Operations Management

 Chapter 1

Introduction to
Operations Management
1-2
Learning Objectives

 Define the term operations management

 Identify the three major functional areas of
organizations and describe how they interrelate
 Compare and contrast service and manufacturing
operations
 Describe the operations function and the nature of
the operations manager’s job
Learning Objectives

 Differentiate between design and operation of

production systems
 Describe the key aspects of operations management
decision making
 Briefly describe the historical evolution of operations
management
 Identify current trends that impact operations
management
Operations Management

 Operations Management is:

The management of systems or processes
that create goods and/or provide services

 Operations Management affects:

 Companies’ ability to compete
 Nation’s ability to compete internationally
 The Organization
Figure 1.1

The Three Basic Functions

Organization

Finance Operations Marketing

 Value-Added Process
Figure 1.2
The operations function involves the conversion of
inputs into outputs
Value added
Inputs
Transformation/ Outputs
Land
Conversion Goods
Labor
process Services
Capital
Feedback

Control
Feedback Feedback
Value-Added & Product Packages

 Value-added is the difference between the cost of

inputs and the value or price of outputs.
 Product packages are a combination of goods and
services.
 Product packages can make a company more
competitive.
 Goods-service Continuum
Figure 1.3

Goods Service

Surgery, teaching

Song writing, software development

Computer repair, restaurant meal

Automobile Repair, fast food

Home remodeling, retail sales

Automobile assembly, steel making

 Food Processor
Table 1.2

Inputs Processing Outputs

Raw Vegetables Cleaning Canned
Metal Sheets Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment
 Hospital Process
Table 1.2

Inputs Processing Outputs

Doctors, nurses Examination Healthy

Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy
 Manufacturing or Service?

Tangible Act
Production of Goods vs. Delivery of
Services
 Production of goods – tangible output
 Delivery of services – an act
 Service job categories
 Government
 Wholesale/retail
 Financial services
 Healthcare
 Personal services
 Business services
 Education
 Key Differences

1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of productivity
 Key Differences
6. Production and delivery
7. Quality assurance
8. Amount of inventory
9. Evaluation of work
10. Ability to patent design
 Goods vs Service

Characteristic Goods Service

Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Output Tangible Intangible
Measurement of productivity Easy Difficult
Opportunity to correct problems High Low
Inventory Much Little
Evaluation Easier Difficult
Patentable Usually Not usual
 Scope of Operations Management

 Operations Management includes:

 Forecasting
 Capacity planning
 Scheduling
 Managing inventories
 Assuring quality
 Motivating employees
 Deciding where to locate facilities
 Supply chain management

And more . ..
 Types of Operations
Table 1.4
Operations Examples
Goods Producing Farming, mining, construction,
manufacturing, power generation
Storage/Transportation Warehousing, trucking, mail
service, moving, taxis, buses,
hotels, airlines
Exchange Retailing, wholesaling, banking,
renting, leasing, library, loans
Entertainment Films, radio and television,
concerts, recording
Communication Newspapers, radio and television
newscasts, telephone, satellites
Figure 1.4

U.S. Manufacturing vs. Service Employment

Year Mfg. Service
45
90 79 21
50 72 28 Mfg.
80
55 72 28 Service
70
60
60 68 32
65 64 36
Percent

50
70
40 64 36
75
30 58 42
80 44 46
20
85 43 57
10
90 35 65
0
95 25 75
45 50 55 60 65 70 75 80 85 90 95 00 02 05
00 30 70
02 25 75 Year
Decline in Manufacturing Jobs

 Productivity
 Increasing productivity allows companies to maintain or
increase their output using fewer workers
 Outsourcing
 Some manufacturing work has been outsourced to more
productive companies
Why Manufacturing Matters

 Over 18 million workers in manufacturing jobs

 Accounts for over 70% of value of U.S. exports
 Average full-time compensation about 20% higher than
average of all workers
 Manufacturing workers more likely to have benefits
 Productivity growth in manufacturing in the last 5 years
is more than double U.S. economy
Why Manufacturing Matters

 More than half of the total R&D performed is in the

manufacturing industries
 Manufacturing workers in California earn an average of
about $25,000 more a year than service workers
 When a California manufacturing job is lost, an average
of 2.5 service jobs are lost
Challenges of Managing Services

 Service jobs are often less structured than

manufacturing jobs
 Customer contact is higher
 Worker skill levels are lower
 Services hire many low-skill, entry-level
workers
 Employee turnover is higher
 Input variability is higher
 Service performance can be affected by
worker’s personal factors
Operations Management Decision
Making

 Models
 Quantitative approaches
 Analysis of trade-offs
 Systems approach
 Establishing priorities
 Ethics
 Key Decisions of Operations
Managers

 What
What resources/what amounts
 When
Needed/scheduled/ordered
 Where
Work to be done
 How
Designed
 Who
To do the work
 Decision Making

System Design
– capacity
– location
– arrangement of departments
– product and service planning
– acquisition and placement of
equipment
 Decision Making

System operation
– personnel
– inventory
– scheduling
– project
management
– quality assurance
 Decision Making

 Models
 Quantitative approaches
 Analysis of trade-offs
 Systems approach
 Models

A model is an abstraction of reality.

– Physical
– Schematic
– Mathematical Tradeoffs

What are the pros and cons of models?

 Models Are Beneficial
 Easy to use, less expensive
 Require users to organize
 Increase understanding of the problem
 Enable “what if” questions
 Consistent tool for evaluation and standardized format
 Power of mathematics
Limitations of Models

 Quantitative information may be emphasized over

qualitative
 Models may be incorrectly applied and results
misinterpreted
 Nonqualified users may not comprehend the rules on
how to use the model
 Use of models does not guarantee good decisions
 Quantitative Approaches

• Linear programming
• Queuing Techniques
• Inventory models
• Project models
• Statistical models

1-32
Analysis of Trade-Offs

 Decision on the amount of inventory to stock

 Increased cost of holding inventory
Vs.
 Level of customer service
 Systems Approach

“The whole is greater than

the sum of the parts.”

Suboptimization
 Pareto Phenomenon

• A few factors account for a high

percentage of the occurrence of some
event(s).
• 80/20 Rule - 80% of problems are caused
by 20% of the activities.

How do we identify the vital few?

Ethical Issues

 Financial statements
 Worker safety
 Product safety
 Quality
 Environment
 Community
 Hiring/firing workers
 Closing facilities
 Worker’s rights
 Business Operations Overlap

Operations

Marketing Finance
 Operations Interfaces
Industrial
Engineering
Maintenance
Distribution

Purchasing Public
Operations Relations

Legal
Personnel

Accounting MIS
Historical Evolution of Operations
Management

 Industrial revolution (1770’s)

 Scientific management (1911)
 Mass production
 Interchangeable parts
 Division of labor
 Human relations movement (1920-60)
 Decision models (1915, 1960-70’s)
 Influence of Japanese manufacturers
 Trends in Business

 Major trends
 The Internet, e-commerce, e-business
 Management technology
 Globalization
 Management of supply chains
 Outsourcing
 Agility
 Ethical behavior
Management Technology

 Technology: The application of scientific discoveries to

the development and improvement of goods and
services
 Product and service technology
 Process technology
 Information technology
 Simple Product Supply Chain
Figure 1.7

Suppliers’ Direct Final

Producer Distributor
Suppliers Suppliers Consumer

Supply Chain: A sequence of activities

And organizations involved in producing
And delivering a good or service
 A Supply Chain for Bread

Stage of Production Value Value of

Added Product
Farmer produces and harvests wheat $0.15 $0.15
Wheat transported to mill $0.08 $0.23
Mill produces flour $0.15 $0.38
Flour transported to baker $0.08 $0.46
Baker produces bread $0.54 $1.00
Bread transported to grocery store $0.08 $1.08
Grocery store displays and sells bread $0.21 $1.29
Total Value-Added $1.29
 Other Important Trends

 Ethical behavior
 Operations strategy
 Working with fewer resources
 Revenue management
 Process analysis and improvement
 Increased regulation and product liability
 Lean production