What Is Operations Management?
Inputs
Process
Land, labor,
capital,
management
The economic
system transforms
inputs to outputs
Chapter 1:
Operations and productivity
Lecture - Part 1
Outputs
Goods and
services
Feedback loop
•Production is the creation of goods and services
•Operations management is the set of activities that creates value in the
form of goods and services by transforming inputs into outputs
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• Main objective: Customer Satisfaction
and Transforms by
– Material
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Machines
Labor
Capital
Management
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Performance Objectives of Operations Management
Classic OM is a Transformation Process
It takes Input of
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Physical
(as in Manufacturing)
Locational
(as in transportation)
Storage
(as in warehousing)
Exchange
(as in retail)
Physiological (as in health care)
Psychological (as in sports)
Informational (as in telecommunication)
– External customers
– Internal customers (employees)
• Customer satisfaction may be achieved through
– Lower Price
• Reduce cost of finished products and services
– Cost Reduction
• Provide optimal inventory level/eliminate waste of resources
– Quality Improvement
• Provide quality products and employee quality services
– Flexibility
• Innovative products and services
• Adaptability to customer needs (customization)
• New technology
Into Outputs of
– Speed of delivery
Goods
 Services
• Time-to-market for new products
• Order-to-delivery for existing products
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Tangible product
Consistent product definition
Production usually separate from consumption
Can be inventoried
Low customer interaction
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Characteristics of Service
Characteristics of Goods
•
•
•
•
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Intangible product
Produced and consumed at same time
Often unique
High customer interaction
Inconsistent product definition
Often knowledge-based
Frequently dispersed
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Product: Combination of Goods and Services
Product: Combination of Goods and Services
Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
$0.59
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100%
75
50
25
0
25
50
75
100%
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Percent of Product that is a Good
Percent of Product that is a Service
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$0.89
$1.20
$2.00
$3.10
Price Paid
Where I Bought It?
What Did I Really Buy?
$0.59
Costco in quantity of 24
Bottle of coke
$0.89
Supermarket counter
Cold bottle of coke
$1.20
Wending machine
Convenient bottle of coke
$2.00
Street vendor with hot dogs
Part of meal
$3.10
Six Flags (amusement park)
Part of overall entertainment
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Operations as Service
Big Deal?
• $3.10/$0.59 = 5.25 times
• Service Business/Service Management
– What does it mean?
– Emerging trend in organizations
• 5.25 times more money is spent in service than in the product itself
(value-added service)
• Services represent a significantly greater size market than the
products with which they are associated
• Core services
– Basic things that customers want from products they purchase
• Quality, flexibility, speed of delivery, and price
• Value-added services
• Companies are increasingly looking towards these services for both
growth and increased profits
• The value of a product increases significantly as services are added
to it
– Differentiate the organization from competitors and build relationships that
bind customers to the firm in a positive way
• Problem solving
• Information
• Sales and field support
• The service also provides a competitive advantage over competition
that does not offer the service
• More than 80% of US GDP is in service
– 8 out of 10 US employees are in service industries
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Changing Challenges
Heritage of Operations Management
Traditional
Approach
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Reasons for
Change
Current
Challenge
High ethical and
social
responsibility;
increased legal and
professional
standards
Ethics and
regulations
not at the
forefront
Public concern over
pollution, corruption,
child labor, etc.
Local or
national focus
Growth of reliable, low
cost communication and
transportation
Global focus,
international
collaboration
Lengthy
product
development
Shorter life cycles;
growth of global
communication; CAD,
Internet
Rapid product
development;
design
collaboration
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Changing Challenges
Traditional
Approach
Low cost
production,
with little
concern for
environment;
free resources
(air, water)
ignored
Low-cost
standardized
products
Reasons for
Change
Changing Challenges
Current
Challenge
Public sensitivity to
environment; ISO 14000
standard; increasing
disposal costs
Environmentally
sensitive
production; green
manufacturing;
sustainability
Rise of consumerism;
increased affluence;
individualism
Mass customization
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Traditional
Approach
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Reasons for
Change
Current
Challenge
Emphasis on
specialized,
often manual
tasks
Recognition of the
employee's total
contribution; knowledge
society
Empowered
employees; enriched
jobs
“In-house”
production;
low-bid
purchasing
Rapid technological change;
increasing competitive
forces
Supply-chain
partnering; joint
ventures, alliances
Large lot
production
Shorter product life cycles;
increasing need to reduce
inventory
Just-In-Time
performance; lean;
continuous
improvement
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Heritage of Operations Management
End of this part
Sustainability
Ecological issues
Green technologies
Energy/carbon footprint
Ethics/Social
responsibility
Etc.
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