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Chapter 1

Introduction to Operations
Management and

Adzlina/UiTMK/Chapter 1 1
What Is Operations Management?
 Product/Output
Goods or services
Consumer goods, industrial goods or producer
 Production is the creation of goods and
 Operations management is the set of
activities that creates value in the form of
goods and services by transforming inputs
into outputs
Adzlina/UiTMK/Chapter 1 2
Why Study OM?
 OM is one of three major functions
(marketing, finance, and operations) of
any organization.
 We want (and need) to know how goods
and services are produced.
 We want to understand what operations
managers do.
 OM is such a costly part of an
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Objectives of OM
 To produce a specific product, on a schedule,
at minimum cost
 To achieve customer satisfaction by providing
them G+S at competitive cost, affordable price,
within a reasonable time schedule
 To be an effective producer - max the value of
 To enhance productivity through efficiency of
the production process
 To adapt for future survival - production system
has to be flexible, ability to respond rapidly to
changes in product design or process design
Adzlina/UiTMK/Chapter 1 4
Organizing to Produce Goods and
 Marketing
- Gets customers
 Operations
- creates product or service
 Finance/Accounting
- Obtains funds
- Tracks money

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Functions - Bank
Commercial Bank

Marketing Operations Finance/


Teller Check Transactions

Scheduling Clearing Processing

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Functions - Manufacturer


Marketing Operations Finance/


Manufacturing Production Quality

Control Control

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Ten Strategic Decisions
1. Design of goods and services 5, Supplement 5
2. Managing quality 6, Supplement 6
3. Process and capacity design 7, Supplement 7
4. Location strategy 8
5. Layout strategy 9
6. Human resources and job design 10
7. Supply-chain management 11, Supplement 11
8. Inventory management 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17

Adzlina/UiTMK/Chapter 1 8
The Strategic Decisions
1. Design of goods and services
 Defines what is required of operations
 Product design determines quality,
sustainability and human resources
2. Managing quality
 Determine the customer’s quality
 Establish policies and procedures to
identify and achieve that quality
Adzlina/UiTMK/Chapter 1 9
The Strategic Decisions
3. Process and capacity design
 How is a good or service produced?
 Commits management to specific
technology, quality, resources, and
4. Location strategy
 Nearness to customers, suppliers, and
 Considering costs, infrastructure, logistics,
and government.
Adzlina/UiTMK/Chapter 1 10
The Strategic Decisions
5. Layout strategy
 Integrate capacity needs, personnel levels,
technology, and inventory
 Determine the efficient flow of materials,
people, and information.
6. Human resources and job design
 Recruit, motivate, and retain personnel with
the required talent and skills.
 Integral and expensive part of the total
system design.

Adzlina/UiTMK/Chapter 1 11
The Strategic Decisions
7. Supply-chain management
 Integrate supply chain into the firm’s strategy.
 Determine what is to be purchased, from
whom, and under what conditions.
8. Inventory management
 Inventory ordering and holding decisions.
 Optimize considering customer satisfaction,
supplier capability, and production schedules.

Adzlina/UiTMK/Chapter 1 12
The Strategic Decisions
9. Scheduling
 Determine and implement intermediate-
and short-term schedules.
 Utilize personnel and facilities while
meeting customer demands.
10. Maintenance
 Consider facility capacity, production
demands, and personnel.
 Maintain a reliable and stable process.

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Characteristics of Goods
 Tangible product
- Can be seen and touched and must be
delivered to customers.
 Production usually separate from consumption
- Goods are produced in advance, sale and
consumption comes later
 Can be inventoried
- Product can be produced in advance and held
as inventories until customer needs them

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 Low customer interaction
- Customers are not involved in the production process.
 Long lead times
- It may takes several days or weeks to manufacture
 Consistent product definition

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Characteristics of Service
 Intangible product
- Cannot be seen, touched or displayed (airlines
services, hotel services)
 Produced & consumed at same time
- there is no stored inventory. (beauty salon
produces hair cut, the doctor produces an
 Often unique
- Mix of financial coverage such as investments
and insurance policies, may be not the same as
anyone else
Adzlina/UiTMK/Chapter 1 16
 High customer interaction
- Services are often difficult to standardize,
automate and make as efficient as we would
like because customer interaction demands
 Inconsistent product definition
- Product definition may be rigorous, as in the
case of an auto insurance policy, but
inconsistent because policyholders change
cars and mature

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 Often knowledge-based
- As in the case of educational, medical and
legal services and therefore hard to automate.
 Frequently dispersed
- Dispersion occurs because services are
frequently brought to the client/customer via a
local office or a retail outlet
 Short lead times
- services may need to be delivered immediately
when customer wants the service
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Differences between Goods & Services
Intangible: Ride in an airline seat Tangible: The seat itself
Produced and consumed simultaneously: Beauty Product can usually be kept in inventory (beauty
salon produces a haircut that is consumed as it is care products)
Unique: Your investments and medical care are Similar products produced (iPods)
High customer interaction: Often what the Limited customer involvement in production
customer is paying for (consulting, education)
Inconsistent product definition: Auto Insurance Product standardized (iPhone)
changes with age and type of car
Often knowledge based: Legal, education, and Standard tangible product tends to make
medical services are hard to automate automation feasible
Services dispersed: Service may occur at retail Product typically produced at a fixed facility
store, local office, house call, or via internet.
Quality may be hard to evaluate: Consulting, Many aspects of quality for tangible products are
education, and medical services easy to evaluate (strength of a bolt)
Reselling is unusual: Musical concert or medical Product often has some residual value

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Operations/Production System

Inputs Transformation Outputs



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Features of Production System
 Inputs
- consist of all resources that are necessary for
production to take place, consist of manpower,
machine, material, money, equipment.
 Transformation Process
- during this process, the less valuable input
resources are transformed into valuable form of
output through a series of value added processes.
Ex: surgical procedures in a hospital, assembly parts
in a automobile factory
- Factors affecting are capacity, efficiency,
effectiveness, flexibility
Adzlina/UiTMK/Chapter 1 21
 Outputs
- End result of a production either good or
 Feedback (actual vs expected)
- A control mechanism for operations systems. It
includes measuring the operations system actual
performance against the expected performance
- Feedback loop – enables management to decide
whether or not adjustments in the organizational
activities are needed

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Productivity – the ratio of outputs (G&S)
divided by the inputs (recourses such as
land, labor, capital and management)
 Measure of process improvement
 Represents output relative to input
Single factor Units produced/output
Productivity = Input used
 Only through productivity increases can our
standard of living improve
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 The measurement of productivity can be
quite direct.
 Labor hours is a common measure of
 Other measures such as capital, material
or energy can be used

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Multi-factor Productivity
- Indicates the ratio of many or all
resources (inputs) to the goods and
services produced (outputs)

Productivity = Unit produced/Output
Labor + material + energy +
capital + miscellaneous

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Measurement Problems
 Quality may change while the quantity of
inputs and outputs remains constant
 External elements may cause an increase
or decrease in productivity
 Precise units of measure may be lacking

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Productivity Variables
 Labor – improvement in the contribution of labor
to productivity is the result of healthier, better
educated and better nourished labor forced
 Capital – inflation and taxes increases the cost
of capital, making capital investment increasingly
 Management – responsible for ensuring that
labor and capital are effectively used to increase

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Current Challenges in OM
 Globalization
 Supply-chain partnering
 Sustainability
 Rapid product development
 Mass customization
 Lean operations

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Ethics, Social Responsibility,
and Sustainability
Challenges facing operations
 Develop and produce safe, high-quality green
 Train, retrain, and motivate employees in a safe
 Honor stakeholder commitments

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