1
Introduction to
Operations
Management
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
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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
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Learning Objectives
 Differentiate between design and operation
of production systems
 Describe the key aspects of operations
management decision making
 Briefly describe the historicalevolution of
operations management
 Identify current trends that impact operations
management
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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
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The Organization
Figure 1.1
The Three Basic Functions
Organization
Finance
Operations
Marketing
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Value-Added Process
Figure 1.2
The operations function involves the conversion of
inputs into outputs
Value added
Inputs
Land
Labor
Capital
Transformation/
Conversion
process
Outputs
Goods
Services
Feedback
Control
Feedback
Feedback
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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.
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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
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Food Processor
Table 1.2
Inputs
Processing
Outputs
Raw Vegetables
Metal Sheets
Water
Energy
Labor
Building
Equipment
Cleaning
Making cans
Cutting
Cooking
Packing
Labeling
Canned
vegetables
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Hospital Process
Table 1.2
Inputs
Doctors, nurses
Hospital
Medical Supplies
Equipment
Laboratories
Processing
Outputs
Examination
Surgery
Monitoring
Medication
Therapy
Healthy
patients
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Manufacturing or Service?
Tangible
Act
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Production of Goods vs. Delivery of
Services
 Production of goods – tangible output
 Delivery of services – an act
 Service job categories
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Government
Wholesale/retail
Financial services
Healthcare
Personal services
Business services
Education
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Key Differences
1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of productivity
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Key Differences
6. Production and delivery
7. Quality assurance
8. Amount of inventory
9. Evaluation of work
10. Ability to patent design
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Goods vs Service
Characteristic
Customer contact
Uniformity of input
Labor content
Uniformity of output
Output
Measurement of productivity
Opportunity to correct problems
Inventory
Evaluation
Patentable
Goods
Low
High
Low
High
Tangible
Easy
High
Much
Easier
Usually
Service
High
Low
High
Low
Intangible
Difficult
Low
Little
Difficult
Not usual1-15
Scope of Operations Management
 Operations Management includes:
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Forecasting
Capacity planning
Scheduling
Managing inventories
Assuring quality
Motivating employees
Deciding where to locate facilities
Supply chain management
And more . . .
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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
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Figure 1.4
Percent
U.S. Manufacturing vs. Service Employment
02
Year
Mfg. Service
45
79
21
90
Mfg.
50
72
28
80
Service
55
72
28
70
60
68
32
60
65
64
36
50
70
64
36
40
75
58
42
30
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
Year
25
75
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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
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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
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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
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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
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Operations Management
Decision Making
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Models
Quantitative approaches
Analysis of trade-offs
Systems approach
Establishing priorities
Ethics
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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
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Decision Making
System Design
–
–
–
–
–
capacity
location
arrangement of departments
product and service planning
acquisition and placement of
equipment
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Decision Making
System operation
–
–
–
–
personnel
inventory
scheduling
project
management
– quality assurance
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Decision Making
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Models
Quantitative approaches
Analysis of trade-offs
Systems approach
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Models
A model is an abstraction of reality.
– Physical
– Schematic
– Mathematical
Tradeoffs
What are the pros and cons of models?
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Models Are Beneficial
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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
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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
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Quantitative Approaches
• Linear programming
• Queuing Techniques
• Inventory models
• Project models
• Statistical models
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Analysis of Trade-Offs
 Decision on the amount of inventory to stock
 Increased cost of holding inventory
Vs.
 Level of customer service
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Systems Approach
“The whole is greater than
the sum of the parts.”
Suboptimization
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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?
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Ethical Issues
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Financial statements
Worker safety
Product safety
Quality
Environment
Community
Hiring/firing workers
Closing facilities
Worker’s rights
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Business Operations Overlap
Figure 1.5
Operations
Marketing
Finance
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Operations Interfaces
Industrial
Engineering
Maintenance
Distribution
Purchasing
Operations
Public
Relations
Legal
Personnel
Accounting
MIS
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Historical Evolution of Operations
Management
Table 1.7
 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
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Trends in Business
 Major trends
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The Internet, e-commerce, e-business
Management technology
Globalization
Management of supply chains
Outsourcing
Agility
Ethical behavior
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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
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Simple Product Supply Chain
Figure 1.7
Suppliers’
Suppliers
Direct
Suppliers
Producer
Distributor
Final
Consumer
Supply Chain: A sequence of activities
And organizations involved in producing
And delivering a good or service
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A Supply Chain for Bread
Value
Added
Value of
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
Stage of Production
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Other Important Trends
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Ethical behavior
Operations strategy
Working with fewer resources
Revenue management
Process analysis and improvement
Increased regulation and product liability
Lean production
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