LGT 5945
Operations
Lecture 1
Introduction –
Operations Strategy & Process Fundamentals
Typical MBA Students Reaction to Operations Management
What is behind every successful product and service?
What is Operations?
“The process of bringing goods and services to customers”
Firm infrastructure
Technology development
Procurement
value
Human resources management
Inbound
logistics
Operations
Outbound
logistics
Marketing
and sales
Service
Value-added = the benefit of the product to customer – its cost
Customer
Course Motivation
Firms that are better at managing their
operations enjoy a significant competitive
advantage.
How to teach this course?
• We feel that professional training requires tools and
strategies that students can implement in practice.
• Real operations, real solutions
• Quantitative models
• Use as little mathematical notation as possible, provide
many real-world examples, while maintaining analytical
rigors.
Basic Economic Order Quantity (EOQ) Model
Total = Annual + Annual + Annual
annual purchase ordering
holding
cost
cost
cost
cost
Three Modules
• Module 1 (M1): Designing and Managing Processes
- operations strategy, and process analysis, waiting line theory,
quality management and statistical quality control, lean
operations, Toyota production system, business process
reengineering
• Module 2 (M2): Matching Supply with Demand
- Capacity management, revenue management, inventory
management
• Module 3 (M3): Managing Supply Chains
- Supply chain design, risks, supply chain coordination
Lecture Topics
Topic
1
Introduction to OM, operations strategies, and process
fundamentals
2
Process analysis and bottlenecks in processes
3
Capacity management and revenue management
4
Inventory management
5
Waiting line theory: the impact of variability
6
Quality management
7
Lean operations and Toyota Production System
8
Supply chain management
9
Supply chain coordination
10
Innovative business models
Grading
Assessment Components
Class participation (attend., discuss., games)
20%
Two quizzes
20%
Group writings
20%
Group project (presentation & report)
20%
Individual assignment
20%
Course Materials
• Required Reading:
- Lecture notes and other materials posted on Blackboard
• Main References:
- Cachon, G. & Terwiesch, C. (2024), Matching Supply With Demand (5th ed.),
McGraw-Hill.
- Krajewski, L. J., Ritzman, L. P., Malhotra, M. K., (2022), Operations
management: processes and supply chains (13th ed.), Pearson/Prentice Hall.
- Chopra, S. (2019) Supply Chain Management: Strategy, Planning, and
Operation (7th ed.), Pearson.
• Other References:
- Anupindi, R., Chopra, S., Deshmukh, S.D., Van Mieghem , J.A. & Zemel, E. (2012),
Managing Business Process Flows (3rd ed.), Prentice Hall.
- Jacobs, F. R., and Chase, R. B., (2021), Operations and Supply Chain Management (16th
Global ed.), McGraw-Hill.
- Heizer, J., Render, B., Munson C., (2022), Operations Management: Sustainability and
Supply Chain Management (14th ed.), Pearson/Prentice Hall.
- Schroeder, R. G., Rungtusanatham, M. J., Goldstein, S. M., (2021), Operations
management in the supply chain: decisions and cases, McGraw-Hill.
Your Participation
• Students are expected to take an active role in classroom
activities.
• Participation includes:
- Asking questions
- Answering questions
- Extending further ideas presented by others
- Offering examples
- Proposing different points of view
- Encouraging others to speak by directing questions in their ways
- Demonstrating that you have prepared for class
• Use your laptop computer and tablet only for class-related
purposes.
What prevents you from better learning?
Multi-Tasking
“A Microsoft study on office interruptions found that workers experienced an
average of four interruptions per hour. For every 30-second distraction, the
research firm Basex estimates it takes 5 minutes for workers to return to
work. That’s 22 minutes wasted every hour which, according to Basex, adds
up to almost $1 trillion in productivity losses each year.”
Source: C. Suddath, Bloomberg
Businessweek, October 29 –
November 4, 2012
Lecture 1 – Learning Outcome
• Understand what operations management is
• Discuss operations and supply chain strategies
• Understand why strategies have implications relative to
business risk
• Form a process view of organization
• Evaluate process performance
• Beware of ethics issues in decision making
What Is Operations Management?
• Operations Management
- Management of the conversion process which transforms
inputs such as raw material and labor into outputs in the
form of finished goods and services.
Value-added*
Inputs
(customers
and/or
materials)
Transformation Process
(components)
Outputs
(goods
and
services)
Resources (capital & labor)
*Value-added: The difference between the cost of inputs and the value or price of outputs.

Producing Burger
Input-Transformation-Output Relationships
for Typical Systems
The Goods–Services Continuum
Most Products Are a “Bundle” of Goods and Services
US Service Industry vs Manufacturing Employment
Growth Since 1939
Differences Between Goods and Services
Goods
Services
Tangible
Intangible
Can be inventoried
Cannot be inventoried
Less interaction between customer Direct interaction between
and process
customer and process
Operations and Supply Chain Management
Operations
Manufacturing and
service processes
used to transform
resources into
products
Supply Chain
Processes that move
information and
material to and from
the firm
Operations and Supply Chain Management
• The design, operation, and improvement of the systems that create
and delivery the firm’s primary products and services
• Operations and supply chain management (OSCM) is
– A functional field of business
– With clear lines management responsibilities
– Concerned with the management of the entire
production/delivery system
Supply Chain Processes
The Process View of Organization
• A process is any transformation that converts inputs to
outputs.
• The process view considers any organization to be a
process that consists of interconnected sub processes.
• The success of any organization is determined by the
performance of all its processes.
• Therefore, evaluate and improve the performance of a
process in terms of value created are the two objectives
of managing operations systems.
Purposes of Process Management
• Matching supply with demand
- Quantity
- Quality
- Time
• Competitiveness
How effectively an organization meets the wants and needs of
customers relative to others that offer similar goods or
services
- Productivity
- Return on assets
Managing Operations
Process Management
S
u
p
p
l
i
e
r
Information Structure
(Select process flow measures
to manage for improvement)
Inputs
Process:
Network of Activities
& Buffers
Resources
Competitiveness
 Productivity
 Return on Assets
Outputs
Customers
Matching supply
with demand
 On time
 On quantity
 On specification
Process Improvement Example: Fashion Business
Fashion Business: process change
Pros and Cons
Make “General” sweaters
and dye to demand
Cost =
$18
Cost =
$21
Competitive Priorities
省
好
快
多
1. Low-cost operations
2. Top quality
3. Consistent quality
Time
4. Delivery speed
5. On-time delivery
6. Development speed
Flexibility 7. Customization
8. Variety
9. Volume flexibility
Cost
Quality
Flexibility Time Quality Cost
Competitive Capabilities
• The Competitive Capabilities are the cost, quality, time and
flexibility dimensions of competitive priorities that a process or
value chain actually possesses and is able to deliver.
- Low Cost means delivering a service or product at the lowest
possible cost to the satisfaction of the customer.
- Wal-Mart
Quality as a Competitive Capability
• Top Quality: Delivering an outstanding service or product.
- Considerable interaction with the customers may be required
to determine what that means.
• Consistent Quality: Producing services or products that meet
design specifications on a consistent basis.
- Example: Intel’s Copy Exact
 Semiconductor fabrication plants have same exact specifications
 Creating interchangeable processes and interchangeable fabs
Time as a Competitive Capability
• Delivery Speed is quickly filling a customer’s order.
- Lead Time is the time between receipt of an order and filling
the order.
• On-Time Delivery means meeting the delivery time
promises.
• Development Speed is quickly introducing a new service
or product.
- Zara, SHEIN
Shein
In the "BrandZ Top 50 Global Brands in
China in 2021"(2021年BrandZ中国全球化品牌
50强), jointly released by Google and Kantar,
SHEIN ranked No. 11, outplaying Tencent.
Flexibility as a Competitive Capability
• Customization means satisfying the unique needs of
each customer by changing the service or product
designs.
• Variety involves handling a wide assortment of services
or products efficiently.
- How to offer variety in an easy way: Subway sandwich
• Volume Flexibility requires accelerating or decelerating
the rate of production quickly to handle large
fluctuations in demand.
What is Strategy?
• Strategic thinking has its roots in military strategy
- “The branch of military science dealing with military
command and the planning and conduct of a war.”
• In business
- “A general plan to achieve your long-term goal.”
- Strategy is how you create a unique and valuable position,
involving a different set of activities.
• Tactics:
- the individual (more concrete) steps and actions
in the plan to achieve your objectives
Hong Kong Store
Positioning Map
Hi-Fashion
Armani
Hugo Boss
Unmet Need –
ZARA
H&M
Lo-Price
Springfield
Old Navy
Cortefiel
Banana Republic
Brooks Brothers
KooKai
Hi-Price
Gap
Lo-Fashion
Contemporary fashion of medium quality at a good price.
Trade-offs
• Trade-offs: activities are incompatible so that more of
one thing necessitates less of another.
• Management must decide which parameters of
performance are critical and concentrate resources on
those characteristics
• For example, a firm that focuses on low-cost
production may not be capable of quickly introducing
new products
• Straddling – seeking to match a successful competitor
while maintaining its existing position
- It adds features, services, or technology to existing activities
- Often a risky strategy
Business Strategy: Making Tradeoffs in Positioning
By product and process redesign, a firm can improve quality and at the same time reduce costs.
Success Depends On
Clever integration of
• A great operations-related strategy
• Processes to deliver products and
services
• Analytics to support the decisions
needed to manage the firm
Levels of Strategy-Making
Operations and Supply Chain Strategy
• Setting broad policies and plans for using the resources
of a firm – must be integrated with corporate strategy
- Corporate strategy provides overall direction and coordinates
operational goals with those of the larger organization
- Can be viewed as part of a planning process that coordinates
operational goals with those of the larger organization
• Operations effectiveness – performing activities in a
manner that best implements strategic priorities at a
minimum cost
Strategies are Implemented Using Operations and Supply
Chain Activities
• All operations activities relate to one another
• To be efficient, the firm must minimize total cost
without compromising customers’ needs
• Consider IKEA
- Targets young, low-cost buyers
- Uses a self-service model showing furniture in familiar
settings
- Designs its own low-cost, modular, ready-to-assemble
furniture
- Stores stock the products in boxes
- Customers pick their own boxes from inventory
- Offers in-store childcare and extended hours
Factors that Influence Cost & Complexity of Packaging a
Shampoo
Recycled materials
Dark color recycled
materials is cheaper
Optimize labeling
Printing labels on bottle
Packing density
Using rectangular
or square bottle
Volume-to-weight ratio
Reduce the variations in
packaging weight
http://www.mckinsey.com/client_service/operations/case_studies/reduce_packaging_costs
Triple Bottom Line
The firm is obligated to
compensate shareholders who
provide capital.
Promote growth and grow
long-term value.
This refers to the firm’s
impact on the environment
This pertains to fair and
beneficial business practices
toward labor, the community,
and the region in which a firm
conducts its business
Ethics
• In making decisions, managers must consider how their
decisions will affect shareholders, management, employers,
customers, the community at large, and the environment.
• Ethical issues including
- Financial statement: accurately
- Worker safety: maintain a good and safe working environment
- Product safety: minimize the risk of injury to users or damage
others
- Quality: avoiding hidden defects
- The environment: not doing things that will harm the environment
- The community: being a good neighbor
- Hiring and firing workers: avoiding false pretenses
- Closing facilities: taking into account the impact on a community
- Employees’ rights: dealing with employees’ problems quickly &
fairly, respect them
Quick Ethical Test
1.
Is it right?
2.
Is it fair?
3.
Who gets hurt?
4.
Would you be comfortable if the details of your decisions
were reported on the front page of your local newspaper?
5.
What would you tell your child to do?
6.
How does it smell/feel?
Three Enemies of Operations
• Three enemies
- Variability
 Examples
 Game
- Waste
- Inflexibility
• Friends: buffers
52
Three Enemies of Operations
Is associated with longer wait times
and / or customer loss
Requires process to hold excess
capacity (idle time)
Primary Causes
of Losses
Variability
Use of resources beyond what is
needed to meet customer
requirements
• 7 different types of waste
• Lean: do more with less
Waste
Buffer or suffer
Often times: quality issues
Inflexibility
Work Waste Value- Work Waste Valueadding
adding
Additional costs incurred because of supply demand
mismatches
• Waiting customers or
• Waiting (idle capacity)
Customer
demand
Capacity
Source: Reinecke / McKinsey
Variability is our enemy
Physician office
Example:
Variability in
Queues
- Patients arrive, on average, every five minutes
- It takes four minutes to serve a patient
- Patients are willing to wait
⇒ What is the utilization of the physician?
⇒ How long will patients have to wait?
A Somewhat Odd Service Process
Arrival Time
Service
Time
1
0
4
2
5
4
3
10
4
4
15
4
5
20
4
6
25
4
7
30
4
8
35
4
9
40
4
10
45
4
11
50
4
12
55
4
Patient
No uncertainty (scheduled arrival)
and arrival rate < service rate (capacity),
→ no queue
one arrival every 5 minutes
A More Realistic Service Process
Patient
Arrival
Time
Service
Time
1
0
5
2
7
6
3
9
7
4
12
6
5
18
5
6
22
2
7
25
4
8
30
3
9
36
4
10
45
2
11
51
2
12
55
3
Variability Leads to Waiting Time
Arrival
Time
Service
Time
1
0
5
2
7
6
3
9
7
4
12
6
5
18
5
6
22
2
7
25
4
8
30
3
9
36
4
10
45
2
11
51
2
12
55
3
Patient
The Curse of Variability
• Variability hurts flow
• With buffers: we see waiting times even though there
exists excess capacity
• Variability is BAD and it does not average itself out
• Understand where it comes from and eliminate what
you can.
Impact of Variability: The Variability Game
Production
Release
Station
WS1
WS2
WS3
WS4
• For each station, a single dice is rolled (1-6).
• The station will ship the lesser of the dice roll and the number of
pieces that are waiting to be processed.
• Each workstation starts with 0 chip in stock.
• How many chips are moved on average after we’ve gone through
the cycle one time? Ten times?
- Therefore, (in theory) the manufacturing line "should" be able to ship an
average of 3.5 pieces per turn.
Game Time
Let’s check our estimate by playing this game
• 5 students in a group
• Play the variability game with your team member
• Each round is 8 weeks
• Record the difference between the number of moved
chips and our expectation for each member
What can you learn from the game?
• The dice represents the capacity of each resource. Each
has exactly the same capacity as the others, but its
actual yield will fluctuate.
• The further away from the first stage, the more behind
the plan of 3.5 per round.
• Defects increase the variability in the process.
Waste is our enemy
1.
2.
3.
4.
5.
6.
7.
7 types of waste
Waste from overproduction
Waste of waiting time
Transportation waste
Inventory waste
Processing waste
Waste of motion
Waste from product defects
Inflexibility is our enemy
No Flexibility vs. Full Flexibility
Products
Plants
1
1
2
2
3
3
4
4
5
5
6
6
7
7
8
8
9
9
10
10
Source: Jordan and Graves
Full Flexibility vs. Chaining
Source: Jordan and Graves
Example: Modular Design
• Example: subway sandwich
- Simple operations and product variety at the same time
• Example: Desktop vs laptop
• Modular hardware, modular software
Friends: Buffers
• Inventory buffer
• Capacity buffer
• Time buffer