Chapter 1
Book: Principles of Operations Management
By Raturi and Evans
Introduction
 Operation Management
 A business activity that involves design, development,
maintenance of systems and processes that transforms
raw materials, technology and labor into Goods and
Services
 An auto mobile factory
 A hospital serving patients
OM’s Purpose
 OM purpose is to support the organization’s business
strategy and help create and sustain competitive
advantage.
Principles of OM
 Designing the VALUE CHAIN for manufacturing
goods and delivering services
 Design and manage processes to support the value
chain e-g product design, purchasing, materials
management, storage, customer support,
transportation, Tech development
Principles of OM (Continued)
 Control and improve the value chain and support
processes to achieve and sustain high level of business
and organization performance
 Managing interface with other functional areas such as
marketing, finance an HR to derive competitive
Operations functions
OM and Competitiveness
 OM is there to develop unique competencies for the
company e-g creative workforce, strong distribution
network or ability to develop a new product rapidly
 OM is linked directly with Product Development, Process
Improvement, TQM, Supply chain management
Technology and Innovation
 OM function is to contribute to Organization by achieving
lower costs, ever improving quality, shorter time and
increased responsiveness
Case Study: BMW
 BMW’s plant in South Carolina
 Established in 23 months for X5 and Z3
 First X5 in 35 Months
 22 Color Options for Z3
 123 Center Consoles options
 26 Wheel Options
 Aim to reduce Product Development Cycles by 30
Percent
Case Study: BMW
 How was it possible
 BMW a master of logistics
 Flexibility raising up to management and people
 Two 10 hours shifts
 Attention to quality
 Tech Innovation
 SAP R3’s beta test site
 Guidance from HONDA
Products
 Products
 Tangible items
 Can be transferred or stored
 Can be consumed after a while
 Services
 Intangible
 Cannot be transferred or stored
 Perishable
 Contracts
 Business Exchange
 Neither services nor goods are transferred
 Goods and services will be provided on a need basis.
Case Study: Ritz Carlton
 One of the largest hotels in United States
 Uses more than one source to get information
 Travel partners, focus groups, credit card companies
 Customer satisfaction and performance date are gathered
daily
 Complaints, claims, feedback from sales force
 Travel publications and even psychological studies on
customers.
 Each production and support process has an executive owner
at head office and at the hotel.
 Responsible for the improvement and success of the process
Case Study: Ritz Carlton
 What it achieves
 Minute attention to detail is achieved e-g language
preference, customer’s culture etc.
 Error free products and services
 Opportunities for improvement
 Sense of authority for the employees
 Increased morale for employees; satisfaction for the
customer.
Comparison
Operation Factor
Goods
Services
Contract
Value
Provided by physical
manufacturing
Provided by availability
The promise of service
delivery when exercised
Tangibility
Goods are inspect able
Difficult to inspect
before usage
Intangibility is often
accompanied by
manufacturing
Process Design
Isolated process design
Must occur in presence
of customer
Accommodate demand
surge and batches
Inventory
Can be stored
Consumer as created
Off line as well as online
modes
Capacity
Can be designed for
average demand
For maximum demand
Flexible for high and
low demand
Quality
High level of precision
and repeatability can be
achieved
Consistency is hard to
maintain; customer
perception can differ
may be influenced by
time and availability.
Location
Facilities can be located
to minimize costs
Must be located near
customer
Centralization and
economies of scale are
likely
Processes and Supply chain
 Process is a set of linked activities that perform some
manufacturing or service task to add value
 Basic unit for defining and managing operations
 Key processes
 Primary processes; Value Creation process. Benefits for
customers and company by creating products. Such as
design, manufacturing and service delivery
 Support Process which does not add direct value to the
product.
 One core process can be secondary process for another
Operations as the
Technical Core
Finance/Accounting
Suppliers
Material availability
Quality data
Delivery schedules
Designs
Budgets
Cost analysis
Capital investments
Stockholder
requirements
Product/Service
Availability
Lead-time estimates
Status of order
Delivery schedules
Operations
Personnel needs
Skill sets
Performance evaluations
Job design/work
measurement
Sales forecasts
Customer orders
Customer feedback
Promotions
Hiring/firing
Training
Legal requirements
Union contract negotiations
Human Resources
Marketing
Production and
Inventory data
Capital budgeting requests
Capacity expansion and
Orders for materials
Technology plans
Production and delivery
Schedules Quality
Requirements Design/
Performance specs
The Value Chain
Feedback-Internal
and
external customers
Inputs
•
•
•
•
•
•
•
•
Workers
Managers
Equipment
Facilities
Materials
Services
Land
Energy
Processes
1
Outputs
3
5
2
4
FeedbackInformation on
performance
• Services
• Goods
Key concepts
 External Suppliers
 Internal Suppliers
 Make or buy Decision
 Backward Integration
 Forward Integration
 Supply Chain
 Procure, Transform, Deliver
 Make to Order : Pull System
 Make to Stock : Push System
Case Study Merrill Lynch
Primary Processes
Support Processes
 Business Development
 Technology
 Marketing
 Information Systems
 Client Services
 Human Resources
 Under Writing
 Administrative Services
 Lending Services
 Post Closing/Secondary
marketing
 Loan Administration
 Legal Services
 Business Services
Key Decisions in OM
 Structural Decisions
 Product and Service Design
 Process Design and Technology
 Capacity
 Facilities
 Infrastructural Decisions
 Quality
 Inventory and Supply Chain
 Schedules
 Project Management
Structural Decisions
Decision Area
Typical Questions
Contemporary
Challenges
Products
(What)
Standard or Custom
Products?
Make to order or make to
stock?
Product design?
Ease of make?
Coordination among
design teams?
Processes
(How)
What kind of equipment
to use?
Automation possibility?
How to configure?
How to integrate new IT
and Internet
developments?
Capacity
(How Much)
How much is needed?
Why type?
Increase or decrease?
Flexible options available?
Competitive advantage?
Facilities
(Where)
Where are the located?
What products to be
produced there?
How to manage and
exploit global
opportunities?
Infrastructural Decisions
Decision Area
Typical Questions
Contemporary
Challenges
Quality Management
How to prevent Defects?
Customer Experience?
How to improve products? Achieve world class
standards?
Inventory and Supply
chain management
What products to
outsource?
How many suppliers to
use
How to increase value
from supply chain?
Effects of IT and internet?
Schedule Management
Centralized or
Decentralized scheduling?
How to prioritize work or
customer orders?
How to imply finance and
cost information to
scheduling?
Integration or ERP with
operations?
Infrastructural Decisions (Contd.)
Decision Area
Typical Questions
Contemporary
Challenges
Project Management
How to respond to special
needs?
Info needed to effectively
manage a project?
To develop a learning
organization?
Manage projects through
functional boundaries
Workforce
Skills and training needed
by workers?
How to appraise and
reward?
How to develop high
performance work
systems?
How to align work systems
for long range objectives?
Organization
Hierarchal or Team Based? Structures best suited in
Train in house or
different cultures?
outsource?
Flatten the organization?
Evolution of OM
 Lean Manufacturing
 1950 introduced by Toyota
 Focuses on






Getting the product right the first time,
Minimum inventories
Continuous improvement
High Quality
Flexible productions
Minimizing all sorts of waste
Evolution of OM (Contd.)
 Agile Manufacturing
 Pre Requisite is Lean Manufacturing



Blends automation and IT
Economically produce a variety of products in any quantity
Adaptable to rapid changeovers
Challenges in OM
 To improve quality eight factors are considered
 Partnering
 Learning Systems
 Adaptability and Speed of Change
 Environmental Sustainability
 Globalization
 Knowledge Focus
 Customization and Differentiation
 Shifting Demographics