Introduction to
Operations Management
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What is Operations Management?
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Production is the creation of goods and services
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Operations management is the set of activities that creates value in
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Operations management is the science and art of ensuring that
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Operations Management is the management of systems or
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OM’s principles help one to view a business as a total system:
activities are coordinated vertically and horizontally across functions.
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Operations Management affects:
– Companies’ ability to compete
– Nation’s ability to compete internationally
the form of goods and services by transforming input into output.
goods and services are created and delivered successfully to customers.
processes that create goods and/or provide services (Stevenson)
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A simple system
Value added
Inputs
Land
Labor
Capital
Transformation/
Conversion
process
Outputs
Goods
Services
Feedback
Control
Feedback
Feedback
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Marketing
Operations
© 1995 Corel Corp.
Finance
© 1995 Corel Corp.
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Function vs. Process
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Customer Benefit Package
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Percentage of Job Creation:
80 – 20
Percentage of Output:
70% of what we export
Productivity:
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Basic Differences (But Cliches!)
Manufacturing
Service
Labor content low
Labor content high
Mechanization / Automation high
Mechanization / Automation low
Customer contact low
Customer contact high
Can be resold
Reselling unusual
Can be easily inventoried
Difficult to inventory
Easy to evaluate work
Difficult to evaluate work
Quality easily measurable
Quality difficult to measure
Selling is distinct from production
Selling is part of service provider
Product is transportable
Product is not transportable
Site of facility important for cost
Site of facility important for contact
Easy to patent
Difficult to patent
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Evolution of Operations Management
• Industrial revolution (1770’s)
– Steam Engine; Coal and Iron; Standard parts and Products; Mass Production; Economies of
Scale. Later: refinement of Steel (1855 by Henry Bessemer)
• Scientific management (1911)
– Frederick Taylor:
The Principles of Scientific Management (1911)
– Henry Ford introduced “Mass Production” by using Assembly Lines and:
• Frederick Taylor’s principles
• Eli Whitney’s ideas of Interchangeable Parts (late 1700)
• Adam Smith’s ideas of Division of Labor (The Wealth of Nations – 1776)
– Frank and Lillian Gilbreth (motion studies); Henry Gantt (scheduling)
• Human relations movement
– Gilbreths (Human Factor-1920s); Elton Mayo (Motivation/Productivity-1930s); Abraham
Maslow (Motivational Theory-1940s); Douglas McGregor (Theory X / Theory Y-1960s);
William Ouchi (Theory Z-1970s)
• Decision models / Management Science / Quantitative Approaches
• Influence of Japanese manufacturers
– Continuous Quality Improvement; Teams; Empowerment; Customer Satisfaction; JIT
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Tools for Decision Making in Operations
• Models:
• Quantitative approaches:
• Analysis of trade-offs /
Establishing priorities:
• Systems approach:
Performance Metrics:
Profit; Productivity; Quality;
Inventory; Schedule; Costs
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Physical
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Schematic
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Mathematical
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Inventory models: Harris-1915
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Queuing Techniques: Erlang-1920s
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Linear programming: Dantzig-1940s
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Project models: Late 1950s
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Statistical models / Forecasting
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Pareto Phenomenon; 80 - 20
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Break even Analysis
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No Sub-optimization
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The whole is greater than the sum
of the parts
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Revenues
Models
Costs
Quantity x
Three commonly known types of models:
1. Physical Models
2. Schematic Models
3. Mathematical Models
Breakeven Mathematical Models
We can find the break-even point by developing a simple
mathematical model.
Let x be the sales volume at the break-even point. Then
Total cost = 100,000 + 12x
Total revenue = 20x.
Setting the total revenue equal to total cost we have
100,000 + 12x = 20x
Hence: x = 12,500.
If sales are less than 12,500 units, the firm will incur a loss;
If sales are more than 12,500, a profit will be realized.
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Trends in Business Operations
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The Internet, e-commerce, e-business
Management of technology
Globalization
Management of supply chains
Outsourcing
Agility
Ethical behavior
Operations strategy
Working with fewer resources – Lean
Revenue management
Process analysis and improvement
Increased regulation and product liability
Middle man; ERP
Federal Labs
NAFTA – Miata – US vs Japan Cars
Low Bids vs Partnerships - JIT
On time vs Fast Delivery - Thailand - Singapore
Low Cost vs Environment - Water Bottles
Electronics - 70-30 - VCR/HDTV - Lee Iacocca 1
Standard Products vs Mass Customization
Reengineering: Michael Hammer
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