OPERATION MANAGEMENT
Operation
 Part of business organization that is responsible for
producing goods and services
Operation Management
 Management of systems or process that create goods
and/or provide services
Goods are physical items that include raw materials, parts,
subassemblies, and final products.
Services are activities that provide some combination of time,
location, form or psychological value.
Feedback
 Measurements taken at various points in the
transformation process.
Control
 Comparison of feedback against previously established
standards to determine if corrective action is needed.
Goods-service Continuum
 Products are typically neither purely service- or purely
goods- based.
Why Study Operations Management?
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Supply Chain
 A sequence of activities and organizations involved in
producing and delivering a good or services.
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Suppliers’ suppliers – Direct suppliers – Producer – Distributor
The Transformation Process
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Every aspects of business affects or is affected by
operations
Many service jobs are closely related to operation
o Financial service
o Marketing service
o Accounting service
o Information service
Through learning about operations and supply chain you
will have a better understanding of:
o The world you live in
o The global dependencies of companies succeed or
fail
o The importance of working with others
Basic Functions of the Business Organization
Process Management

Process – one or more actions that transform inputs into
outputs
Three Categories of Business Processes
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Function Overlap
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Finance & operation
o Budgeting
o Economic analysis of investment proposals
o Provision of Funds
Marketing & operations
o Demand Data
o Product and Service design
o Competitor analysis
o Lead time data
OM-Related Professional Societies
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APICS - The Association for Operations Management
American Society for Quality (ASQ)
Institute for Supply Management (ISM)
Institute for Operations Research and Management Science
(INFORMS)
The Production and Operations Management Society
(POMS)
The Project Management Institute (PMI)
Council of Supply Chain Management Professionals (CSCMP)
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Upper-management processes
 These govern the operation of the entire
organization
Operational Processes
 These are core processes that make up the value
stream
Supporting processes
 These support the core processes
Supply & Demand
Process Variation
Four Sources of Variation:
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Variety of goods or services being offered
 The greater the variety of goods and 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.
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Role of the Operation 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.
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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.
Scope of Operation Management
 Ranges across the organization
The operations function includes many interrelated activities such
as:
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Forecasting
Capacity planning
Facilities and layout
Scheduling
Managing inventories
Assuring quality
Motivating employees
Deciding where to locate facilities
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System design decisions
o Capacity
o Facility location
o Facility layout
o Product and service planning
o Acquisition and placement of equipment
 These are typically strategic decisions that
o usually require long-term commitment of resources
o determine parameters of system operation
System operation decisions
 These are generally tactical and operational decisions
o Management of personnel
o Inventory management and control
o Scheduling
o Project management
o Quality assurance
 Operations managers spend more time on system
operation decision than any other decision area
o They still have a vital stake in system design
OM Decision Making
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Most operations decisions involve many alternatives
that can have quite different impacts on costs or profits
Typical operations decisions include:
o What: What resources are needed, and in what
amounts?
o When: When will each resource be needed? When
should the work be scheduled? When should
materials and other supplies be ordered?
o Where: Where will the work be done?
o How: How will he product or service be designed?
How will the work be done? How will resources be
allocated?
o Who: Who will do the work?
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
Benefits of Models
1) Models are generally easier to use and less expensive than
dealing with the real system
2) Require users to organize and sometimes quantify
information
3) Increase understanding of the problem
4) Enable managers to analyze “What if?” questions
5) Serve as a consistent tool for evaluation and provide a
standardized format for analyzing a problem
6) Enable users to bring the power of mathematics to bear on
a problem.
Model Limitations
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Quantitative information may be emphasized at the
expense of qualitative information
Models may be incorrectly applied and the results
misinterpreted
o 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
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A decision-making approach that frequently seeks to obtain
a mathematically optimal solution
o Supported by computer calculations
o Often work together with qualitative approaches
Metrics and Trade-Offs
Understanding Models
 Keys to successfully using a model in decision making
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Performance metrics
o
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All managers use metrics to manage and control
operations
 Profits
 Costs
 Quality
 Productivity
 Flexibility
 Inventories
 Schedules
 Forecast accuracy
Analysis of trade-offs
o A trade-off is giving up one thing in return for
something else
 Carrying more inventory (an expense) in order to
achieve a greater level of customer service
Systems Approach
System - a set of interrelated parts that must work together
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The business organization is a system composed of
subsystems
o Marketing subsystem
o Operations subsystem
o Finance subsystem
The systems approach
o Emphasizes interrelationships among subsystems
o Main theme is that the whole is greater than the sum of
its parts
o The output and objectives of the organization take
precedence over those of any one subsystem
Establishing Priorities
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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
o 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
 This is a concept that is appropriately applied to all
areas and levels of management
Historical Evolution of OM
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Industrial Revolution
Scientific management
Human relations movement
Decision models and management science
Influence of Japanese manufacturers
Industrial Revolution
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Pre-Industrial Revolution
o 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
o Began in England in the 1770s
o Division of labor - Adam Smith, 1776
o Application of the “rotative” steam engine, 1780s
o Cotton gin and interchangeable parts - Eli Whitney,
1792
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Management theory and practice did not advance
appreciably during this period
Scientific Management
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Movement was led by efficiency engineer, Frederick
Winslow Taylor
o Believed in a “science of management” based on
observation, measurement, analysis and improvement
of work methods, and economic incentives
o Management is responsible for planning, carefully
selecting and training workers, finding the best way to
perform each job, achieving cooperation between
management and workers, and separating management
activities from work activities
o Emphasis was on maximizing output
Human Relations Movement
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The human relations movement emphasized the
importance of the human element in job design
o Lillian Gilbreth – applications of psychology
o Elton Mayo – Hawthorne studies on worker motivation,
1930
o Abraham Maslow – motivation theory, 1940s; hierarchy
of needs, 1954
o Frederick Hertzberg – Two Factor Theory, 1959
o Douglas McGregor – Theory X and Theory Y, 1960s
o William Ouchi – Theory Z, 1981
Decision Models & Management Science
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F.W. Harris – mathematical model for inventory
management, 1915
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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
Influence of Japanese Manufacturing
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Refined and developed management practices that
increased productivity
o Credited with fueling the “quality revolution”
o Just-in-Time production
Key Issues for Operation Managers Today
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Economic conditions
Innovating
Quality problems
Risk management
Competing in a global economy
Environmental Concern
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Sustainability
o Using resources in ways that do not harm ecological
systems that support human existence
 Sustainability measures often go beyond traditional
environmental and economic measures to include
measures that incorporate social criteria in decision
making
 All areas of business will be affected
 Product and service design
 Consumer education programs
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Disaster preparation and response
Supply chain waste management
Outsourcing decisions
6) Increasing importance of e-business
7) The complexity of supply chains
8) The need to manage inventories
Ethical Issues in Operation
 may arise in many aspects of operations management:
 Financial statements
 Worker safety
 Product safety
 Quality
 The environment
 The community
 Hiring and firing workers
 Closing facilities
 Workers’ rights
The Need for Supply Chain Management
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In the past, organizations did little to manage the supply
chain beyond their own operations and immediate suppliers
which led to numerous problems:
o Oscillating inventory levels
o Inventory stockouts
o Late deliveries
o Quality problems
Supply Chain Issues
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2)
3)
4)
5)
The need to improve operations
Increasing levels of outsourcing
Increasing transportation costs
Competitive pressures
Increasing globalization
Lesson 2
Decision Theory
 A general approach to decision making that is suitable to a
wide range of operations management decisions
 Capacity planning
 Product and service design
 Equipment selection
 Location planning
Characteristics of Suitable Problems
 are suitable for using decision theory
 A set of possible future conditions that will have a
bearing on the results of the decision
 A list of alternatives from which to choose
 A known payoff for each alternative under each possible
future condition
Process for Using Decision Theory
1) Identify the possible future states of nature
2) Develop a list of possible alternatives
3) Estimate the payoff for each alternative for each possible
future state of nature
4) If possible, estimate the likelihood of each possible future
state of nature
o
5) Evaluate alternatives according to some decision criterion
and select the best alternative
Payoff Table
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 A table showing the expected payoffs for each alternative in
every possible state of nature
 A decision is being made concerning which size facility
should be constructed
 The present value (in millions) for each alternative
under each state of nature is expressed in the body of
the above payoff table
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Failure to complete a step before jumping to the next
step
o Failure to admit mistakes
o Inability to make a decision
Bounded rationality
o The limitations on decision making caused by costs,
human abilities, time, technology, and availability of
information
Sub optimization
o The results of different departments each attempting
to reach a solution that is optimum for that
department
Decision Process
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Decision Environments
Steps:
Identify the problem
Specify objectives and criteria for a solution
Develop suitable alternatives
Analyze and compare alternatives
Select the best alternative
Implement the solution
Monitor to see that the desired result is achieved
Cause of Poor Decision
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Decisions occasionally turn out poorly due to unforeseeable
circumstances; however, this is not the norm
 More frequently poor decisions are the result of a
combination of
 Mistakes in the decision process
 Errors in the Decision Process
o Failure to recognize the importance of each step
o Skipping a step
 There are three general environment categories:
o Certainty
 Environment in which relevant parameters have
known values
o Risk
 Environment in which certain future events have
probabilistic outcomes
o Uncertainty
 Environment in which it is impossible to assess the
likelihood of various possible future events
Decision Making Under Uncertainty
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Decisions are sometimes made under complete uncertainty:
No information is available on how likely the various states
of nature are.
Decision criteria:
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o
o
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Maximin
 Choose the alternative with the best of the worst
possible payoffs
Maximax
 Choose the alternative with the best possible payoff
Laplace
 Choose the alternative with the best average payoff
Minimax regret
 Choose the alternative that has the least of the worst
regrets
Decision Making Under Risk
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Decisions made under the condition that the probability of
occurrence for each state of nature can be estimated
 A widely applied criterion is expected monetary value (EMV)
o EMV
 Determine the expected payoff of each alternative,
and choose the alternative that has the best expected
payoff
o This approach is most appropriate when the decision maker
is neither risk averse nor risk seeking
Decision Tree
 A schematic representation of the available alternatives and
their possible consequences
 Useful for analyzing sequential decisions
 Composed of
o Nodes
 Decisions – represented by square nodes
 Chance events – represented by circular nodes
o Branches
 Alternatives – branches leaving a square node
 Chance events – branches leaving a circular node
 Analyze from right to left
o For each decision, choose the alternative that will yield the
greatest return
o If chance events follow a decision, choose the alternative
that has the highest expected monetary value (or lowest
expected cost)
Expected Value of Perfect Information
 Expected value of perfect information (EVPI)
o The difference between the expected payoff with perfect
information and the expected payoff under risk
o Two methods for calculating EVPI
 EVPI = expected payoff under certainty – expected
payoff under risk
 EVPI = minimum expected regret
Sensitivity Analysis
 Determining the range of probability for which an
alternative has the best expected payoff
 The approach illustrated is useful when there are two states
of nature
o It involves constructing a graph and then using
algebra to determine a range of probabilities over
which a given solution is best
Lesson 3
A Cold Hard Fact
 Better quality, higher productivity, lower costs, and the
ability to respond quickly to customer needs are more
important than ever, and… THE BAR IS GETTING HIGHER
Competitiveness
 How effectively an organization meets the wants and needs
of customers relative to others that offer similar goods or
services
 Organizations compete through some combination of their
marketing and operations functions
 What do customers want?
 How can these customer needs best be satisfied?
Making’s Influence
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Identifying consumer wants and/or needs
Pricing and quality
Advertising and promotion
Businesses Compete Using Operations
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Product and service design
Cost
Location
Quality
Quick response
Flexibility
Inventory management
Supply chain management
Service
10) Managers and workers
Why Some Organizations Fail
1) Neglecting operations strategy
2) Failing to take advantage of strengths and opportunities
and/or failing to recognize competitive threats
3) Too much emphasis on short-term financial performance at
the expense of R&D
4) Too much emphasis in product and service design and not
enough on process design and improvement
5) Neglecting investments in capital and human resources
6) Failing to establish good internal communications and
cooperation
7) Failing to consider customer wants and needs
Hierarchical Planning
Mission
 The reason for an organization’s existence
 Mission statement
 States the purpose of the organization
 It answers the question “What business are we in?”
Goals
 The mission statement serves as the basis for
organizational goals
 Provide detail and the scope of the mission
 Goals can be viewed as organizational destinations
 Goals serve as the basis for organizational strategies
Strategy
 A plan for achieving organizational goals
 Serves as a roadmap for reaching the organizational
destinations
 The organizational strategy guides the organization by
providing direction for, and alignment of, the goals and
strategies of the functional units
 The organizational strategy is a major success/failure
factor
Organizational strategies
 Overall strategies that relate to the entire organization
 Support the achievement of organizational goals and
mission
Functional strategies
 Strategies that relate to each of the functional areas
and that support achievement of the organizational
strategy
Tactics
 The methods and actions taken to accomplish strategies
 The “how to” part of the process
Operations
 The actual “doing” part of the process
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Successful strategy formulation also requires taking into
account:
o Order qualifiers
 Characteristics that customers perceive as minimum
standards of acceptability for a product or service to
be considered as a potential for purchase
o Order winners
 Characteristics of an organization’s goods or services
that cause it to be perceived as better than the
competition
Environmental Scanning
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o
Core Competencies
 The special attributes or abilities that give an organization a
competitive edge
 To be effective core competencies and strategies need
to be aligned
Strategy Formulation
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o
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Effective strategy formulation requires taking into
account:
Core competencies
Environmental scanning
 SWOT
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Internal factors
Strengths and weaknesses
1) Human resources
2) Facilities and equipment
3) Financial resources
4) Customers
5) Products and services
6) Technology
7) Suppliers
External factors
Opportunities and threats
1) Economic conditions
2) Political conditions
3) Legal environment
4) Technology
5) Competition
6) Markets
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Operation Strategy
 The approach, consistent with organization strategy, that is
used to guide the operations function
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Strategic IM Decision Areas
It is believed that by reducing time, costs are lower,
quality is higher, productivity is higher, time-to-market
is faster, and customer service is improved
Areas where organizations have achieved time
reductions:
o
o
o
o
o
o
Planning time
Product/service design time
Processing time
Changeover time
Delivery time
Response time for complaints
Agile Operation
 A strategic approach for competitive advantage that
emphasizes the use of flexibility to adapt and prosper in an
environment of change
 Involves the blending of several core competencies:
o
o
o
o
Quality-Based Strategies
 Strategy that focuses on quality in all phases of an
organization
 Pursuit of such a strategy is rooted in a number of
factors:
o Trying to overcome a poor quality reputation
o Desire to maintain a quality image
o A desire to catch up with the competition
o A part of a cost reduction strategy
Time-Based Strategies
 Strategies that focus on the reduction of time needed to
accomplish tasks
Cost
Quality
Reliability
Flexibility
The Balanced Scorecard Approach
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A top-down management system that organizations can use
to clarify their vision and strategy and transform them into
action
o Develop objectives
o Develop metrics and targets for each objective
o Develop initiatives to achieve objectives
o Identify links among the various perspectives
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Finance
Customer
Internal business processes
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Learning and growth
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For an industry, high relative productivity makes it less likely it
will be supplanted by foreign industry
Monitor results
Service Sector Productivity
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o
o
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o
o
Productivity
 A measure of the effective use of resources, usually
expressed as the ratio of output to input
 Productivity measures are useful for
o Tracking an operating unit’s performance over time
o Judging the performance of an entire industry or country
Why Productivity Mates
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High productivity is linked to higher standards of living
 As an economy replaces manufacturing jobs with lower
productivity service jobs, it is more difficult to maintain high
standards of living
 Higher productivity relative to the competition leads to
competitive advantage in the marketplace
 Pricing and profit effects
Service sector productivity is difficult to measure and manage
because
It involves intellectual activities
It has a high degree of variability
A useful measure related to productivity is process yield
Where products are involved
 Ratio of output of good product to the quantity of raw
material input
Where services are involved, process yield measurement is often
dependent on the particular process:
 Ratio of cars rented to cars available for a given day
 Ratio of student acceptances to the total number of students
approved for admission
Factors Affecting Productivity
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Methods
Quality
Management
Technology
Capital
Improving Productivity
1)
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Develop productivity measures for all operations
Determine critical (bottleneck) operations
Develop methods for productivity improvements
Establish reasonable goals
Make it clear that management supports and encourages
productivity improvement
6) Measure and publicize improvements
7) Don’t confuse productivity with efficiency