Operations as a
Competitive Weapon
Chapter 1
Learning Objectives
• Meaning of Operations Management
• Meaning of Process
• Differences and Similarities of
Manufacturing and Services
• Trends in Operations Management
• Operations Management across the
Organization
Operations Management
• Operation include activities directly
related to producing goods and services.
• Operation is a function or system that
transforms inputs into outputs of greater
value.
• Management
involves
planning,
organizing, staffing, directing and
improving people to achieve the goal.
Operations Management
• Operations Management can be
defined as planning, organizing,
staffing, controlling and directing the
production system and also designing
operating and improvement of the
production systems.
• Operations Management deals with
processes that produces goods and
services that people use every day.
Operations Management
• Operations management is an area of
business that is concerned with the
production of goods and services, and
involves the responsibility of ensuring
that business operations are efficient
and effective. It is the management of
resources, the distribution of goods and
services to customers, and the analysis
of queue systems.
Operations Management
• Operations Management is the
management of systems or processes
that create goods or/and provide
services.
• Operations Management is the
business function responsible for
planning, coordinating, and controlling
the resources needed to produce a
company’s products and services.
Operations Management
• Operations Management refers to the
direction and control of the process that
transform inputs into products and
services.
• Operations management (OM) is
defined as the design, operation, and
improvement of the systems that create
and deliver the firm’s primary products
and services.
Why Study Operations Management?
Systematic Approach
to Org. Processes
Business Education
Operations
Management
Cross-Functional
Applications
Career Opportunities
Reasons for Studying
Operations Management
• 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.
• Operations
management
provides
a
systematic way of looking at organizational
process. Operations management uses
analytical thinking to deal with real-world
problems. It sharpness our understanding of
the world around us.
Reasons for Studying
Operations Management
• Operations
management
presents
interesting career opportunities. These
can be in direct supervision of operations
or in staff position in operations
management specialties such as supply
chain management and quality assurance.
• The concepts and tools of operations
management 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.
How is operations relevant
to my major?
• Accounting
• Information
Technology
• Management
• “As an auditor you must
understand the fundamentals
of operations management.”
• “IT is a tool, and there’s no
better place to apply it than in
operations.”
• “We use so many things you
learn in an operations class—
scheduling, lean production,
theory of constraints, and
tons of quality tools.”
How is operations relevant
to my major?
• Economics
• Marketing
• Finance
• “It’s all about processes. I live
by flowcharts and Pareto
analysis.”
• “How can you do a good job
marketing a product if you’re
unsure of its quality or delivery
status?”
• “Most of our capital budgeting
requests are from operations,
and most of our cost savings,
too.”
OM Across the Organization
• Most businesses are supported by the
functions of operations, marketing, and
finance
• The major functional areas must interact to
achieve the organization goals
• Marketing is not fully capable of meeting
customer needs if they do not understand
what operations can produce
• Human resources must understand job
requirements and worker skills
OM Across the Organization
• Finance cannot judge the need for
capital investments if they do not
understand operations concepts and
needs.
• Information systems enables the
information
flow
throughout
the
organization.
• Accounting
needs
to
consider
inventory
management,
capacity
information, and labor standards.
Operations Decision Making
Marketplace
Corporate Strategy
Finance Strategy
Operations Strategy
Marketing Strategy
Operations Management
People
Plants
Parts
Materials &
Customers
Processes
Products &
Services
Planning and Control
Input
Production System
Output
OM Responsibilities
• Line management Responsibilities
• Management Decisions can be divided
into three broad areas:
1. Strategic (long-term) decisions
2. Tactical
(intermediate-term)
decisions
3. Operational planning and control
(short-term) decisions.
Responsibilities of Operations
Management
Planning
–
–
–
–
–
–
–
Capacity
Location
Products & services
Make or buy
Layout
Projects
Scheduling
Controlling/Improving
–
–
–
–
Inventory
Quality
Costs
Productivity
Organizing
– Degree of centralization
– Process selection
Staffing
– Hiring/laying off
– Use of Overtime
Directing
– Incentive plans
– Issuance of work orders
– Job assignments
Key Decisions of
Operations Managers
• What
What resources/what amounts
• When
Needed/scheduled/ordered
• Where
Work to be done
• How
Designed
• Who
To do the work
Operations as a
Transformation Process
INPUT
•Material
•Machines
•Labor
•Management
•Capital
TRANSFORMATION
PROCESS
OUTPUT
•Goods
•Services
Feedback & Requirements
1-19
Types of Transformation
• Physical--manufacturing
• Locational--transportation
• Exchange--retailing
• Storage--warehousing
• Physiological--health care
• Informational--telecommunications
Five P’s of Transformation
Process
•
•
•
•
•
People
Plants
Parts
Process
Planning and Controlling
Input – Transformation – Output
Relationships for Typical Systems
Systems
Primary Resources
Inputs
Primary
Typical
Transformatio Desired
n function (s) Output
Hospital
Patients
Doctors, Nurses, Health Care
Medical
(Physiological)
Supplies,
Equipment
Healthy
individuals
Restaurant
Hungry
customers
Food, chef,
wait-staff,
environment
Satisfied
customers
Well-prepared,
well-served food;
agreeable
environment
(Physical and
exchange)
Input – Transformation – Output
Relationships for Typical Systems
Systems
Primary
Inputs
Resources Primary
Typical
Transformatio Desired
n function (s) Output
Automobi Sheet steel, Tools,
Fabrication and Highle factory engine parts equipment, assembly of
quality cars
workers
cars (Physical)
College
Highor
school
university graduate
Teachers,
books,
class
rooms
Imparting
Educated
knowledge and individual
skills
( informational)
Operations Management
as a Function
Figure 1.4
Operations as technical core
• Operations
• Marketing
• Finance and
accounting
• Human resources
• Outside suppliers
1-25
Business Information Flow
Types of OM Decisions
• Part 1 : Strategic Choices: Operations
managers help to determine the company’s
global strategies and competitive priorities
and how best to design process that fit with
its competitive priorities.
• Part 2 : Process: Process are fundamental
to all activities that produce goods or
services. Operations managers make
process decisions about the types of work
to be done in house, the amount of
automation to use, and methods of
improving existing systems.
Types of OM Decisions
• Part 3 : Quality : Quality issues underlie all
process and work activity. Operations managers
help establish quality objectives and seek ways to
improve the quality of the firm’s products and
services.
• Part 4 : Capacity, Location, Layout: The types of
decisions in this category often require long-term
commitments. Operation managers help determine
the system’s capacity (Capacity); the location of
news facilities including global operations
(Location); and the organization of departments
and a facility’s physical layout (Layout)
Types of OM Decisions
• Part
5:
Operating
Decision:
Operations manager help to coordinate
the various parts of the internal and
external supply chain (Supply-Chain
Management),
forecast
demand
(Forecasting),
manage
inventory
(Inventory Management), and control
output and staffing levels over time
(Aggregate Planning).
Development of OM as a
Field
Scientific
Management
Computers
(MRP)
Moving Assembly
Line
JIT/TQC &
Automation
Hawthorne
Studies
Manufacturing
Strategy
Electronic
Enterprise
Operations
Research
Service Quality
and Productivity
Global Supply
Chain Mgmt.
Historical
Underpinnings
TQM & Quality
Certification
Business Process
Reengineering
OM's Emergence
as a Field
Historical Events in
Operations Management
Era
Events/Concepts
Dates
Originator
Industrial
Revolution
Steam engine
Division of labor
Interchangeable parts
1769
1776
1790
James Watt
1911
Frederick W. Taylor
1911
Frank and Lillian
Gilbreth
1912
Henry Gantt
1913
Henry Ford
Scientific
Management
Principles of scientific
management
Time and motion
studies
Activity scheduling
chart
Moving assembly line
Adam Smith
Eli Whitney
Historical Events in
Operations Management
(cont.)
Era
Human
Relations
Operations
Research
Events/Concepts
Dates
Originator
Hawthorne studies
1930
1940s
1950s
1960s
1947
1951
Elton Mayo
Abraham Maslow
Frederick Herzberg
Douglas McGregor
George Dantzig
Remington Rand
1950s
Operations
research groups
1960s,
1970s
Joseph Orlicky, IBM
and others
Motivation theories
Linear programming
Digital computer
Simulation, waiting
line theory, decision
theory, PERT/CPM
MRP, EDI, EFT, CIM
Historical Events in
Operations Management
(cont.)
Era
Events/Concepts
Dates Originator
JIT (just-in-time)
1970s
Taiichi Ohno (Toyota)
TQM (total quality
management)
1980s
W. Edwards Deming,
Joseph Juran
1980s
Wickham Skinner,
Robert Hayes
1990s
Michael Hammer,
James Champy
1990s
GE, Motorola
Strategy and
Quality
Revolution operations
Business process
reengineering
Six Sigma
Historical Events in
Operations Management
(cont.)
Era
Events/Concepts
Dates Originator
Internet
Revolution
Internet, WWW, ERP,
supply chain
management
1990s
ARPANET, Tim
Berners-Lee SAP,
i2 Technologies,
ORACLE
E-commerce
2000s
WTO, European Union,
and other trade
agreements, global
supply chains,
outsourcing, BPO,
Services Science
1990s
2000s
Amazon, Yahoo,
eBay, Google, and
others
Numerous
countries
and companies
Globalization
Differences between
Manufacturing and Service
Organizations
• Services
• Intangible, perishable
product
• Service cannot be
inventoried
• High customer
contact
• Short response time
• Labor intensive
• Manufacturing
• Physical, durable
product
• Product can be
inventoried
• Low customer
contact
• Longer response
time
• Capital intensive
Differences between
Manufacturing and Service
Organizations
• Services
• Manufacturing
• Small Facilities
• Quality not easily
measured
• Local Markets
• Large facilities
• Quality
easily
measured
• Regional, national
or
international
markets
The Range From Services to
Products
Similarities between Services
and Manufacturing
• All use technology
• Both have quality, productivity, &
response issues
• All must forecast demand
• Each will have capacity, layout, and
location issues
• All
have
customers,
suppliers,
scheduling and staffing issues
Service - Manufacturing
• Manufacturing often provides services
• Services often provides tangible goods
• Some organizations are a blend of
service/
manufacturing/
quasimanufacturing (QM) organizations
• QM characteristics include
– Low customer contact & Capital Intensive
Trends in OM
Several business trends are currently
having a great impact on operations
management. These are
 Growth of the service sector
 Productivity Changes
 Global Competitiveness
 Quality, time and technological change
 Environmental, ethical and diversity
issues
Trends in OM
• Service sector growth: The service
sector of the economy is significant.
Services may be divided into three main
groups. These are
 Government
 Wholesale and retail sales
 Other
services
(transportation,
utilities, communication, health etc)
public
The share of the workforce in service
jobs is well above 60 percent in Britain,
Canada, France and Japan.
Trends in OM
• Service sector growing to
50-80% of non-farm jobsSee
Global
competitiveness
• Demands
for
higher
quality
• Huge
technology
changes
• Time based competition
• Work force diversity
Trends in OM
• Productivity Changes: Productivity is
the value of outputs (goods and
services) produced divided by the value
of input resources (wages, costs of
equipment and the like) used. The value
of output can be measured by what the
customer pays or simply by the number
of units produced or customers served.
The value of inputs can be measured by
their costs or simply by the number of
hours worked.
Trends in OM
• Global Competitiveness: Strong
global competition affects industries
everywhere. Most products today
are global composites of material
and services from throughout the
world. Polo Shirt is sewn in
Hondurus from cloth cut in the
United states.
Trends in OM
• Competition based on quality, time
and technology: Another important
trend is that more firms are competing
on the basis of time; filling orders
earlier
than
the
competitors,
introducing new products and services
quickly, and reaching the market first.
Another increasing important factor in
operations management is accelerating
technological change.
Trends in OM
• Ethical, workforce diversity and
environmental issues: Business face
more ethical quandaries than ever
before, intensified by an increasing
global
presence
and
global
technological change. Environment
issues, such as toxic wastes, poisoned
drinking water, poverty, air quality and
global warming are getting more
emphasis.
Today’s OM Environment
• Customers demand better quality, greater
speed, and lower costs
• Companies implementing lean systems
concepts – a total systems approach to
efficient operations
• Recognized need to better manage
information using ERP and CRM systems
• Increased
cross-functional
decision
making
Achieving Cross-Functional
Coordination
• A unified strategy should be
developed by management as a
starting point, giving each department
a vision of what it must do to help
fulfill the overall organizational
strategy.
• The organizational structure and
management hierarchy can be
redesigned
to promote crossfunctional coordination.
Achieving Cross-Functional
Coordination
• The goal-setting process and reward
systems
can
encourage
crossfunctional coordination.
• Improvements to information systems
also
can
boost
coordination.
Information must in part be tailored to
the needs of each functional manger.
Achieving Cross-Functional
Coordination
• Informal social systems are another
device that can be used to encourage
better understanding across functional
lines.
• Employee selection and promotion
also can help foster more crossfunctional coordination by encouraging
broad perspective and common goals.
Productivity
Productivity is a common measure on
how well resources are being used. In
the broadest sense, it can be defined as
the following ratio:
Outputs
Inputs
Factors Affecting
Productivity
Capital
Quality
Technology
Management
Measures of Productivity
• Partial measures
– output/(single input)
• Multi-factor measures
– output/(multiple inputs)
• Total measure
– output/(total inputs)
Total Measure Productivity
Total Measure Productivity = Outputs
Inputs
or
= Goods and services produced
All resources used
Partial Measure Productivity
• Partial measures of productivity =
•
Output or Output or Output or Output
Labor
Capital
Materials
Energy
Multifactor Measure
Productivity
• Multifactor measures of productivity =
•
Output
Labor
+
Capital
.
+
Energy
or
•
Output
Labor
+
Capital
.
+
Materials
Productivity
Calculate the productivity
following operation.
for
the
• Three employees process 600 insurance
policies in a week. They work 8 hours per
day, 5 days per week.
• A team of workers make 400 units, which
is valued by its standard cost of Tk.10
each (before markups for other expenses
and profit). The accounting department
reports that for this job the actual costs
are Tk.400 for labor, Tk.1000 for materials,
and Tk.300 for overhead.
Productivity
Policies processed
Labor productivity =
Employee hours
600 policies
Labor productivity =
(3 employees)(40 hours/employee)
Labor productivity = 5 policies/hour
Productivity
Labor productivity = 5 policies/hour
Multifactor productivity =
Quantity at standard cost
Labor cost + Materials cost + Overhead cost
Productivity
Labor productivity = 5 policies/hour
Multifactor productivity =
(400 units)(Tk.10/unit)
Tk.4000
=
= 2.35
Tk.400 + Tk.1000 + Tk.300 Tk.1700
Productivity Growth
Productivity Growth =
Current Period Productivity – Previous Period Productivity
Previous Period Productivity
Productivity Growth Rate
Example:
– Last week a company produced 150 units using
200 hours of labor
– This week, the same company produced 180
units using 250 hours of labor
150 units
P1 
 0.75 units / hour
200 hours
180 units
P2 
 0.72 units / hour
250 hours
P2  P1
0.72  0.75
Growth Rate 

 0.04
P1
0.75
or a negative 4% growth rate