INTRODUCTION
Helping students understand the fundamental concepts and techniques necessary for attaining world-class
performance in manufacturing and service operations is the main objective of this book. Besides its
importance to corporate competitiveness, reasons for studying this field are
1. A business education is incomplete without an understanding of modern approaches to
managing operations. Every organization produces some product or service so students
must be exposed to modern approaches for doing this effectively. Moreover, hiring
organizations now expect business graduates to speak knowledgeably about many issues in
the field. While this has long been true in manufacturing, it is becoming equally important
in services, both public and private. For example, “reinventing government” initiatives draw
heavily on total quality management, business process reengineering, and just-in-time
delivery—concepts that fall under the OM umbrella.
2. Operations management provides a systematic way of looking at organizational processes.
OM uses analytical thinking to deal with real world problems. It sharpens our understanding
of the world around us, whether we are talking about how to compete with Japan or how
many lines to have at the bank teller’s window.
3. Operations management presents interesting career opportunities. These can be in direct
supervision of operations or in staff positions in OM specialties such as materials
management and quality assurance. In addition, consulting firms regularly recruit
individuals with strong OM capabilities to work in such areas as process reengineering and
computer-based inventory systems.
4. The concepts and tools of OM are widely used in managing other functions of a business.
All managers have to plan work, control quality, and ensure productivity of individuals under
their supervision. Other employees must know how operations work to effectively perform
their jobs. (See insert, “OM and Other Business Specialties.”)
OM and Other Business Specialties
Accountants need to understand the basics of inventory management, capacity utilization, and
labor standards to develop accurate cost data, perform audits, and prepare financial reports. Cost
accountants in particular must be aware of how just-in-time (JIT)and computer-integrated manufacturing
(CIM) work.
Financial managers can use inventory and capacity concepts to judge the need for capital
investments, to forecast cash flow, and to manage current assets. Further, there is a mutual concern
between OM and finance in specific decisions such as make-or-buy and plant expansion and / or
relocation.
Marketing specialists need to understand what operations can do relative to meeting customer due
dates, product customization, and new product introduction. In service industries, marketing and
production often take place simultaneously, so marketing and OM have overlapping interests.
Personnel specialists must know how jobs are designed, the relationship between standards and
incentive plans, and the types of production skills required of the direct workforce.
MIS specialists often install operations information systems that they themselves design or that
are developed as off-the-shelf software by computer companies. A major business application of
computers is in production control.
Entrepreneurs often because they run out of working capital due to poor production planning
and inventory management. (need we say more?)
Marketplace
Corporate Strategy
Finance Strategy
Operations Strategy
Marketing Strategy
Operations Management
Inputs
Material
Customers
Outputs
People
Plants
Parts
Processes
Products
Services
Planning and Control Systems
Production System
EXHIBIT 1
Summary Model of the Field
THE FIELD OF OPERATIONS MANAGEMENT
Operations Management Defined
Operations management may be defined as the design, operation, and improvement of the
production systems that create the firm’s primary products or services. Like marketing and finance, OM
is a functional field of business with clear line management responsibilities. This point is important
because operations management is frequently confused with operations research and management science
(OR/MS) and industrial engineering (IE). The essential difference is that OM is a field of management,
while OR/MS is the application of quantitative methods to decision making in all fields, and IE is an
engineering discipline. Thus, while operations managers use the decision-making tools of OR/MS (such
as linear programming) and are concerned with many of the same issues as IE (such as factory
automation), OM’s distinct management role distinguishes it from these other disciplines.
Operations decisions are made in the context of the firm as a whole. Starting at the top of
Exhibit 1, the marketplace (the firm’s customers for its products or services) shapes the firm’s corporate
strategy. This strategy is based on the corporate mission, and in essence reflects how the firm plans to
use all its resources and functions (marketing, finance, and operations) to gain competitive advantage.
The operations strategy specifies how the firm will employ its production capabilities to support its
corporate strategy. (similarly, the marketing strategy addresses how the firm will sell and distribute its
goods and services, while the finance strategy identifies how best to utilize the firm’s financial resources.)
Within the operations function, management decisions can be divided into three broad areas:
Strategic (long-term) decisions.
Tactical (intermediate-term) decisions.
Operational planning and control (short-term) decisions.
The strategic issues are usually very broad in nature, addressing such questions as: How will we
make the product? Where do we locate the facility or facilities? How much capacity do we need?
When should we add more capacity? Thus, by necessity, the time frame for strategic decisions is
typically very long—usually several years or more, depending on the specific industry. (Chapter 2
discusses operations strategy in depth.)
Operations Decisions
Operations management decisions at the strategic level impact the company’s long-range
effectiveness in terms of how it can address its customers’ needs. Thus, for the firm to succeed, these
decisions must be in alignment with the corporate strategy. Decisions made at the strategic level become
the fixed conditions or operating constraints under which the firm must operate in both the intermediate
and short term.
At the next level in the decision-making process, tactical planning primarily addresses how to
efficiently schedule material and labor within the constraints of previously made strategic decisions.
Issues that OM concentrates at this level are: How many workers do we need? When do we need them?
Should we work overtime or put on a second shift? When should we have material delivered? Should we
have a finished goods inventory? These tactical decisions, in turn, become the operating constraints
under which operational planning and control decisions are made.
Management decisions with respect to operational planning and control are narrow and short-term
by comparison. Issues at this level include: What jobs do we work on today or this week? Who do we
assign to what tasks? What jobs have priority?
Production Systems
The heart of OM is the management of production systems. A production system uses
operations resources to transform inputs into some desired output. An input may be a raw material, a
customer, or a finished product from another system. As indicated in the bottom of Exhibit 1, operations
resources consist of what we term the five P’s of operations management: people, plants, parts,
processes, and planning and control systems. People are the direct and indirect workforce. Plant
included the factories or service branches where production is carried out. Parts include the materials
(or, in the case of services, the supplies) that go through the system. Processes include the equipment
and steps by which production is accomplished. Planning and control systems are the procedures and
information management uses to operate the system.
Transformations that take place include
Physical, as in manufacturing
Location, as in transportation.
Exchange, as in retailing.
Storage, as in warehousing.
Physiological, as in health care.
Informational, as in telecommunications.
These transformations, of course, are not mutually exclusive. For example, a department store
can (1) allow shoppers to compare prices and quality (informational), (2) hold items in inventory until
needed (storage), and (3) sell goods (exchange), Exhibit 2 presents sample
input—transformation—output relationships for a variety of systems. Note that only the direct resources
are listed. A more complete system description would, of course, also include managerial and support
functions.
Differences between Services and Goods Production
At the most basic level, the difference between a good and a service is that a service is something
that “if you drop it on your foot, it won’t hurt you.” More formally, the essential difference between the
two is that service is an intangible process, while a good is the physical output of a process. Further,
other differences are that in services, location of the service facility and direct customer involvement in
creating the output are often essential factors; in goods production, they usually are not. There are many
shades of gray here. Manufacturers provide many services as part of their product, and many services
often manufacture the physical products that they deliver to their customers or consume goods in creating
the service. (See Exhibit 3 for the classic depiction of the goods/service content of different service
businesses.) McDonald’s manufactures a tangible product, but because it is designed to have some contact
with the customer to complete the service production process, the firm is in the service category.
Also, from an operations perspective, customers are on the “shop floor” when consuming many
services. the shop floor may be called the front office, dining area, operating room, or passenger cabin,
depending on the industry. There are also many behind-the-scenes activities with tangible inputs and
outputs. For example, major airlines, banks, and insurance companies have large back offices that
support customer contact operations. As the service design chapter relates, such back-office operations
process things and information (e.g., tickets, checks, and claims) and so can be run much like a factory.
OM in the Organizational Chart
Exhibit 4 locates operations activities within a manufacturing organization and a service
organization. Aside from differences in terminology, the service organization also differs from the
manufacturing firm in structure. The manufacturing company typically groups operations activities to
produce its products in one department. Service firms scatter operations activities throughout the
organization. For example, reservations scheduling in an airline is part of the production process for
airline travel, even though it is carried out by a non-operations department. This is seen even more
clearly in banking where there is often a retail operations department and a check processing operations
department. Note thatin manufacturing the plant manager’s position is used to administer the various
support activities required for production. Note also that in both types of organizations, it is typical for
operations activities to account for the lion’s share of capital investment and workforce. Exhibit5 lists
some line and staff jobs that are frequently viewed as relating to the operations function.
CLOSED VERSUS OPENSYSTEMS VIEWS OFOPERATIONS
The manufacturing organization chart in Exhibit 4 shows reporting arrangements and typical
operations responsibilities. It does not really convey how the manufactur9ingorganization, particularly
the factory itself, relates to its external and internal environment. Contrasting open and closed system
views of manufacturing gives us a perspective on these relationships.
Traditionally, manufacturing managers have sought to protect their factory operations from
outside disturbances through the use of buffers between the plant and its customers. These buffers can
be physical (such as inventories) or organizational (such as the other functions shown surrounding the
“factory” in Exhibit 6). Note that with the exception of the purchasing function—which is often part of
the manufacturing organization—manufacturing has few formal direct links with the outside environment.
(Purchasing itself, under this model, deals only with suppliers.)
This closed system view, with its reliance on buffering, has been perceived as desirable for three
reasons. (1) Interaction with customers, vendors, and salespeople can be a disturbing influence on
production. (2) The production transformation process is often more efficient than the processes for
obtaining inputs and disposing of finished goods. (3) With certain processes (for example, auto assembly
lines and continuous flow processes such as petroleum refining), productivity can be maximized only by
operating at a continuous rate which is often different from the market-demanded rate.
The inherent drawbacks of the closed system model are now becoming readily apparent,
however. One drawback is lack of flexibility due to information lags between the factory and the
so-called boundary functions. Another is an “us versus them” attitude (for example, “People in the
factory don’t understand the business,” “People in marketing don’t know our problems.”). Finally, lack
of interaction with the customer (discussed shortly) loses some competitive opportunities for the business.
The open system model of factory operations is obviously quite different. Here, the factory is
open to communication and interaction with its customers and suppliers, and it develops means to
eliminate procedural and personal barriers between itself and other functions. This calls for a service
orientation on the part of manufacturing operations.
MANUFACTURING OPERATIONS AS SERVICE
The emerging model in industry is that every organization is in the service business. This is true
whether the organization makes big planes or Big Macs. From this we must recognize that
manufacturing operations, as well as every other part of the organization, are also in the service business
even if the customer is an internal one. In manufacturing, such services can be divided into core and
value-added services provided to internal and external customers of the factory.
The core services customers want from the factory are products that are made correctly, are
customized to their needs, are delivered on time, and are priced competitively. These are commonly
summarized as the classic performance objectives of the operations function: quality, flexibility, speed,
and price (or cost of production). Achieving these services is the focus of this book, and is discussed in
detail in Chapter3.
Value-added services are services that simply make the external customer’s life easier or, in the
case of internal customers, help them to better carry out their particular function. Chase and Garvin
(1992) suggest that value-added factory services can be classified into four broad categories:
information, problem solving, sales support, and field support.
1.
Information is the ability to furnish critical data on product performance, process
parameters, and cost to internal groups (such as R&D) and to external customers, who then
use the data to improve their own operations or products. For example, Hewlett-Packard's
Fort Collins quality department provides quality data sheets and videotapes documenting
actual product testing and field quality performance to field sales and service personnel.
2.
Problem solving is the ability to help internal and external groups to solve problems,
especially in quality. For example, Raritan Corporation, a metal rod fabricator, sends factory
workers out with salespeople to troubleshoot quality problems. Those factory workers then
return to the factory and join with shop floor personnel on remedial efforts.
3.
Sales support is the ability to enhance sale sand marketing efforts by demonstrating
the technology, equipment, or production systems the company is trying to sell. In part
Digital Equipment Corporation sells its CIM (computer-integrated manufacturing) system by
showcasing it on its own factory floor. Sometimes sales are enhanced by the factory
showing off its workforce's skills. For example, to demonstrate its products' quality, Sara
Lee has visitors observe the artistic skills of its "meringue fluffers" on its pie line.
4.
Field support is the ability to replace defective parts quickly (for example,
Caterpillar promises to make repair parts available anywhere in the world within 48 hours) or
to replenish stocks quickly to avoid downtime or stockouts (for example, The Limited, a
retail chain, is linked to its Hong Kong textile mills via fast-selling items as soon as weekly
sales figures are collected).
Value-added services provided to external customers yield two benefits. First, they differentiate
the organization from the competition. Indeed, in many cases it is easier to copy a firm's product than it
is to create the value-added service infrastructure to support it. Second, they build relationships that bind
customers to the organization in a positive way, as the sidebar, "Linking the Shop-Floor Worker to the
Customer," relates.
PLAN OF THIS BOOK
This book is organized around the stages that a production system goes through in its
birth-to-maturity life cycle. We have chosen this structure because it mirrors system development in the
real world. The text starts by analyzing the competitive strategy under which the system is to operate.
It then looks at product design and process choicers that set the foundation for the system per se. Next, it
considers the design of the various parts of the production system--getting the five P's of OM into
alignment to achieve efficient production. The book then presents tools to help plan and control the
system's start-up. The text then deals extensively with the system in steady state, focusing on day-to-day
operations. The book concludes with revision the system to achieve major improvements in
performance. Exhibit 7 identifies key issues in each stage of system operation.
Note that the text is not built around the life cycle of any one system. On the contrary, we have
intentionally chosen examples from a variety of manufacturing and service operations to emphasize that
good operations management is essential in such diverse systems as hospitals, banks, universities, and, of
course, factories.
HISTORICAL DEVELOPMENT OF OM
Exhibit 8 gives a timeline of OM's history. We now highlight some of its major concepts and
their developers.
Although operations management has existed since people started to produce, the advent of
scientific management around the turn of the century is probably the major historical landmark for the
field. This concept was developed by Frederick W. Taylor, an imaginative engineer and insightful
observer of organizational activities.
The essence of Taylor's philosophy was that (1) scientific laws govern how much a worker can
produce per day, (2) it is the function of management to discover and use these laws in the operation of
productive systems, and (3) it is the function of the worker to carry out mangement's wishes without
question. Taylor's philosophy was not greeted with approval by all his contemporaries. On the
contrary, some unions resented or feared scientific management--with some justification. In too many
instances, managers of the day were quick to embrace the mechanisms of Taylor's philosophy--time
study, incentive plans, and so forth--but ignored their responsibility to organize and standardize the work
to be done. Hence, there were numerous cases of rate cutting (reducing the payment per piece if the
production rate was deemed too high), overwork of labor, and poorly designed work methods. The
overreaction such abuses led to the introduction of a bill in Congress in 1913 to prohibit the use of time
study and incentive plans in federal government operations. The unions advocating the legislation
claimed that Taylor's subject in several of his time-study experiments, a steelworker called Schmidt, had
died from overwork as a result of following Taylor's methods. (As evidence they even distributed
pictures of Schmidt's "grave.") It was later discovered that Schmidt (whose real name was Henry Nolle)
was alive and well and working as a teamster.1 Ultimately, the bill was defeated.
Note that Taylor's ideas were widely accepted in contemporary Japan. A Japanese translation of
Taylor's book, Principles of Scientific Management (titled The Secret of Saving Lost Motion), sold more
than 2 million copies. To this day, there is a strong legacy of Taylorism in Japanese approaches to
manufacturing management.2
Notable coworkers of Taylor were Frank and Lillian Gilbreth (motion study, industrial
psychology) and Henry L. Gantt (scheduling, wage payment plans). Their work is well known to
management scholars. However, it is provably not well known that Taylor, a devout Quaker, requested
"cussing lessons" from an earthy foreman to help him communicate with workers; that Frank Gilbreth
defeated younger champion bricklayers in bricklaying contests by using his own principles of motion
economy; or that Gantt won a presidential citation for his application of the Gantt chart to shipbuilding
and refitting during World War 1.
Moving Assembly Line
The year 1913 saw the introduction of one of the machine age's greatest technological
innovations--the moving assembly line for the manufacture of Ford cars.3 Before the line was
introduced, in August of that year, each auto chassis was assembled by one worker in about 121/2 hours.
1
Milton J. Nadworny, "Schmidt and Stakhanov: Work Heroes in Two Systems," Californial Management Review
6,no. 4 (Summer 1964), pp. 69-76.
2
Charles J. McMillan, "Production Planning in Japan," Journal of General Management 8, no. 4, pp. 44-71.
Eight months later, when the line was in its final form, with each worker performing a small unit of work
and the chassis being moved mechanically, the average labor time per chassis was 93 minutes. This
technological breakthrough, coupled with concepts of scientific management, represents the classic
application of labor specialization and is still common today.
Hawthrone Studies
Mathematical and statistical developments dominated the evolution of operations management
from Taylor's time up to around the 1940s. An exception was the Hawthrone studies, conducted in the
1930s by a research team from the Harvard Graduate School of Business Administration and supervised
by sociologist Elton Mayo. These experiments were designed to study the effects of certain
environmental changes on assembly workers' output at the Western Electric plant in Hawthorne, Illinois.
The unexpected findings, reported in Management and the Worker (1939) by F. J. Roethlisberger and W.
J. Dickson, intrigued sociologists and students of "traditional" scientific management alike. To the
surprise of the researchers, changing the level of illumination, for example, had much less effect on
output than the way in which the changes were introduced to the workers. That is, reductions in
illumination in some instances led to increased output because workers felt an obligation to their group to
keep output high. Discoveries such as these had tremendous implications for work design and
motivation and ultimately led many organizations to establish personnel management and human relations
departments.
Operations Research
World War 2, with its complex problems of logistics control and weapons systems design,
provided the impetus for the development of the interdisciplinary, mathematically oriented field of
operations research. Operations research (OR) brings together practitioners in such diverse fields as
mathematics, psychology, and economics. Specialists in these disciplines form a team to structure and
analyze a problem in quantitative terms so they can obtain a mathematically optimal solution. As
3
Ford is said to have gotten the idea for an assembly line from observing a Swiss watch manufacturer's use of the
technology. Incidentally, all Model-T Fords were painted black. Why? Because black paint dried fastest.
mentioned earlier, operations research, or its approximate synonym management science, now provides
many of the quantitative tools used in operations management as well as other business disciplines.
OM's Emergence as a Field
In the late 1950s and early 1960s, scholars began to deal specifically with operations management
as opposed to industrial engineering or operations research. Writers such as Edward Bowman and
Robert Fetter (Analysis for Production and Operations Management [1957]) and Elwood S. Buffa
(Modern Production Management [1961]) noted the commonality problems faced by all productive
systems and emphasized the importance of viewing production operations as a system. They also
stressed the useful applications of waiting line theory, simulation, and linear programming, which are
now standard topics in the field. In 1973, Chase and Aquilano's first edition of this book stressed the
need "to put the management back into operations management " and suggested the life cycle as a means
of organizing the subject.
Computers and the MRP Crusade
The major development of the 1970s was the broad use of computers in operations problems.
For manufacturers, the big breakthrough was the application of materials requirements planning
(MRP) to production control. This approach ties together in a computer program all the parts that go
into complicated products. This program then enables production planners to quickly adjust production
schedules and inventory purchases to meet changing demands for final products. Clearly, the massive
data manipulation required for changing schedules on products with thousands of parts would be
impossible without such programs and the computer capacity to run them. The promotion of this
approach (pioneered by Joseph Orlicky of IBM and consultant Oliver Wight) by the American Production
and Inventory Control Society (APICS) has been termed the MRP Crusade.
JIT, TQC, and Factory Automation
The 1980s saw a revolution in the management philosophies and the technologies by which
production is carried out. Just-in-time (JIT) production is the major breakthrough in manufacturing
philosophy. Pioneered by the Japanese, JIT is an integrated set of activities designed to achieve
high-volume production using minimal inventories of parts that arrive at the workstation just in time.
This philosophy--coupled with total quality control (TQC), which aggressively seeks to eliminate
causes of production defects--is now a cornerstone in many manufacturers' production practices.
As profound as JIT's impact has been, factory automation in its various forms promises to have
even greater impact has been greater impact on operations management in coming decades. Such terms
as computer-integrated manufacturing (CIM), flexible manufacturing systems (FMS), and factory
of the future (FOF) are already familiar to many reader of this book and are becoming everyday to OM
practitioners.
Manufacturing Strategy Paradigm
The late 1970s and early 1980s saw the development of the Manufacturing Strategy Paradigm by
researchers at the Harvard Business School. This work by professors William Abernathy, Kim Clark,
Robert Hayes, and Steven Wheelwright (built on earlier efforts by Wickham Skinner) emphasized how
manufacturing executives could use their factories' capabilities as strategic competitive weapons. The
paradigm itself identified how what we call the five P's of production management can be analyzed as
strategic and tactical decision variables. Central to their thinking was the notion of factory focus and
manufacturing trade-offs. They argued that because a factory cannot excel on all performance measures.
Its management must derive a focused strategy, creating a focused factory that does a limited set of tasks
extremely well. This raised the need for making trade-offs among such performance measures as low
cost, high quality, and high flexibility in designing and managing factories.
Service Quality and Productivity
The great diversity of service industries--ranging from airlines to zoos, with about 2,000 different
types in between--precludes identifying any single pioneer or developer that has made a major impact
across the board in these areas. However, one service company's unique approach to quality and
productivity has been so successful that it stands as a reference point in thinking about how to deliver
high-volume standardized services. In fact, McDonald's operation system is so successful that the
president of Chaparral Steel used it as a model in planning the company's highly efficient mini-mills.
Total Quality Management and Quality Certification
The unquestioned major development in the field of operations management, as well as in
management practice in general, is total quality management (TQM). Though practiced by many
companies in the 1980s, it become truly pervasive in the 1990s. All operations executives are aware of the
quality message put forth by the so-called quality gurus--W. Edwards Deming, Joseph M. Juran, and
Philip Crosby. Helping the quality movement along is the Baldrige National Quality Award started in
1986 under the direction of the American Institute of Quality Control and the National Institute of
Standards and Technology. The Baldrige Award recognizes up to five companies a year for outstanding
quality management systems.
The ISO 9000 certification standards put forth by the International Organization for
Standardization now play a major role in setting quality standards for global manufacturers in particular.
Many European companies requires require that their vendors meet these standards as a condition for
obtaining contracts.
Business Process Reengineering
The need to become lean to remain competitive in the global economic recession in the 1990s
pushed companies to seek major innovations in the processes by which they run their operations. The
flavor of business process reengineering (BPR) is conveyed in the title of Michael Hammer's influential
article "Reengineering Work: Don't Automate, Obliterate." The approach seeks to make revolutionary
changes as opposed to evolutionary changes (which are commonly advocated in TQM). It does this by
taking a fresh look at what the organization is trying to do in all its business processes, and then
elimination nonvalue-added steps and computerizing the remaining ones to achieve the desired outcome.