INTRODUCTION TO
OPERATIONS
MANAGEMENT
OPERATIONS MANAGEMENT
 What is operations?
The part of a business organization that is
responsible for producing goods or services
 How can we define operations management?
The design, operation and improvement of
the systems or processes that create goods
and/or provide services
SUPPLY & DEMAND
Operations &
Supply Chains
Supply
Sales & Marketing
>
Demand
Supply
<
Demand
Supply
=
Demand
Wasteful
Costly
Opportunity Loss
Customer
Dissatisfaction
Ideal
THE OPERATIONS FUNCTION
 Operations as a transformation process
 Operations as a basic function
 Operations as the technical core
THE TRANSFORMATION PROCESS
Value-Added
Inputs
•Land
•Materials
•Labor
•Management
•Capital
•Information
Transformation/
Conversion
Process
Outputs
•Goods
•Services
Feedback
Feedback
Control
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.
WHAT IS VALUE ADDED?
The essence of operations function is to add
value during the transformation process
Value added is the difference between the cost
of intputs and the value or price of outputs.
FIRMS USE THE MONEY
GENERATED BY VALUE
ADDED FOR:
R&D
Investment in new facilities and equipment
Paying workers
Paying for materials
Paying for general expenses
Profits
TRANSFORMATION PROCESS OF
A CANNED FOOD PROCESSOR
Inputs
Metal sheets
Raw vegetables
Water
Energy
Labor
Building
Equipment
Processing
Outputs
Canned
• Cleaning
• Making cans vegetables
• Cutting
• Cooking
• Packing
• Labeling
TRANSFORMATION PROCESS OF
A HOSPITAL
Inputs
Doctors, nurses
Hospital
Medical Supplies
Equipment
Laboratories
Processing
Examination
Surgery
Monitoring
Medication
Therapy
Outputs
Healthy
patients
EXAMPLES OF VARIOUS
OPERATIONS
Operations
Goods Producing
Storage/
Transportation
Exchange
Entertainment
Communication
Examples
Farming, mining, construction
,
manufacturing, power generation
Warehousing, trucking, mail
service, moving, taxis, buses,
hotels, airlines
Retailing, wholesaling, banking,
renting, leasing, library, loans
Films, radio and television,
concerts, recording
Newspapers, radio and television
newscasts, telephone, satellites
TYPES OF TRANSFORMATION
PROCESSES
Physical- manufacturing
Locational- transportation
Exchange- retailing
Storage- warehousing
Physiological- health care
Informational- telecommunications
Psychological- entertainment
OPERATIONS AS A BASIC
FUNCTION
Marketing
Generates demand
gets customers
Operations
creates product or service
Finance/Accounting
Obtains funds
Tracks organizational performance
BASIC FUNCTIONS OF THE
BUSINESS ORGANIZATION
Organization
Marketing
Operations
Finance
SUPPLY CHAIN
Supply Chain – a sequence of activities and
organizations involved in producing and
delivering a good or service
Suppliers’
suppliers
Direct
suppliers
Producer
Distributor
Final
Customers
IMPORTANCE OF OM
(WHY STUDY OM?) (1 of 2)
 Operations is one of the three major functions of
an organization
Offers a major opportunity for an
organization to improve its productivity and
profitability
OM affects 1) the companies’ ability to
compete and 2) the nation’s ability to
compete internationally
Nearly half of the employed people over
the world have jobs in operations
IMPORTANCE OF OM
(WHY STUDY OM?) (2 of 2)
 The OM function is responsible for a major
portion of the assets of most organizations
OM is a costly part of an organization
The concepts, tools and techniques of
OM are widely used in managing other
functions.
Presents career opportunities
OPTIONS FOR INCREASING
CONTRIBUTION
Sales
Cost of
Goods Sold
Gross
Margin
Finance
Costs
Net
Margin
Taxes @
25%
Contribution
Finance &
Accounting
Marketing Option
Option
OM Option
Sales
Finance P roduction
Current
Revenue : +50% Costs: -50% Costs: -20%
$100,000
$150,000
$100,000
$100,000
-80,000
-120,000
-80,000
-64,000
20,000
30,000
20,000
36,000
-6,000
-6,000
-3,000
-6,000
14,000
24,000
17,000
30,000
-3,500
-6,000
-4,250
-7,500
10,500
18,000
12,750
22,500
TYPES OF PRODUCTION
PROCESSES
(PROCESS FLOW STRUCTURES)
 INTERMITTENT
Job shop
Batch production
 CONTINOUS
Mass production
Continuous flow
production
 PROJECT
18
EMERGENCY ROOM
E.R.Triage
room
Patient A broken leg
Patient B erratic
pacemaker
Hallway
E.R. beds
Pharmacy
Billing/exit
19
AUTOMOBILE PLANT
sequential
Raw materials
or customer
Material
and/or
labor
Station
1
Material
and/or
labor
Station
2
Material
and/or
labor
Station
3
Station
4
FG
Material
and/or
labor
Used for Repetitive or Continuous Processing
20
PRODUCTION OF GOODS
VS.
DELIVERY OF SERVICES
MANUFACTURING
vs. SERVICE
Manufacturing and Service Organizations differ chiefly because
manufacturing is goods-oriented and service is act-oriented.
Goods
Services
Tangible
Act-Oriented
22
GOODS-SERVICE CONTINUUM
Products are typically neither purely service- or
purely goods-based.
Goods
Services
Surgery, Teaching
Songwriting, Software Development
Computer Repair, Restaurant Meal
Home Remodeling, Retail Sales
Automobile Assembly, Steelmaking
23
GOODS VS. SERVICES (1 of 3)
CHARACTERISTICS
GOODS SERVICE
Customer contact
Low
High
Uniformity of inputs and
outputs
High
Low
Labor content
Low
High
Automation
Easy
Generally difficult
Output
Tangible
Intangible, often unique
Measurement of productivity
Easy
Difficult
Opportunity to correct
problems
High
Low
Inventory
Much
Little
Quality evaluation
Easier
Difficult
Production activities
Obvious
Not so obvious
GOODS VS. SERVICES (2 of 3)
CHARACTERISTICS
GOODS
SERVICE
Production and consumption
Separate
Location
Centralized
Locational factors to be considered Cost-oriented
Generally take
place at the same
time
Generally
dispersed
Revenue-oriented
Reselling
Possible
Not possible
Patentability
Usually
Not usually
Activities
Smooth and
efficient
Slower and
awkward
Inventoriability
andTransportability
Inventoriable Non inventoriable
&
and so
Transportable nontransportable
GOODS VS. SERVICES (3 of 3)
CHARACTERISTICS
GOODS
SERVICE
Job structure
More
structured
Less structured
Worker skill levels
Generally
higher
Generally
lower
Employee turnover
Generally
lower
Generally
higher
MANAGING SERVICES IS
CHALLENGING







Jobs in services are often less structured than in manufacturing
Customer contact is generally much higher in services compared
to manufacturing
In many services, worker skill levels are low compared to those
of manufacturing employees
Services are adding many new workers in low-skill, entry-level
positions
Employee turnover is high in services, especially in low-skill
jobs
Input variability tends to be higher in many service
environments than in manufacturing
Service performance can be adversely affected by many factors
outside of the manager’s control (e.g., employee and customer
27
attitudes)
SERVICE JOB CATEGORIES
(1 of 2)
 Governmental services
 Municipal services
 Trade services (wholesale/retail)
 Finance, insurance, real estate
 Medical (healthcare)
 Personal services
SERVICE JOB CATEGORIES
(2 of 2)
 Business services
 Education
 Food, lodging and entertainment
 Utilities and transportation
 Legal, consulting
 Repair
SERVICES IN
MANUFACTURING
In manufacturing, services can be divided
into two groups:
Core Services
Value-added Services
CORE SERVICES
Core services are basic things that customers
want from products they purchase
CORE SERVICES PERFORMANCE
OBJECTIVES
Quality
Flexibility
Operations
Management
Price (or cost
Reduction)
Speed
VALUE-ADDED SERVICES
Value-added services differentiate the
organization from competitors and build
relationships that bind customers to the firm
in a positive way
VALUE-ADDED SERVICE
CATEGORIES
Problem Solving
Information
Operations
Management
Field Support
Sales Support
PROCESS MANAGEMENT
Process - one or more actions that transform inputs into outputs
Three Categories of Business Processes:
Upper-management These govern the operation of
processes
the entire organization.
Operational
These are core processes that
processes
make up the value stream.
Supporting processes These support the core
processes.
35
PROCESS VARIATION
Four Sources of 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. They
are important for capacity planning.
Random variation
Natural variation that is present in all
processes. Generally, it cannot be
influenced by managers.
Assignable variation
Variation that has identifiable sources.
This type of variation can be reduced, or
eliminated, by analysis and corrective
action.
Variations can be disruptive to operations and supply chain processes. They may result
in additional costs, delays and shortages, poor quality, and inefficient work systems. 36
The Scope of OM: What Do
Operations Managers Do?
Plan - Organize - Staff - Lead - Control
SCOPE OF OPERATIONS
MANAGEMENT
The scope of operations management ranges across
the organization.
The operations function includes many
interrelated activities such as:
– Forecasting
– Capacity planning
– Scheduling
– Managing inventories
– Assuring quality
– Motivating employees
– Deciding where to locate facilities
– And more . . .
38
ROLE OF THE OPERATIONS
MANAGER
The Operations Function consists of all
activities directly related to producing goods or
providing services.
A primary function of the operations manager
is to guide the system by decision making.
– System Design Decisions
– System Operation Decisions
39
SYSTEM DESIGN DECISIONS
System Design Decisions
– Capacity
– Facility location
– Facility layout
– Product and service planning
– Process planning
– Technology planning
– Acquisition and placement of equipment
These are typically strategic decisions that require
• long-term commitment of resources
• Determine parameters of system operation
40
SYSTEM OPERATION
DECISIONS
System Operation 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 but they
still have a vital stake in system design
41
U.S. MANUFACTURING vs.
SERVICE EMPLOYMENT
 Insert Figure 1.7
42
THE DECLINE IN
MANUFACTURING EMPLOYMENT
Productivity
– Increasing productivity allows companies to
maintain or increase their output using fewer
workers
Outsourcing
– Some manufacturing work has been outsourced to
more productive companies
A Statistical Artifact
– Manufacturers are increasingly using contract and
temporary labor which no longer show up in the
statistics as manufacturing employment
43
OPERATIONS MANAGEMENT
AND 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?
How: How will he product or service be designed? How will
the work be done? How will resources be allocated?
Who: Who will do the work?
OPERATIONS MANAGEMENT
AND DECISION MAKING
 Models
 Quantitative approaches
 Analysis of tradeoffs
 Systems approach
 Establishing priorities
GENERAL APPROACH TO
DECISION MAKING
Modeling is a key tool used by all decision makers
– Model - an abstraction of reality; a
simplification of something.
– Common features of models:
 They are simplifications of real-life
phenomena
 They omit unimportant details of the reallife systems they mimic so that attention
can be focused on the most important
46
aspects of the real-life system
MODELS
Types of Models:
– Physical Models
Look like their real-life counterparts
– Schematic Models
Look less like their real-life
counterparts than physical models
– Mathematical Models
Do not look at all like their real-life
counterparts
UNDERSTANDING MODELS
Keys to successfully using a model in decision
making
– What is its purpose?
– How is it used to generate results?
– How are the results interpreted and used?
– What are the model’s assumptions and
limitations?
48
BENEFITS OF MODELS
Models are generally easier to use and less expensive
than dealing with the real system
Require users to organize and sometimes quantify
information
Provide a systematic approach to problem solving
Increase understanding of the problem
Enable managers to analyze “What if?” questions
Enable managers to specify objectives
Serve as a consistent tool for evaluation and provide a
standardized format for analyzing a problem
Enable users to bring the power of mathematics to bear
on a problem.
MODEL LIMITATIONS
 Quantitative information may be emphasized
at the expense of qualitative information
 Models may be incorrectly applied and the
results misinterpreted
 This is a real risk with the widespread
availability of sophisticated, computerized
models are placed in the hands of uninformed
users.
The use of models does not guarantee good
decisions.
QUANTITATIVE APPROACHES
(ANALYTICAL TOOLS USED IN OM)
A decision making approach that frequently seeks to
obtain a mathematically optimal solution
Linear programming
Queuing techniques
Forecasting techniques
Inventory models
Project models
Statistical models
Simulation
Decision analysis
METRICS AND TRADE-OFFS
 Performance Metrics
– All managers use
metrics to manage
and control
operations
 Profits
 Costs
 Productivity
 Forecast accuracy
 Analysis of Trade-Offs
– A trade-off is giving
up one thing in return
for something else
 Carrying more
inventory (an
expense) in order to
achieve a greater
level of customer
service
Tradeoffs
52
ESTABLISHING PRIORITIES
In nearly all cases, certain issues or items are
more important than others
Recognizing this allows managers to focus their
attention to those efforts that will do the most
good
53
ESTABLISHING PRIORITIES:
PARETO PHENOMENON
Pareto Phenomenon - a few factors account for a
high percentage of occurrence of some event(s)
The critical few factors should receive the
highest priority
80/20 Rule- 80% of the problems are caused by
20% of the activities
This is a concept that is appropriately applied to
all areas and levels of management
How do we identify the vital few?
54
SYSTEMS APPROACH
System - a set of interrelated parts that must work together
The business organization is a system composed of
subsystems
marketing subsystem
operations subsystem
finance subsystem
The systems approach
Emphasizes interrelationships among subsystems
Main theme is that the whole is greater than the sum of its
parts
The output and objectives of the organization take
precedence over those of any one subsystem
55
DEGREE OF CUSTOMIZATION
Relative to other standardized products and services
customized products:
Tend to be more labor intensive
Tend to be more time consuming
Tend to require more highly-skilled people
Tend to require more flexible equipment
Have much lower volume of output
Have higher price tags
Degree of customization has a significant influence on
the entire organization
Process selection
Job design
Affects marketing, sales, accounting, finance, and
56
information systems
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
57
THE HISTORICAL EVOLUTION
OF OPERATIONS
MANAGEMENT
HISTORICAL EVENTS IN OM
 Industrial Revolution (1770s)
 Scientific Management (1911)
 Human Relations Movement (1920-1960)
 Decision Models – Management Science (1915,
1940-70s)
 Influence of Japanese Manufacturers-Quality
Revolution & JIT (1970s-1990s )
 Globalization (1970s- )
 Information Age/Internet Revolution (1990s-)
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
60
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
61
SCIENTIFIC MANAGEMENTCONTRIBUTORS
 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
62
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
63
DECISION MODELS AND
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
64
INFLUENCE OF JAPANESE
MANUFACTURERS
 Refined and developed management
practices that increased productivity
– Credited with fueling the “quality
revolution”
– Just-in-Time production
65
EXCITING NEW CHALLENGES
IN
OPERATIONS MANAGEMENT
NEW TRENDS AND ISSUES IN
OM
Mass Customization
Supply Chain Management
Outsourcing
Lean manufacturing
Agility
E-Business and E-Commerce
Management of Technology
Globalization
Ethical Behavior
NEW CONCEPTS AND TRENDS:
MASS CUSTOMIZATION
The rapid, low cost production of goods
and services that fulfill constantly changing
and increasingly unique customer desires.
68
NEW CONCEPTS AND TRENDS:
SUPPLY CHAIN MANAGEMENT
The management of the sequence of
organizations- their facilities, functions and
activities- that are involved in producing and
delivering a product or service
SCM requires the application of a systems
approach to managing the flow of information,
materials and services from raw material
suppliers through factories and warehoses to the
end user (customer)
THE NEED FOR MANAGING
THE SUPPLY CHAIN
In the past, organizations did little to
manage the supply chain beyond their own
operations and immediate suppliers which
led to numerous problems such as:
Oscillating inventory levels
Inventory stockouts
Late deliveries
Quality problems
70
A SUPPLY CHAIN FOR BREAD
Value
Added
Value of
Product
Farmer produces and harvests wheat
$0.15
$0.15
Wheat transported to mill
$0.08
$0.23
Mill produces flour
$0.15
$0.38
Flour transported to baker
$0.08
$0.46
Baker produces bread
$0.54
$1.00
Bread transported to grocery store
$0.08
$1.08
Grocery store displays and sells bread
$0.21
$1.29
Total Value-Added
$1.29
Stage of Production
ELEMENTS OF SUPPLY CHAIN
MANAGEMENT (1 of 2)
 Customers – what products/services do
customers want
 Forecasting – predicting timing and volume of
customer demand
 Design – incorporating customer wants,
manufacturability, and time to market
 Capacity planning – matching supply and
demand
 Processing – controlling quality, scheduling
work
72
ELEMENTS OF SUPPLY CHAIN
MANAGEMENT (2 of 2)
 Inventory – meeting demand requirements while
managing costs
 Purchasing – evaluating potential suppliers,
supporting the needs of operations on purchased
goods and services
 Suppliers – monitoring supplier quality, on-time
delivery, and flexibility; maintaining supplier
relations
 Location – determining the location of facilities
 Logistics – deciding how to best move information
and materials$
73
NEW CONCEPTS AND TRENDS:
OUTSOURCING
Buying goods or services rather than
producing goods or performing services
within the organization
NEW CONCEPTS AND TRENDS:
LEAN MANUFACTURING
Systems that use minimal amounts of resources less space, less inventory, fewer workers, fewer
levels of management- to produce a high volume
of high-quality goods with some variety
An adaptation of mass production that prizes
quality and flexibility
Incorporates advantages of mass production
(high volume, low unit cost) and craft
production (variety and flexibility)
NEW CONCEPTS AND TRENDS:
AGILITY
 The ability of an organization to respond
quickly to demands or opportunities.
 Involves maintaining a flexible system that
can quickly respond to changes in either the
volume of demand or changes in
product/service offerings
NEW CONCEPTS AND TRENDS:
ELECTRONIC COMMERCE
The use of computer networks, primarily the
internet, to buy and sell products, services,
and information.
OTHER TRENDS (1 of 2)
Enhancing Value-Added Services
Management of Technology
Emphasis on Operations Strategy
Increasing Emphasis on Cost Control and
Productivity Improvement
Quality and Process Improvements
Increasing emphasis on business and social
responsibility
OTHER TRENDS (2 of 2)
Developing flexible supply chains to enable
mass customization of products and
services
Achieving the Service Factory
GLOBALIZATION
GLOBALIZATION CAN TAKE
THE FORM OF:
 Selling in foreign markets
 Producing in foreign lands
 Purchasing from foreign suppliers
 Partnering with foreign firms
REASONS TO GLOBALIZE
OPERATIONS (1 of 2)
To take advantage of favorable costs
To gain access to and attract international
markets
To build reliable sources of supply
To improve the supply chain
To be more responsive to changes in
demand
REASONS TO GLOBALIZE
OPERATIONS (2 of 2)
 To provide better goods and services
 To learn to improve operations
 To attract and retain global talent
 To keep abreast of the latest trends and
technologies
EXAMPLES OF GLOBAL
STRATEGIES
Boeing – both sales and production are
worldwide.
Benetton – moves inventory to stores around
the world faster than its competitor by building
flexibility into design, production, and
distribution
Sony – purchases components from suppliers
in Thailand, Malaysia, and around the world
GM is building four similar plants in
Argentina, Poland, China, and Thailand
SOME MULTINATIONAL
CORPORATIONS (1 of 3)
Company
Nestlé
Nokia
Philips
Bayer
ABB
SAP
Exxon Mobil
Royal Dutch/Shell
IBM
McDonald’s
Country
of Origin
Switzerland
Finland
Netherlands
Germany
Germany
Germany
United States
Netherlands
United States
United States
Foreign Sales
as % of Total
98.2
97.6
94.0
89.8
87.2
80.0
79.6
73.3
62.7
61.5
SOME MULTINATIONAL
CORPORATIONS (2 of 3)
Company Home
Country
% Sales % Assets
Outside Outside
Home
Home
Country
% Foreign
Workforce
Country
Citicorp
USA
34
46
NA
ColgatePalmolive
USA
72
63
NA
Dow
Chemical
Gillette
USA
60
50
NA
USA
62
53
NA
Honda
Japan
63
36
NA
IBM
USA
57
47
51
SOME MULTINATIONAL
CORPORATIONS (3 of 3)
Company Home
Country
% Sales
Outside
Home
Country
% Assets
Outside
Home
Country
% Foreign
Workforce
ICI
Britain
78
50
NA
Nestlé
Switzerland 98
95
97
Philips
Netherlands 94
Electronics
Siemens
Germany
51
85
82
NA
38
Unilever
70
64
Britain &
Netherlands
95
BOEING SUPPLIERS
Firm
Country
Parts
Alenia
Italy
Wing flaps
AeroSpace
Technologies
CASA
Fuji
Australia
Rudder
Spain
Japan
GEC Avionics
United Kingdom
Korean Air
Korea
MenascoAerospace Canada
Ailerons
Landing gear
doors, wing section
Flight computers
Flap supports
Landing gears
Short Brothers
Ireland
Landing gear doors
Singapore
Aerospace
Singapore
Landing gear doors
AN INTERNATIONAL
COMPARISON OF HOURLY
WAGE RATES
$ 35 –
$ 30 –
$ 25 –
Germa
Japan
United
EU
$ 20 –
$ 15 –
$ 10 –
$5–
$0–
|
1975
|
1980
|
1985
|
1990
|
1995
Asian
Mexic
|
2000
COMPETITIVENESS
COMPETITIVENESS
The degree to which a nation can produce goods
and services that meet the test of international
markets while simultaneously maintaining or
expanding the real incomes of its citizens.
COMPETITIVENESS OF
SELECTED COUNTRIES
100
80
60
40
20
0
US
Singapore Finland
Ireland
Germany
UK
Japan
Mexico
Russia