INTRODUCTION TO

OPERATIONS
MANAGEMENT
 OPERATIONS MANAGEMENT
What is operations?
The part of a business organization that is
responsible for producing goods or services

How can we define operations management?

The design, operation and improvement of
the systems or processes that create goods
and/or provide services
SUPPLY & DEMAND
Operations &
Supply Chains Sales & Marketing

Wasteful
Supply
> Demand Costly

Opportunity Loss
Supply
< Demand Customer
Dissatisfaction

Supply
= Demand Ideal
 THE OPERATIONS FUNCTION

Operations as a transformation process

Operations as a basic function

Operations as the technical core
THE TRANSFORMATION PROCESS
Value-Added

Inputs Transformation/ Outputs

Land Conversion Goods
Materials Services
Labor
Process
Management
Capital
Information

Feedback

Feedback Feedback
Control

Feedback = measurements taken at various points in the transformation process

Control = The comparison of feedback against previously established
standards to determine if corrective action is needed.
 WHAT IS VALUE ADDED?

The essence of operations function is to add

value during the transformation process

Value added is the difference between the cost

of intputs and the value or price of outputs.
 FIRMS USE THE MONEY
GENERATED BY VALUE
ADDED FOR:
R&D
Investment in new facilities and equipment
Paying workers
Paying for materials
Paying for general expenses
Profits
TRANSFORMATION PROCESS OF
A CANNED FOOD PROCESSOR
Inputs Processing Outputs
Metal sheets Cleaning Canned
Raw vegetables Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment
TRANSFORMATION PROCESS OF
A HOSPITAL
Inputs Processing Outputs
Doctors, nurses Examination Healthy
Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy
 EXAMPLES OF VARIOUS
OPERATIONS
Operations Examples
Goods Producing Farming, mining, construction ,
manufacturing, power generation
Storage/ Warehousing, trucking, mail
Transportation 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
TYPES OF TRANSFORMATION
PROCESSES
Physical- manufacturing
Locational- transportation
Exchange- retailing
Storage- warehousing
Physiological- health care
Informational- telecommunications
Psychological- entertainment
 OPERATIONS AS A BASIC
FUNCTION
Marketing
Generates demand
gets customers
Operations
creates product or service
Finance/Accounting
Obtains funds
Tracks organizational performance
BASIC FUNCTIONS OF THE
BUSINESS ORGANIZATION

Organization

Marketing Operations Finance

 SUPPLY CHAIN

Supply Chain a sequence of activities and

organizations involved in producing and
delivering a good or service

Suppliers Direct Final

Producer Distributor
suppliers suppliers Customers
 IMPORTANCE OF OM
(WHY STUDY OM?) (1 of 2)
Operations is one of the three major functions of
an organization
Offers a major opportunity for an
organization to improve its productivity and
profitability
OM affects 1) the companies ability to
compete and 2) the nations ability to
compete internationally
Nearly half of the employed people over
the world have jobs in operations
 IMPORTANCE OF OM
(WHY STUDY OM?) (2 of 2)
The OM function is responsible for a major
portion of the assets of most organizations
OM is a costly part of an organization
The concepts, tools and techniques of
OM are widely used in managing other
functions.
Presents career opportunities
OPTIONS FOR INCREASING
CONTRIBUTION
Finance &
Accounting
Marketing Option Option OM Option
Sales Finance P roduction
Current Revenue : +50% Costs: -50% Costs: -20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of -80,000 -120,000 -80,000 -64,000
Goods Sold
Gross 20,000 30,000 20,000 36,000
Margin
Finance -6,000 -6,000 -3,000 -6,000
Costs
Net 14,000 24,000 17,000 30,000
Margin
Taxes @ -3,500 -6,000 -4,250 -7,500
25%
Contribution 10,500 18,000 12,750 22,500
 TYPES OF PRODUCTION
PROCESSES
(PROCESS FLOW STRUCTURES)
INTERMITTENT
Job shop
Batch production
CONTINOUS
Mass production
Continuous flow
production
PROJECT
18
EMERGENCY ROOM

E.R.Triage Patient A -
room broken leg

Patient B -
erratic
pacemaker
Hallway

E.R. beds Pharmacy Billing/exit

19
 AUTOMOBILE PLANT
sequential

Raw materials Station Station Station Station

or customer FG
1 2 3 4

Material Material Material Material

and/or and/or and/or and/or
labor labor labor labor

Used for Repetitive or Continuous Processing

20
PRODUCTION OF GOODS
VS.
DELIVERY OF SERVICES
 MANUFACTURING
vs. SERVICE
Manufacturing and Service Organizations differ chiefly because
manufacturing is goods-oriented and service is act-oriented.

Goods Services

Tangible Act-Oriented

22
 GOODS-SERVICE CONTINUUM
Products are typically neither purely service- or
purely goods-based.
Goods Services
Surgery, Teaching

Songwriting, Software Development

Computer Repair, Restaurant Meal

Home Remodeling, Retail Sales

Automobile Assembly, Steelmaking

23
 GOODS VS. SERVICES (1 of 3)
CHARACTERISTICS GOODS SERVICE
Customer contact Low High
Uniformity of inputs and High Low
outputs
Labor content Low High
Automation Easy Generally difficult
Output Tangible Intangible, often unique
Measurement of productivity Easy Difficult
Opportunity to correct High Low
problems
Inventory Much Little
Quality evaluation Easier Difficult
Production activities Obvious Not so obvious
 GOODS VS. SERVICES (2 of 3)
CHARACTERISTICS GOODS SERVICE

Production and consumption Separate Generally take

place at the same
time
Location Centralized Generally
dispersed
Locational factors to be considered Cost-oriented Revenue-oriented

Reselling Possible Not possible

Patentability Usually Not usually
Activities Smooth and Slower and
efficient awkward

Inventoriability Inventoriable Non inventoriable

andTransportability & and so
Transportable nontransportable
 GOODS VS. SERVICES (3 of 3)
CHARACTERISTICS GOODS SERVICE

Job structure More Less structured

structured
Worker skill levels Generally Generally
higher lower
Employee turnover Generally Generally
lower higher
 MANAGING SERVICES IS
CHALLENGING
Jobs in services are often less structured than in manufacturing
Customer contact is generally much higher in services compared
to manufacturing
In many services, worker skill levels are low compared to those
of manufacturing employees
Services are adding many new workers in low-skill, entry-level
positions
Employee turnover is high in services, especially in low-skill
jobs
Input variability tends to be higher in many service
environments than in manufacturing
Service performance can be adversely affected by many factors
outside of the managers control (e.g., employee and customer
attitudes) 27
 SERVICE JOB CATEGORIES
(1 of 2)
Governmental services
Municipal services
Trade services (wholesale/retail)
Finance, insurance, real estate
Medical (healthcare)
Personal services
 SERVICE JOB CATEGORIES
(2 of 2)
Business services
Education
Food, lodging and entertainment
Utilities and transportation
Legal, consulting
Repair
 SERVICES IN
MANUFACTURING

In manufacturing, services can be divided

into two groups:
Core Services
Value-added Services
 CORE SERVICES

Core services are basic things that customers

want from products they purchase
CORE SERVICES PERFORMANCE
OBJECTIVES
Quality

Flexibility
Operations
Speed
Management

Price (or cost

Reduction)
 VALUE-ADDED SERVICES

Value-added services differentiate the

organization from competitors and build
relationships that bind customers to the firm
in a positive way
 VALUE-ADDED SERVICE
CATEGORIES
Problem Solving

Operations
Information Management Sales Support

Field Support
 PROCESS MANAGEMENT
Process - one or more actions that transform inputs into outputs

Three Categories of Business Processes:

Upper-management These govern the operation of
processes the entire organization.
Operational These are core processes that
processes make up the value stream.
Supporting processes These support the core
processes.

35
 PROCESS VARIATION
Four Sources of Variation:
Variety of goods or services The greater the variety of goods and
being offered services offered, the greater the
variation in production or service
requirements.
Structural variation in demand These are generally predictable. They
are important for capacity planning.
Random variation Natural variation that is present in all
processes. Generally, it cannot be
influenced by managers.
Assignable variation Variation that has identifiable sources.
This type of variation can be reduced, or
eliminated, by analysis and corrective
action.
Variations can be disruptive to operations and supply chain processes. They may result
in additional costs, delays and shortages, poor quality, and inefficient work systems. 36
 The Scope of OM: What Do
Operations Managers Do?

Plan - Organize - Staff - Lead - Control

 SCOPE OF OPERATIONS
MANAGEMENT
The scope of operations management ranges across
the organization.
The operations function includes many
interrelated activities such as:
Forecasting
Capacity planning
Scheduling
Managing inventories
Assuring quality
Motivating employees
Deciding where to locate facilities
38
And more . . .
 ROLE OF THE OPERATIONS
MANAGER
The Operations Function consists of all
activities directly related to producing goods or
providing services.

A primary function of the operations manager

is to guide the system by decision making.
System Design Decisions
System Operation Decisions

39
 SYSTEM DESIGN DECISIONS
System Design Decisions
Capacity
Facility location
Facility layout
Product and service planning
Process planning
Technology planning
Acquisition and placement of equipment

These are typically strategic decisions that require

long-term commitment of resources
Determine parameters of system operation
40
 SYSTEM OPERATION
DECISIONS
System Operation Decisions
Management of personnel
Inventory management and control
Scheduling
Project management
Quality assurance

Operations managers spend more time on system

operation decision than any other decision area but they
still have a vital stake in system design

41
U.S. MANUFACTURING vs.
SERVICE EMPLOYMENT
Insert Figure 1.7

42
 THE DECLINE IN
MANUFACTURING EMPLOYMENT
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
A Statistical Artifact
Manufacturers are increasingly using contract and
temporary labor which no longer show up in the
statistics as manufacturing employment
43
 OPERATIONS MANAGEMENT
AND DECISION MAKING
Most operations decisions involve many alternatives that
can have quite different impacts on costs or profits
Typical operations decisions include:
What: What resources are needed, and in what amounts?

When: When will each resource be needed? When should the

work be scheduled? When should materials and other supplies
be ordered?

Where: Where will the work be done?

How: How will he product or service be designed? How will

the work be done? How will resources be allocated?

Who: Who will do the work?

OPERATIONS MANAGEMENT
AND DECISION MAKING

Models
Quantitative approaches
Analysis of tradeoffs
Systems approach
Establishing priorities
 GENERAL APPROACH TO
DECISION MAKING
Modeling is a key tool used by all decision makers
Model - an abstraction of reality; a
simplification of something.
Common features of models:
They are simplifications of real-life
phenomena
They omit unimportant details of the real-
life systems they mimic so that attention
can be focused on the most important
aspects of the real-life system 46
 MODELS
Types of Models:
Physical Models
Look like their real-life counterparts
Schematic Models
Look less like their real-life
counterparts than physical models
Mathematical Models
Do not look at all like their real-life
counterparts
 UNDERSTANDING MODELS

Keys to successfully using a model in decision

making
What is its purpose?
How is it used to generate results?
How are the results interpreted and used?
What are the models assumptions and
limitations?

48
 BENEFITS OF MODELS
Models are generally easier to use and less expensive
than dealing with the real system
Require users to organize and sometimes quantify
information
Provide a systematic approach to problem solving
Increase understanding of the problem
Enable managers to analyze What if? questions
Enable managers to specify objectives
Serve as a consistent tool for evaluation and provide a
standardized format for analyzing a problem
Enable users to bring the power of mathematics to bear
on a problem.
 MODEL LIMITATIONS
Quantitative information may be emphasized
at the expense of qualitative information
Models may be incorrectly applied and the
results misinterpreted
This is a real risk with the widespread
availability of sophisticated, computerized
models are placed in the hands of uninformed
users.
The use of models does not guarantee good
decisions.
 QUANTITATIVE APPROACHES
(ANALYTICAL TOOLS USED IN OM)
A decision making approach that frequently seeks to
obtain a mathematically optimal solution
Linear programming
Queuing techniques
Forecasting techniques
Inventory models
Project models
Statistical models
Simulation
Decision analysis
 METRICS AND TRADE-OFFS
Performance Metrics Analysis of Trade-Offs
All managers use A trade-off is giving
metrics to manage up one thing in return
and control for something else
operations Carrying more
Profits inventory (an
Costs expense) in order to
Productivity achieve a greater
level of customer
Forecast accuracy service

Tradeoffs 52
 ESTABLISHING PRIORITIES

In nearly all cases, certain issues or items are

more important than others
Recognizing this allows managers to focus their
attention to those efforts that will do the most
good

53
 ESTABLISHING PRIORITIES:
PARETO PHENOMENON
Pareto Phenomenon - a few factors account for a
high percentage of occurrence of some event(s)
The critical few factors should receive the
highest priority
80/20 Rule- 80% of the problems are caused by
20% of the activities
This is a concept that is appropriately applied to
all areas and levels of management

How do we identify the vital few? 54

 SYSTEMS APPROACH
System - a set of interrelated parts that must work together
The business organization is a system composed of
subsystems
marketing subsystem
operations subsystem
finance subsystem
The systems approach
Emphasizes interrelationships among subsystems
Main theme is that the whole is greater than the sum of its
parts
The output and objectives of the organization take
precedence over those of any one subsystem 55
 DEGREE OF CUSTOMIZATION
Relative to other standardized products and services
customized products:
Tend to be more labor intensive
Tend to be more time consuming
Tend to require more highly-skilled people
Tend to require more flexible equipment
Have much lower volume of output
Have higher price tags

Degree of customization has a significant influence on

the entire organization
Process selection
Job design
Affects marketing, sales, accounting, finance, and
information systems 56
ETHICAL ISSUES IN OPERATIONS

Ethical issues arise in Financial statements

many aspects of Worker safety
operations
Product safety
management:
Quality
The environment
The community
Hiring and firing
workers
Closing facilities
Workers rights 57
THE HISTORICAL EVOLUTION
OF OPERATIONS
MANAGEMENT
 HISTORICAL EVENTS IN OM
Industrial Revolution (1770s)
Scientific Management (1911)
Human Relations Movement (1920-1960)
Decision Models Management Science (1915,
1940-70s)
Influence of Japanese Manufacturers-Quality
Revolution & JIT (1970s-1990s )
Globalization (1970s- )
Information Age/Internet Revolution (1990s-)
 INDUSTRIAL REVOLUTION
Pre-Industrial Revolution
Craft production - System in which highly skilled
workers use simple, flexible tools to produce small
quantities of customized goods
Some key elements of the industrial revolution
Began in England in the 1770s
Division of labor - Adam Smith, 1776
Application of the rotative steam engine, 1780s
Cotton Gin and Interchangeable Parts - Eli
Whitney, 1792
Management theory and practice did not advance
appreciably during this period 60
 SCIENTIFIC MANAGEMENT
Movement was led by efficiency engineer, Frederick
Winslow Taylor
Believed in a Science of Management based on
observation, measurement, analysis and
improvement of work methods, and economic
incentives
Management is responsible for planning, carefully
selecting and training workers, finding the best
way to perform each job, achieving cooperate
between management and workers, and separating
management activities from work activities
Emphasis was on maximizing output 61
 SCIENTIFIC MANAGEMENT-
CONTRIBUTORS
Frank Gilbreth - father of motion studies
Henry Gantt - developed the Gantt chart
scheduling system and recognized the value of
non-monetary rewards for motivating employees
Harrington Emerson - applied Taylors ideas to
organization structure
Henry Ford - employed scientific management
techniques to his factories
Moving assembly line
Mass production
62
 HUMAN RELATIONS
MOVEMENT
The human relations movement emphasized the
importance of the human element in job design
Lillian Gilbreth
Elton Mayo Hawthorne studies on worker
motivation, 1930
Abraham Maslow Motivation theory, 1940s;
Hierarchy of Needs, 1954
Frederick Hertzberg Two Factor Theory, 1959
Douglas McGregor Theory X and Theory Y,
1960s
William Ouchi Theory Z, 1981 63
 DECISION MODELS AND
MANAGEMENT SCIENCE
F.W. Harris Mathematical Model for
Inventory Management, 1915
Dodge, Romig, and Shewart Statistical
Procedures for Sampling and Quality Control,
1930s
Tippett Statistical Sampling Theory, 1935
Operations Research (OR) Groups OR
applications in Warfare
George Dantzig Linear Programming, 1947
64
 INFLUENCE OF JAPANESE
MANUFACTURERS
Refined and developed management
practices that increased productivity
Credited with fueling the quality
revolution
Just-in-Time production

65
EXCITING NEW CHALLENGES
IN
OPERATIONS MANAGEMENT
NEW TRENDS AND ISSUES IN
OM
Mass Customization
Supply Chain Management
Outsourcing
Lean manufacturing
Agility
E-Business and E-Commerce
Management of Technology
Globalization
Ethical Behavior
NEW CONCEPTS AND TRENDS:
MASS CUSTOMIZATION

The rapid, low cost production of goods

and services that fulfill constantly changing
and increasingly unique customer desires.

68
 NEW CONCEPTS AND TRENDS:
SUPPLY CHAIN MANAGEMENT
The management of the sequence of
organizations- their facilities, functions and
activities- that are involved in producing and
delivering a product or service

SCM requires the application of a systems

approach to managing the flow of information,
materials and services from raw material
suppliers through factories and warehoses to the
end user (customer)
 THE NEED FOR MANAGING
THE SUPPLY CHAIN
In the past, organizations did little to
manage the supply chain beyond their own
operations and immediate suppliers which
led to numerous problems such as:

Oscillating inventory levels

Inventory stockouts
Late deliveries
Quality problems
70
 A SUPPLY CHAIN FOR BREAD

Value Value of
Stage of Production 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

 ELEMENTS OF SUPPLY CHAIN
MANAGEMENT (1 of 2)
Customers what products/services do
customers want
Forecasting predicting timing and volume of
customer demand
Design incorporating customer wants,
manufacturability, and time to market
Capacity planning matching supply and
demand
Processing controlling quality, scheduling
work
72
 ELEMENTS OF SUPPLY CHAIN
MANAGEMENT (2 of 2)
Inventory meeting demand requirements while
managing costs
Purchasing evaluating potential suppliers,
supporting the needs of operations on purchased
goods and services
Suppliers monitoring supplier quality, on-time
delivery, and flexibility; maintaining supplier
relations
Location determining the location of facilities
Logistics deciding how to best move information
and materials$ 73
NEW CONCEPTS AND TRENDS:
OUTSOURCING

Buying goods or services rather than

producing goods or performing services
within the organization
NEW CONCEPTS AND TRENDS:
LEAN MANUFACTURING
Systems that use minimal amounts of resources -
less space, less inventory, fewer workers, fewer
levels of management- to produce a high volume
of high-quality goods with some variety
An adaptation of mass production that prizes
quality and flexibility
Incorporates advantages of mass production
(high volume, low unit cost) and craft
production (variety and flexibility)
 NEW CONCEPTS AND TRENDS:
AGILITY

The ability of an organization to respond

quickly to demands or opportunities.
Involves maintaining a flexible system that
can quickly respond to changes in either the
volume of demand or changes in
product/service offerings
NEW CONCEPTS AND TRENDS:
ELECTRONIC COMMERCE

The use of computer networks, primarily the

internet, to buy and sell products, services,
and information.
 OTHER TRENDS (1 of 2)
Enhancing Value-Added Services
Management of Technology
Emphasis on Operations Strategy
Increasing Emphasis on Cost Control and
Productivity Improvement
Quality and Process Improvements
Increasing emphasis on business and social
responsibility
 OTHER TRENDS (2 of 2)

Developing flexible supply chains to enable

mass customization of products and
services
Achieving the Service Factory
GLOBALIZATION
GLOBALIZATION CAN TAKE
THE FORM OF:
Selling in foreign markets
Producing in foreign lands
Purchasing from foreign suppliers
Partnering with foreign firms
 REASONS TO GLOBALIZE
OPERATIONS (1 of 2)
To take advantage of favorable costs
To gain access to and attract international
markets
To build reliable sources of supply
To improve the supply chain
To be more responsive to changes in
demand
 REASONS TO GLOBALIZE
OPERATIONS (2 of 2)
To provide better goods and services
To learn to improve operations
To attract and retain global talent
To keep abreast of the latest trends and
technologies
 EXAMPLES OF GLOBAL
STRATEGIES
Boeing both sales and production are
worldwide.
Benetton moves inventory to stores around
the world faster than its competitor by building
flexibility into design, production, and
distribution
Sony purchases components from suppliers
in Thailand, Malaysia, and around the world
GM is building four similar plants in
Argentina, Poland, China, and Thailand
 SOME MULTINATIONAL
CORPORATIONS (1 of 3)
Country Foreign Sales
Company of Origin as % of Total
Nestl Switzerland 98.2
Nokia Finland 97.6
Philips Netherlands 94.0
Bayer Germany 89.8
ABB Germany 87.2
SAP Germany 80.0
Exxon Mobil United States 79.6
Royal Dutch/Shell Netherlands 73.3
IBM United States 62.7
McDonalds United States 61.5
 SOME MULTINATIONAL
CORPORATIONS (2 of 3)
Company Home % Sales % Assets % Foreign
Country Outside Outside Workforce
Home Home
Country Country
Citicorp USA 34 46 NA
Colgate- USA 72 63 NA
Palmolive
Dow USA 60 50 NA
Chemical
Gillette USA 62 53 NA
Honda Japan 63 36 NA

IBM USA 57 47 51
 SOME MULTINATIONAL
CORPORATIONS (3 of 3)
Company Home % Sales % Assets % Foreign
Country Outside Outside Workforce
Home Home
Country Country
ICI Britain 78 50 NA

Nestl Switzerland 98 95 97

Philips Netherlands 94 85 82
Electronics
Siemens Germany 51 NA 38
Unilever Britain & 95 70 64
Netherlands
 BOEING SUPPLIERS
Firm Country Parts
Alenia Italy Wing flaps
AeroSpace Australia Rudder
Technologies
CASA Spain Ailerons
Fuji Japan Landing gear
doors, wing section
GEC Avionics United Kingdom Flight computers
Korean Air Korea Flap supports
MenascoAerospace Canada Landing gears
Short Brothers Ireland Landing gear doors
Singapore Singapore Landing gear doors
Aerospace
 AN INTERNATIONAL
COMPARISON OF HOURLY
WAGE RATES
$ 35
$ 30
$ 25
Germa
Japan
$ 20
United
$ 15 EU

$ 10
$5 Asian
Mexic
$0 | | | | | |
1975 1980 1985 1990 1995 2000
COMPETITIVENESS
 COMPETITIVENESS

The degree to which a nation can produce goods

and services that meet the test of international
markets while simultaneously maintaining or
expanding the real incomes of its citizens.
 COMPETITIVENESS OF
SELECTED COUNTRIES

100
80
60
40
20
0
US Singapore Finland Ireland Germany UK Japan Mexico Russia