Introduction to Operations
Management
Chapter 1
Learning Objectives
• Define the terms operations management and supply
chain
• Identify 3 major functional areas of organizations and
describe how they interrelate
• Identify similarities and differences between
production and service operations
• Explain the key aspects of operations management
decision making
• Describe the operations function and the nature of the
operations manager’s job
• Describe current issues in business that impact
operations management
What Is “Operations Management”
ABC News: “Inside Amazon: Secrets of an Online Mega-Giant”
Operations Management
• What is operation?
– The part of a business organization that is
responsible for producing goods or services.
• What is operation management?
– The management of systems or processes that
create goods and/or provide services.
The 3 Basic Functions of Business
Organizations
Organization
Marketing
Operations
Finance
Operations Function
Value-Added
Inputs
•Land
•Labor
•Capital
•Materials
•Information
Transformation/
Conversion
Process
Outputs
•Goods
•Services
Measurement
and Feedback
Measurement
and Feedback
Control
Measurement
and Feedback
Feedback = measurements taken at various points in the transformation process
Control = The comparison of feedback against previously established standards to
determine if corrective action is needed.
Goods v.s. Services
Goods
Services
Tangible
Act-Oriented
The Goods-Service Continuum
• Goods: physical items that include raw materials, parts,
subassemblies, and final products.
• Services: activities that provide some combination of
time, location, form or psychological value.
Goods
Services
Surgery, Teaching
Songwriting, Software Development
Computer Repair, Restaurant Meal
Home Remodeling, Retail Sales
Automobile Assembly, Steelmaking
Discussion
• How goods are different from services?
• Hints:
– Degree of customer contact
– Quality assurance
– Inventory
– Wages
– Ability to patent
–…
Key Differences
Characteristic
Goods
Service
Customer contact
Low
High
Uniformity of input
High
Low
Labor content of jobs
Low
High
Uniformity of output
High
Low
Production and delivery (Output)
Tangible
Intangible
Measurement of productivity
Easy
Difficult
Quality assurance (Opportunity to correct problems)
High
Low
Amount of inventory
Much
Little
Evaluation of work
Easier
Difficult
Ability to patent design
Usually
Not usual
Process Management
• Process: One or more actions that transform inputs into
outputs.
• Three Categories of Business Processes:
– Upper-management processes: These govern the operation of
the entire organization.
– Operational processes: These are core processes that make up
the value stream.
– Supporting processes: These support the core processes.
• Supply v.s. Demand
– Ideally, the capacity of a process will be such that its output just
matches demand.
Supply and Demand
Sales &
Marketing
Operations &
Supply Chains
Supply
>
Demand
Wasteful
Costly
Supply
<
Demand
Opportunity
Loss
Customer
Dissatisfaction
Supply
=
Demand
Ideal
4 Sources of Process Variation
• Variety of goods or services being offered
– The greater the variety of goods and services offered, the greater the
variation in production or service requirements.
• Structural variation in demand
– These are generally predictable (seasonal variation or seasonality, e.g.,
swimwear, warm clothes, Christmas, tourist seasons, school supplies).
– They are important for capacity planning
• Random variation
– Natural variation that is present in all processes (e.g., random demand
etc.). Generally, it cannot be influenced by managers.
• Assignable variation
– Variation that has identifiable sources. (e.g., defective inputs,
incorrect work methods, equipment etc.)
– This type of variation can be reduced, or eliminated, by analysis and
corrective action.
P&G’s Products
Image Credit: pgbeautyscience.com
Scope of Operations Management –
The Airline Example
•
•
•
•
•
•
•
•
Forecasting
Capacity planning
Locating facilities
Facilities and layout
Scheduling
Managing inventories
Assuring quality
Motivating and training employees
Role of the Operations Manager
• Recap:
– Operations: The part of a business organization that is
responsible for producing goods or services
– Operations management: The management of
systems or processes that create goods and/or
provide services
• A primary function of the operations manager is
to guide the system by decision making.
– System Design Decisions
– System Operation Decisions
System Design Decisions
• System Design
–
–
–
–
Capacity
Facility location
Facility layout
Product and service planning
• These are typically strategic decisions that
– usually require long-term commitment of resources
– determine parameters of system operation
System Operation Decisions
• System Operation
– These are generally tactical and operational decisions
•
•
•
•
•
Management of personnel
Inventory management and control
Scheduling
Project management
Quality assurance
• Operations managers spend more time on system
operation decision than any other decision area
– They still have a vital stake in system design
Decision Making
 Most operations decisions involve many alternatives that
can have quite different impacts on costs or profits
 Typical operations decisions include:
 What: What resources are needed, and in what amounts?
 When: When will each resource be needed? When should the
work be scheduled? When should materials and other supplies
be ordered?
 Where: Where will the work be done?
 Who: Who will do the work?
 How: How will the product or service be designed? How will the
work be done? How will resources be allocated?
General Approach to Decision Making
• Modeling is a key tool used by all decision
makers
– Model:
• an abstraction of reality; a simplification.
– Common features of models:
• They are simplifications of real-life phenomena
• They omit unimportant details of the systems they
mimic so that attention can be focused on the most
important aspects of the real-life system
Types of Models
• Physical Models
– Look like their real-life counterparts
– Advantage: visual correspondence with reality
• Schematic Models
– Look less like their real-life counterparts than
physical models (graphs, charts, blueprints,
drawings, etc.)
• Mathematical Models
– Do not look at all like their real-life counterparts
Discussion
• What are the advantages and disadvantages
of models?
• Hints:
– Usability
– Abstraction
– Quantities v.s. qualitative
– Suitablilty
Benefits of Models
1. Models are generally easier to use and less expensive
than dealing with the real system
2. Require users to organize and sometimes quantify
information
3. Increase understanding of the problem
4. Enable managers to analyze “What if?” questions
5. Serve as a consistent tool for evaluation and provide a
standardized format for analyzing a problem
Limitation of Models
1. Important variables may be missed
2. Quantitative information may be emphasized
over qualitative
3. Models may be incorrectly applied and
results misinterpreted
4. Nonqualified users may not use the model
incorrectly
Quantitative Methods
• A decision making approach that seeks to
obtain a mathematically optimal solution
– Linear programming
– Queuing techniques
– Inventory models
– Project models
– Forecasting techniques
– Statistical models
Historical Evolution of OM
•
•
•
•
•
Industrial Revolution
Scientific Management
Human Relations Movement
Decision Models and Management Science
Influence of Japanese Manufacturers
Industrial Revolution
• Pre-Industrial Revolution
– Craft production - System in which highly skilled workers
use simple, flexible tools to produce small quantities of
customized goods
• Some key elements of the industrial revolution
–
–
–
–
Began in England in the 1770s
Division of labor - Adam Smith, 1776
Application of the “rotative” steam engine, 1780s
Cotton Gin and Interchangeable parts - Eli Whitney, 1792
• Management theory and practice did not advance
appreciably during this period
Scientific Management
• Movement was led by efficiency engineer,
Frederick Winslow Taylor
– Believed in a “science of management” based on
observation, measurement, analysis and improvement
of work methods, and economic incentives
– Management is responsible for planning, carefully
selecting and training workers, finding the best way to
perform each job, achieving cooperate between
management and workers, and separating
management activities from work activities
– Emphasis was on maximizing output
Scientific Management - contributors
• Frank Gilbreth - father of motion studies
• Henry Gantt - developed the Gantt chart
scheduling system and recognized the value of
non-monetary rewards for motivating employees
• Harrington Emerson - applied Taylor’s ideas to
organization structure
• Henry Ford - employed scientific management
techniques to his factories
– Moving assembly line
– Mass production
Decision Models & Management
Science
• F.W. Harris – mathematical model for
inventory management, 1915
• Dodge, Romig, and Shewart – statistical
procedures for sampling and quality control,
1930s
• Tippett – statistical sampling theory, 1935
• Operations Research (OR) Groups – OR
applications in warfare
• George Dantzig – linear programming, 1947
Human Relations Movement
• The human relations movement emphasized the
importance of the human element in job design
– Lillian Gilbreth
– Elton Mayo – Hawthorne studies on worker
motivation, 1930
– Abraham Maslow – motivation theory, 1940s;
hierarchy of needs, 1954
– Frederick Hertzberg – Two Factor Theory, 1959
– Douglas McGregor – Theory X and Theory Y, 1960s
– William Ouchi – Theory Z, 1981
Influence of Japanese Manufacturers
• Refined and developed management practices
that increased productivity
– Credited with fueling the “quality revolution
– Just-in-Time production
• Their approach emphasized
– quality and continual improvement,
– worker teams and empowerment, and
– achieving customer satisfaction.
Discussion
• Based on your experience, how do operations
today differentiate from previous stages?
What are the key issues?
• Hints:
– What factors came into play?
– What factors is not as important as before?
– What do you think the new trend will be?
Key Issues For Today’s Business
Operations
• Economic conditions
• Management of technology (Innovating)
– The Internet, e-commerce, e-business
• Competing in a global economy
– Globalization, outsourcing
• Quality Problems
• Risk Management
Environmental Concerns
• Sustainability
– Using resources in ways that do not harm
ecological systems that support human existence
• Sustainability measures often go beyond traditional
environmental and economic measures to include
measures that incorporate social criteria in decision
making
• All areas of business will be affected
–
–
–
–
Product and service design
Consumer education programs
Disaster preparation and response
Outsourcing decisions
US Carbon Footprint
• The United States has been one of the few bright
spots for climate-change policy in recent years.
Thanks to the recession, improved efficiency
measures and the shale-gas boom, the nation's
carbon-dioxide emissions from energy fell 12
percent between 2005 and 2012.
• Strategies
•
•
•
•
Energy Efficiency
Energy Conservation
Fuel Switching
Carbon Capture and Sequestration
Source: US Environmental Protection Agency
Source: The Washington Post 1/13/14
Ethical Issues in Operations
• Ethical issues arise in
many aspects of
operations
management:
– Financial statements
– Worker safety
– Product safety
– Quality
– The environment
– The community
– Hiring and firing
workers
– Closing facilities
– Workers rights
• WSJ 4/21/14
Worker Safety
• http://online.wsj.com/news/articles/SB10001424052702303873604579493502231397942
• Inside Nike's Struggle to Balance Cost and Worker Safety in Bangladesh
• Nike, which first used a factory in Bangladesh in 1991, had kept its footprint there small, never
working with more than 10 factories. The rest of the industry moved more aggressively into
Bangladesh.
• The decision came not long before another garment-manufacturing hub known as Rana Plaza
collapsed, killing 1,100 people in a suburb of Dhaka, in the worst industrial disaster in
Bangladesh's history. The tragedy, which happened a year ago this month, has forced Western
apparel sellers to re-examine their world-wide search for cheap labor, which has turned
Bangladesh into an exporter of $20 billion of clothing a year.
Supply Chain
Suppliers’
suppliers
Direct
suppliers
Producer
Distributor
Final
Customers
Supply Chain
Supply Chain
• What is supply chain?
– The sequence of organizations – their facilities,
functions, and activities – that are involved in
producing and delivering a product or service.
Discussion
• Why does supply chain management matter?
• Hints:
– From a customer’s perspective
– From a manager’s perspective
– From a executive’s perspective
The Need for Supply Chain
Management
• In the past, organizations did little to manage
the supply chain beyond their own operations
and immediate suppliers which led to
numerous problems:
– Oscillating inventory levels
– Inventory stockouts
– Late deliveries
– Quality problems
Supply Chain Issues
1.
2.
3.
4.
5.
The need to improve operations
The need to manage inventories
Increasing transportation costs
Increasing levels of outsourcing
Increasing importance of ebusiness
6. Competitive pressures
7. Increasing globalization
8. The complexity of supply chains
Supply Chain Issues
1. The need to improve operations
– Sustainability
– Productivity (more in chapter 2)
– Efficiency (more in chapter 5)
– Quality (more in chapters 9 & 10)
Supply Chain Issues
2. The need to manage inventories
– Just in time (JIT)
– Vendor Managed Inventory (VMI)
– Logistics
Supply Chain Issues
3. Increasing transportation costs
Supply Chain Issues
4. Increasing levels of outsourcing
– Law of Comparative Advantage
– Benefits of Outsourcing
•
•
•
•
Allow a company to focus on strategic, core competencies
Cost savings or cost avoidance
Flexibility for using services as needed
Changes fixed costs into variable costs
– Types of Business Activities Outsourced
•
•
•
•
•
Information Technology (IT)
Human Resources (HR)
Learning Function (Corporate Training)
Customer Service (Call centers)
Finance and Accounting
Supply Chain Issues
5. Increasing importance of e-business
– E-business: The use of internet to network and empower
business processes, electronic commerce, organizational
communication and collaboration with in a company and
with its customers, suppliers, and other stakeholders.
(Combe, 2006)
To
From
Consumer
Business
Government
Consumer
C2C
C2B
C2G
Business
B2C
B2B
B2G
Government
G2C
G2B
G2G
Supply Chain Issues
6. Competitive pressures
7. Increasing globalization
8. The complexity of
supply chains
Serdarasan, Seyda. "A review of supply chain
complexity drivers." Proceedings of the 41st
International Conference on Computers &
Industrial Engineering, pp792-797
OM and Supply Chain
Career Opportunities
•
•
•
•
•
•
•
•
•
Operations manager
Supply chain manager
Production analyst
Schedule coordinator
Production manager
Industrial engineer
Purchasing manager
Inventory manager
Quality manager
Key Points
• The operations function is that part of every business
organization that produces products and/or delivers
services.
• Operations consists of processes that convert inputs
into outputs. Failure to manage those processes
effectively will have a negative impact on the
organization.
• A key goal of business organizations is to achieve an
economic matching of supply and demand. The
operations function is responsible for providing the
supply or service capacity for expected demand.
• All processes exhibit variation that must be managed.
Key Points
• Although there are some basic differences
between services and products that must be
taken into account from a managerial standpoint,
there are also many similarities between the two.
• Environmental issues will increasingly impact
operations decision making.
• Ethical behavior is an integral part of good
management practice.
• All business organizations have, and are part of, a
supply chain that must be managed.