OPERATIONS STRATEGY
OPERATIONS MANAGEMENT
POM – planning, coordinating, and executing of all activities that create goods and
services.
<Discussion: “what is Operations Management”>
<functions of a business>
Contemporary “production/operations” management is not only about manufacturing, but is
also related to health care, food service, recreation, banking, hotel management, retail
sales, education, transportation, government, etc.
<Describe operations on a cruise ship>
<Describe operations on a bicycle factory>
<Comment on what is common or different in managing operations of these businesses>
(Both above include: scheduling activities, motivating employees, ordering and managing
supplies, selecting and maintaining equipment, satisfying quality standards, and – above
all – satisfying customers. In both systems success is dependent on short and long term
planning).
3 key organizational functions: Finance, Production/Operations, Marketing.
(Except the primary functions, there are also personnel, accounting, engineering,
distribution, maintenance, etc.).
The three must perform well on its own and must interface well with each other!
<Why?>
OPERATIONS
Activities, directly related to value-added production of goods or provision of services.
e.g.
Goods producing
Farming, mining, construction, manufacturing, power generation
Storage/transportation Warehousing, trucking, mail service, moving taxis, buses, hotels,
airlines
Exchange
Retailing, wholesaling, banking, renting or leasing, library loans
Entertainment
Films, radio and television, plays, concerts, recording
Communication
Newspapers, radio and TV newscasts, telephone, satellites
Operations convert inputs into outputs and generate additional value.
<Draw examples of the process: inputs – transformation process – outputs>
FINANCE
Securing resources at favorable prices and allocating those resources throughout the
organization. <Discussion: Finance and Operations liaison>.
Budgeting. Economic analysis of investment proposals. Provision of funds.
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MARKETING
Everything you know about it 
<Discussion of liaison b/w Marketing and Operations and Finance; short-medium-long
term planning>
A primary function of an operation manager is to guide the system (planningimplementation-control) by decision making.
Certain decisions affect the design of the system, and others – the operation of the
system.
System design: capacity, geographic location, arrangement of departments, placement of
equipment, product and service planning, acquisition of equipment. (Mostly, a strategic
aspect).
System operation: management of personnel, inventory planning and control, scheduling,
project management, quality assurance. (Day-to-day operations).
System design is the domain of top management (usually), but operations manager is a
critical advisor since system design determines many of the parameters of system
operation.
Design decision area:
- product and service design,
- process selection,
- quality,
- capacity,
- layout,
- design of work systems,
- location.
Operations decision area:
- quality control,
- forecasting,
- inventory management,
- aggregate planning,
- materials requirements planning,
- scheduling,
- project management,
- waiting lines.
The operations manager is the key figure in the system: he or she has the ultimate
responsibility of the creation of goods and services.
(Note, working in banking system and steel production assumes presence of absolutely
different skills, but what the two are similar at is that both jobs are managerial! In every
case, the operations manager must coordinate the use of resources through the
management process of planning, organizing, staffing, directing, and controlling.
Also, chief role of an operations manager is that of planner and decision maker).
DIFFERENTIATING FEATURES OF PRODUCTION SYSTEMS
Degree of standardization.
(Standardized [higher volume and lower unit cost] vs. customized).
<Examples, discussion of advantages and limitations>
Type of operation.
Project. (Set of activities directed toward a unique goal). Usually, projects are relatively
large scale. (E.g., development of a new product, installation of a computerized production
line, construction of a hospital, etc.).
Key “project” features: specific time frame, non-routine.
Job shop. (Small quantities or customized products). E.g. repair work shops.
Batch processing. Used when a moderate volumes of similar products are produced.
(Bakeries, canneries are typically produced in batches). E.g., ice-cream producer will
produce a batch of strawberry ice cream, then vanilla, etc.
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Repetitive production. High volume of standardized products (discrete).
Continuous production. Uniform product production (chemicals, sugar, film, oil products,
etc.).
<Discuss critical issues [location, supply, etc] of the production systems above>.
Manufacturing vs. servicing systems.
(Servicing is act-oriented, while manufacturing is product-oriented).
Major categories of service jobs:
Government, wholesale/retail, financial, health care, personal, business, education, etc.
Manufacturing and service are often similar in terms of what is done but different in how it
is done. <Discussion>.
Key issues differentiating production and servicing systems:
Characteristic
Manufacturing
Customer contact
Low
Uniformity of input
High
Labor content of jobs (higher labor content vs. more
Low
capital-intensive production)
Uniformity of output
High
Measurement of productivity
Easy
Quality assurance
High
<Discussion>
Service
High
Low
High
Low
Difficult
Low
Usually, production systems have both manufacturing and servicing elements.
Percent of people, getting involved in servicing business (instead of production or farming)
is increasing (in US, from 48% in 1950 to more than 70% in 1990 of all jobs, although most
of them are low-end occupations).
<Why this trend is harmful for economy?>
Implications for Design and Operation of Production Systems.
Degree of output standardization, type of operation, product/service combination will have
a bearing on capital requirements, choice of equipment, capacity planning, location
planning, layout, inventory management, work force requirements, scheduling, and quality
assurance.
E.g. high-volume operation requires a steady rate of output (which is costly to vary,
though); hence, a good forecast is necessary to adequately design the system. Job shop
is flexible, so forecasting is less critical at the design stage. Inventory management of the
two also sharply differs. Standardization of purchases also varies.
Understanding the aspects of operations gives an insight to creating an optimized system.
USE OF MODELS
Physical (most telegraphic), Schematic, Mathematical (most abstract).
Model strips away the unimportant details so that attention can be concentrated on the
most important aspects of a situation (thus increasing the opportunity to understand a
problem and its solution).
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The goal of modeling is to develop a model that adequately portrays some real-life
phenomenon. Once developed, a model can be manipulated (changing inputs to observe
outcomes).
<requirements and limitations of models>
Models are beneficial because:
- easy to use and inexpensive if compared with the actual situations;
- models organize reveal the needs for info;
- provide systematic approach to problem solving;
- increase understanding of the problem;
- enable managers to analyze “what if?” questions;
- require users to be very specific about objectives;
- serve as a consistent tool for evaluation;
- enable users to bring the power of mathematics to bear on the problem;
- provide a standardized format for analyzing a problem.
Model’s limitations:
- quantitative aspect limit the richness of qualitative judgements;
- misapplication and misinterpretation;
- model building can become an end in itself.
Models, however, must be QUANTITATIVE (instead of qualitative). (Actually, it was not
until the WWII that major efforts were made to develop these techniques; in order to
handle complex military logistics problems, interdisciplinary teams were assembled).
e.g. Linear programming, queuing techniques, inventory models, PERT, CPM (critical path
method), forecasting techniques, statistical models, etc. are all quantitative.
ANALYSIS OF TRADE-OFFS
(e.g., increased level of customer service and the additional inventory; or selection of extra
equipment – more features vs. cost; quality – cost; productivity – wages/accidents; etc.)
Trade-offs are essentially the building blocks of operations management.
SYSTEM APPROACH
(A system is a set of interrelated parts that must work together).
The whole is greater than the sum of its parts; optimization must be made at the system
level, not at individual (e.g., marketing, operations, finance).
<A world hunger system connotation example>.
ESTABLISHING PRIORITIES
Usually, relatively few factors account for the major share of a problem so that dealing with
those factors will generally have a disproportionately large impact on the results achieved.
<Pareto phenomenon; 80/20 rule>
HISTORICAL EVOLUTION OF POM (production and operations management).
Ancient world (Pyramids, Great Wall of China, ships of Roman and Spanish empires) was
characterized by “public works” (non-commercial, government projects).
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POM appears with industrial revolution (approximately, 1770, in England). Before –
custom manufacturing, no mechanisms, simple tools, etc.
Key developments.
Steam engine (James Watt, 1764) – provided the source of power to operate machines.
Spinning jenny (James Hargreave, 1770).
Power loom (Edmund Cartwright, 1785).
The Wealth of Nations (Adam Smith, 1776) – division of labor.
Interchangeable parts concept (Eli Whitney, 1790) – developed a system for
manufacturing muskets with standardized parts.
(Though, production progressed, management was still in the same condition as before
the industrial revolution and definitely required a more systematic approach).
1911. Frederick Winslow Taylor (efficiency engineer and inventor). 1911 – published his
book “The principles of scientific management”. Taylor’s methods emphasized maximizing
output. (There was a whole story of hearing initiated by Congress on the issue of worker
abuse; Taylor even testified himself; the hearing made publicity to the scientific methods in
management).
1911. Frank Gilbreth. Motion study.
1911. Lilian Gilbreth. Worker fatigue.
1912. Harry Gantt. Gantt charts.
Harrington Emerson. Principles of scientific management (based on Taylor’s ideas). (He
testified in a congressional hearing that railroads could save a million dollars a day by
applying principles of scientific management).
1913. Henry Ford. Assembly line. <Read the case in Stevenson, p. 24>
1915. F. W. Harris. One of the first decision model. 1915. A math model for inventory
management.
1930. Elton Mayo. Hawthorne studies on worker motivation (which is, in addition to the
physical and technical aspects of work, is critical for improvement of productivity).
1935. H. F. Dodge, H. G. Romig, W. Shewhart (at Bell Telephone Labs, 1930) developed
statistical procedures for sampling and quality control.
1935. L. H. C. Tippett conducted studies that provided the groundwork for statistical
sampling theory.
WW II was a catalyzed the development of quantitative models (due to pressure on
manufacturing output).
After the WW II, efforts to develop and refine quantitative tools for decision making
continued, resulting in a decision models for forecasting, inventory management, project
management, and other areas of POM.
In 1960s and 1970s, management science techniques were highly regarded, but in 1980
they, surprisingly, lost some favor. <Why?! How the advancement of computers cures the
situation?>
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1947. George Dantzig. Linear programming.
1951. Sperry Univac. Commercial digital computers.
1950-1960 – spread of automation, rapid advancement of computer technology and
quantitative tools.
1975. W Skinner. Emphasis on manufacturing strategy.
1980s. Japanese can be credited with spawning the “quality revolution”.
1990. Information highway (Internet).
RECENT TRENDS
1. Global marketplace (NAFTA (Canada, US, Mexico); GATT (124 countries), European
Union; South Asian Association for Regional Cooperation (SAARC; Bangladesh,
Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka); and other).
2. Operations strategy (relating to the overall business strategy).
3. Total quality management (TQM).
4. Flexibility.
5. Time reduction.
6. Technology (computers in product design, processing technology (new materials,
methods, equipment), informational processing, communication, etc.).
7. Worker involvement (decision making by blue-collar personnel).
8. Reengineering (questioning, why a company does things the way it does).
9. Environment issues, recycling.
EXTRA NEW TRENDS
Agile manufacturing (Stephenson, p. 29) is a term applied to an organization that has
created the processes, tools, and training to enable it to respond quickly to customer
needs and market changes while still controlling costs and quality. Agile manufacturing is
seen as the next step after LEAN in the evolution of production methodical.
Goldman et al. suggest that Agility has four underlying components:
1. delivering value to the customer;
2. being ready for change;
3. valuing human knowledge and skills;
4. forming virtual partnerships.
The first three of these are also attributes of lean manufacturing.
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