM to calculate how many of each part went into the final
product(s). This eliminates much of the shop-floor data collection activity, which is required if each part must be tracked and
accounted for during production.
*backorder – A customer demand for which no stock is available and where the customer is prepared to wait for the item to arrive in
stock. If a firm cannot immediately satisfy a customer order, the customer is asked to wait. This order is called a
“backorder,” and is usually filled as soon as the items become available. If a product is not available, it is said to be “on
backorder.” In a sense, when we “backorder” demand, we are “inventorying” the demand. The set of backorders for a firm is
often called the “order backlog.”
backward loading (backloading) – A planning method that plans backwards from the due date to determine the start date. The word
“loading” implies that we are not creating a detailed schedule; backward loading might fill up a time “bucket” (say a half-day)
until the capacity is fully utilized. See backward scheduling.
backward scheduling – A scheduling method that plans backwards from the due date (or time) to determine the start date (or time).
Unlike backward loading, backward scheduling creates a detailed schedule for each operation based on the planned available
capacity.
*balanced scorecard – A reporting tools that shows senior management key performance metrics so that they can assess how well the
firm is achieving the strategy. Typical “boxes” include owners (financial metrics), operations (internal non-financial metrics
such as cycle time and quality), customers (customer satisfaction/loyalty), employees (employee satisfaction), and suppliers
(on-time delivery, quality, etc.). (Source: Art Hill)
A balanced scorecard is a framework that translates a company's vision and strategy into a coherent set of performance
measures. Developed by Robert Kaplan and David Norton (published in the Harvard Business Review in 1993), a balanced
business scorecard helps businesses evaluate how well they meet their strategic objectives. It typically has four to six
components, each with a series of sub-measures. Each component highlights one aspect of the business. The balanced
scorecard includes measures of performance that are lagging (return on capital, profit), medium-term indicators (like customer
satisfaction indices) and leading indicators (such as adoption rates for, or revenue from, new products).
(Source: http://www.adamssixsigma.com/Glossary_of_terms/six%20sigma%20glossary%20B.htm
Professor Hill has written a two-page technical note on Strategy Maps, which is closely related to the balanced scorecard
concept.
*bar code – Information encoded into a pattern of parallel bars and spaces that can be read by a scanner. The encoded information is a
unique serialization that can be correlated with other information from a database. Bar codes are particularly well suited for
tracking products through a process.
bathtub curve – A “U” shaped curve used for reliability theory that shows a typical hazard function with products more likely to fail
either very early in their useful life or very late in their useful life.
*benchmarking – Comparing products and/or processes to a standard in order to evaluate and improve performance. Benchmarking
can be done for either product or process performance. Internal process benchmarking sets the standard by comparing
processes in the same firm (e.g., another department, region, machine, worker, etc.). External process benchmarking sets the
standard based on a process from another firm. Competitive benchmarking sets the standard based on a competitor’s product
or process. Several quality awards such as the Deming Award in Japan, The European Quality Award in Europe, and The
Malcolm Baldrige Award in the U.S.A. provide benchmarks for quality performance. Many professional trade organizations
provide benchmarking standards. Having a numerical standard is only part of the benchmarking process -- real improvement
only comes when a “best in class” process or product is understood in detail and when the technology is transferred. Some
firms foolishly “benchmark” against another firm that is convenient, easy to find, close by, etc. Clearly, it is better to
benchmark the best in the world. Benchmarking can be informal or formal -- informal benchmarking involves going to a
warm climate in the winter, having some good food, and making some new friends. Formal benchmarking involves mapping
processes, sharing process maps, comparing numbers, etc. We want to measure not only the current status of the variable but
also the rate of change. For example, if we benchmark a “world class” firm and find that they have a cycle time of 10 weeks.
We work really hard over the next year and get our cycle time down to 10 weeks. Does that mean that we now have world
class cycle time? The answer, of course, is that we might not because the “world class” firm will likely be improving its cycle
The Encyclopedia of Operations Management Terms
Copyright ©2003 Professor Arthur V. Hill, Carlson School of Management, University of Minnesota Page 4
time during the year and might be doing so at a very rapid rate. Calculus teaches us that we need to know s(t), the position of
the metric at time t and v(t)=ds(t)/dt, the velocity (first derivative) at time t.
*best practices – This term is typically used in the context of a multi-divisional or multi-location firm that has similar processes in
many locations. For e
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