BE1401, Business Operations & Processes
Introduction to Operations Management
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Chapter Learning Objectives
Learning Objectives for Chapter One
• LO1‐1. Introduction to Operations
• LO1‐2. Explain strategic tradeoffs, inefficiencies and determine if
a firm is on the efficient frontier
• LO1‐3. Explain the three system inhibitors
• LO1‐4. Articulate the key operational decisions a firm needs to
make supply match with demand
What is Operations Management
 Operations Management deals with the design, operation,
and improvement of the production systems that create the
firm’s primary products or services
 Operations includes any physical process that accepts
inputs and uses resources to transform those inputs into
valuable outputs – strategic, tactical and operational
decisions
 Why is Operations Management relevant to Business
students?
Key part of business education Systematic
Career opportunities
Interfaces with Other Functions
What is Operations Management
 Can you identify any activity that you experienced or took
part in today that was created/impacted by operations?
 All physical products that you used
 All services that you used
Back office operation in
a bank
Take‐out / restaurant
operation
Kitchen unit
manufacturing
operation
 Operations are everywhere and impact each aspect
of our lives
 Efficiency and effectiveness of operations is crucial
Operations management in all types of organization
Automobile assembly factory – Operations
management uses machines to efficiently
assemble products that satisfy current customer
demands
Operations management in all types of organization (Continued)
Physician (General practitioner) –
Operations management uses
knowledge to effectively diagnose
conditions in order to treat real and
perceived patient concerns
Operations management in all types of organization (Continued)
Management consultant – Operations
management uses people to effectively
create the services that will address current
and potential client needs
Operations management in all types of organization (Continued)
Disaster relief charity –
Operations management
uses ours and our
partners’ resources to
speedily provide the
supplies and services that
relieve community
suffering
Operations management in all types of organization (Continued)
Advertising agency – Operations
management uses our staff’s knowledge and
experience to creatively present ideas that
delight clients and address their real needs
How do firms Compete
L01–2
• Different customers have different preferences or needs which
gives rise to different “market segments”
• Companies select certain market segments that they will serve
• Requires building capabilities/competencies to efficiently serve
selected market segments
Examples
• NTUC Fairprice versus7‐Eleven
• Ferrari versus Hyundai
• McDonalds versus Subway
• Starbucks versus Heartland Coffeeshop
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Strategic Trade‐Off
L01–2
• Market Segments – A set of customers who have similar
preferences
• Capabilities – The dimensions of the customer’s preferences a
firm is able to satisfy. Capabilities allow a company to do well on
some but not all aspects of customer preferences
• Trade‐offs – The need to sacrifice one capability in order to
increase another one
• Strategic trade‐off – when selecting inputs and resources, the
firm must choose between a set that excels in one direction of
customer preferences or another, but no single set of inputs and
resources can excel in all dimensions.
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Four Dimensions of Performance: Trade‐offs
Cost
▪ Efficiency
▪ Measured by:
‐ cost per unit
‐ utilization
Quality
▪ Product quality (how good?)
=> Price
▪ Process quality (as good as
promised?)
=> Defect rate
Variety
Time
▪ Customer heterogeneity
▪ Measured by:
▪ Responsiveness to demand
▪ Measured by:
‐ number of options
‐ flexibility / set‐ups
‐ make‐to‐order
‐ customer lead time
‐ flow time
Figure 1.2
The Strategic Trade‐Off between Responsiveness and
Productivity
•
•
Design operations that match demand of a segment with supply of appropriate products
Achieve this by making tradeoffs
Figure 1.3
Restaurant C an Underperforming Operation
Figure 1.4
Definition of the Efficient Frontier
Figure 1.5
Restaurant D a High‐Performing Operation Enters the
Market
• Pareto dominated – A firm’s performance is inferior on all attributes of
the customer’s preferences
• Efficient Frontier – The set of firms that are not Pareto dominated.
• Inefficiency – The gap between a firm and the efficient frontier
Understand inefficiencies and efficient frontier
Firms seek to utilize inputs and resources to fullest potential ‐ Restaurant D is doing this best
D is an example of an innovator, outsmarting A, B, C on both dimensions
What Can Ops Management (This Course) Do to Help?
“The Science of the Better”
Willingness
To Pay
High
Current frontier
In the industry
Competitor A
Eliminate
inefficiencies
Competitor C
Low
Competitor B
Low labor
productivity
High labor
productivity
Efficiency
($/unit)
Operations Management helps identify and eliminate inefficiencies:
• Make Tradeoffs among dimensions of performance
• Reduce Inefficiencies and move firms towards the efficient frontier
• Helps innovate/improve corresponding to a shift in the efficient frontier
Airline Industry in the Year 2000
Revenue $
per
passenger
mile
Passenger miles per operating
expense
x‐axis shows the miles obtained per $ expense and
y‐axis shows the revenue $ per mile. This was the situation in 2000.
AmericaWest and NorthWest were Pareto dominated
Airline Industry in 2012
Revenue $
per
passenger
mile
Passenger miles per operating
expense
x‐axis shows the miles obtained per $ expense and
y‐axis shows the revenue $ per mile. This was the situation in 2012
No obvious “under performer”
Overcoming Inefficiencies
A company can only be successful if its customers are willing to pay a
sufficiently high price to cover the cost of the product or service we
offer. The difference between the revenue we earn and the costs it
incurs is its profit. There are only two types of costs:
Costs for inputs: Inputs are the things that a business
•
purchases. A fast food restaurant has to purchase meat, salad, buns,
soda, etc. Car manufacturers have to buy steel, seats and tires;
computer makers have to buy displays, chips and power supplies and
hospitals have to purchase medications, bandages and food.
Costs for resources: Resources are the things in a business that
•
help transform input into out‐ put and thereby help provide supply for
what customers demand. In a fast food restaurant, the resources are
the cooking equipment, the real estate of the restaurant and the
employees. Car manufacturers and computer makers have plants,
warehouses and employees. Hospitals have to pay for doctors, nurses
and their building.
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Three System Inhibitors
LO1‐3
Combination of forces
• Waste – The consumption of inputs and resources that do not
add value to the customer
• Variability – Predictable or Unpredictable changes in the
demand or the supply process
• Inflexibility – The inability to adjust to either changes in
the supply process or changes in customer demand
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What Keeps Firms From the Efficient
Frontier?
Fast food
restaurant
Rental Cars
Fashion Retailer
Emergency room
Waste
Left‐over food
Cars sitting in the
parking lot
Items that stay in the
store all season
Time spent on patients
who could have been
seen in primary care
Variability
Swings in
customer demand
Bad weather
conditions delaying
the arrival of cars
Consumer demand
driven by fashion
Sudden increases in
patient volume due to
the flu season
Inflexibility
Rigid staffing
levels
Inability to move
vehicles across
rental centers
Long times to
replenish items from
over‐seas
Inability to admit
patients to a lack of
inpatient beds
What is Waste?
Waste corresponds to all the consumption of inputs and resources that do not add value
to the customers.
Since waste consumes inputs and resources, waste is costly. But, since it does not add
value to the customer, the customer is not willing to pay for this.
Examples from the restaurant industry:
‐ Food that has been purchased but has not been used before its expiration date
‐ Food is prepared but then not sold (think of left‐over beef patties as wasted food)
‐ Wasted time of employees: poor tools (example: sauce dispenser)
‐ Wasted time of employees for transportation / moving food around
‐ Poor menu design: items that are not demanded
‐ Providing services the customer does not value (table service)
More details to follow in the chapter in the discussion of Lean Operations
What is Variability?
Variability corresponds to changes in either demand (demand variability) or supply (supply
variability) over time.
Demand variability:
Customer arrivals: customers come at very different times of the day.
Predictable variability (seasonality): more demand at noon than at 3pm.
True randomness: every day is somewhat random
Customer requests: particular menu item a customer wants to order.
Customer behavior: payment, chattiness, complaints, questions
Supply variability
Time to serve a customer: difference in speed across workers.
Disruptions: weather, absenteeism
Defects: mistake in ordering, cooking, delivery
What is Inflexibility?
Flexibility is an operation’s ability to react to variability.
Examples in the restaurant setting:
‐ Increase the size of the restaurant at noon, but then scale back down at 3pm
‐ Cross trained employees
‐ Flexible hours / short minimum shift durations
‐ Common ingredients across dishes
‐ Ability to repurpose parts of a menu item to a different menu item
Inflexibility, is thus the inability of an operation to quickly and cheaply change in
response to new information.
Operations Management at Work
Improving the way we and/or
others do their work
“The Science for the Better”
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Operations Management Key
Decisions Overview
LO1‐4
•
•
•
•
Process Analysis and Improvement.
Process Productivity and Quality.
Anticipate Customer Demand.
Respond to Customer Demand.
•
•
•
•
•
•
What is the product/service
Who are the customers and their needs
How much do we charge
How efficiently are products/services delivered
Where will the demand be fulfilled
When will the demand be fulfilled
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Summary
LO1‐1. Introduction to Operations
LO1‐2. Explain strategic tradeoffs, inefficiencies and determine if a firm is
on the efficient frontier
LO1‐3. Explain the three system inhibitors
LO1‐4. Articulate the key operational decisions a firm needs to make supply
match with demand
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