CHAPTER 1
INTRODUCTION
LEARNING OBJECTIVES
 Describe and Explain concepts, functions and
nature of OM
 Identify current OM problems, issues and
trends.
 Describe and Explain approaches used by OM
What Is OM?
Inputs
Labor,
capital,
Land,
Information
Processes
Outputs
Transformation/
conversion process
Goods
and
services
Feedback loop
Production is the creation of goods and
services.
Operations management (OM) is the set of
activities that creates value in the form of
goods and services by transforming inputs
into outputs.
Operations management (OM) is the
management of systems or processes that
create goods and/or provide services.
Organizing to Produce
Goods and Services
Essential functions:
Marketing – generates demand
Production/operations – creates the product
Finance/accounting – tracks how well the
organization is doing, pays bills, collects the
money
Organizational Charts
Airline
Operations
Ground support
equipment
Maintenance
Ground Operations
Facility
maintenance
Catering
Flight Operations
Crew scheduling
Flying
Communications
Dispatching
Management science
Finance/
accounting
Accounting
Payables
Receivables
General Ledger
Finance
Cash control
International
exchange
Marketing
Traffic
administration
Reservations
Schedules
Tariffs (pricing)
Sales
Advertising
GOODS- SERVICES CONTINUUM
Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100%
75
50
25
0
25
50
75
100%
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|
|
|
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Percent of Product that is a Good Percent of Product that is a Service
GOODS vs SERVICE
Characteristic
Customer contact
Goods
Low
Service
High
Uniformity of input
Labor content
Uniformity of output
High
Low
High
Low
High
Low
Output
Measurement of productivity
Opportunity to correct problems
Inventory
Tangible
Easy
High
Much
Intangible
Difficult
Low
Little
Evaluation
Patentable
Easier
Usually
Difficult
Not usual
WHY STUDY OM ?
one of three major functions (marketing,
finance, and operations) of any
organization.
we want (and need) to know how goods
and services are produced.
we want to understand what operations
managers do.
a costly part of an organization
WHAT OPERATIONS MANAGERS DO?
Planning
Organizing
Staffing
Leading
Controlling
Where are the OM Jobs?
Significant Events in OM
Current Trend in OM
Coordinate the relationships between
mutually supportive but separate
organizations.
Optimizing global supplier,
production, and distribution networks.
Increased co-production of goods and
services.
Current Issues in OM (cont’d)
Managing the customer’s experience
during the service encounter.
Raising the awareness of operations
as a significant competitive weapon.
New Trends in OM
Past
Causes
Future
Local or
national focus
Reliable worldwide
communication and
transportation networks
Global focus,
moving
production
offshore
Batch (large)
shipments
Short product life cycles and
cost of capital put pressure on
reducing inventory
Just-in-time
performance
Low-bid
purchasing
Supply chain competition
requires that suppliers be
engaged in a focus on the
end customer
Supply chain
partners,
collaboration,
alliances,
outsourcing
New Trends in OM (cont’d)
Past
Causes
Future
Lengthy
product
development
Shorter life cycles, Internet,
rapid international
communication, computeraided design, and
international collaboration
Rapid product
development,
alliances,
collaborative
designs
Standardized
products
Affluence and worldwide
markets; increasingly flexible
production processes
Mass
customization
with added
emphasis on
quality
Job
specialization
Changing socioculture milieu;
increasingly a knowledge and
information society
Empowered
employees,
teams, and lean
production
New Trends in OM (cont’d)
Past
Causes
Future
Low-cost
focus
Environmental issues, ISO
14000, increasing disposal
costs
Environmentally
sensitive
production, green
manufacturing,
recycled materials,
remanufacturing
Ethics not
at forefront
Businesses operate more
openly; public and global
review of ethics; opposition
to child labor, bribery,
pollution
High ethical
standards and
social responsibility
expected
Productivity Challenge
Productivity is the ratio of outputs (goods
and services) divided by the inputs
(resources such as labour and capital)
The objective is to improve productivity!
 Note: Production is a measure of output only and not a measure of
efficiency
Productivity
Units produced
Productivity =
Input used
measure of process improvement.
represents output relative to input
Productivity Calculations
Labor productivity:
Productivity =
=
Units produced
Labor-hours used
1,000
250
= 4 units/labor-hour
Productivity Calculations (cont’d)
Multi-factors productivity:
Output
Productivity =
Labor + Material + Energy
+ Capital + Miscellaneous
Productivity Variables
Labor - contributes about 10% of the
annual increase.
Capital - contributes about 38% of the
annual increase
Management - contributes about 52% of
the annual increase
Global View of Operations
Reasons to Globalize
Tangible 1.
Reasons
2.
3.
4.
5.
6.
Intangible
Reasons
Reduce costs (labor, taxes, tariffs, etc.)
Improve supply chain
Provide better goods and services
Understand markets
Learn to improve operations
Attract and retain global talent
Developing Missions and Strategies
Mission
statements tell an organization where it
is going.
The Strategy
tells the organization how to get there
Strategies for Competitive Advantage
Differentiation
better, or at least different.
Cost leadership
cheaper, achieving maximum value
Respone
Rapid, flexible and reliable performance
10 Strategic OM Decisions
1. Goods and
service design
2. Quality
3. Process and
capacity design
4. Location
selection
5. Layout design
6. Human resources
and job design
7. Supply chain
management
8. Inventory
9. Scheduling
10. Maintenance
OM’s Contribution to Strategy
Operations
Decisions
Product
Quality
Process
Examples
Specific
Strategy Used
Competitive
Advantage
FLEXIBILITY:
Sony’s constant innovation
of new products………………………………....Design
HP’s ability to lead
the printer market………………………………Volume
Southwest Airlines No-frills service……..…..LOW COST
Location
Layout
Human
resource
Supply chain
Inventory
Scheduling
Maintenance
DELIVERY:
Pizza Hut’s 5-minute guarantee
at lunchtime…………………..…..………………….Speed
Federal Express’s “absolutely,
positively on time”………………………..….Dependability
QUALITY:
Motorola’s HDTV converters….……........Conformance
Motorola’s pagers………………………..….Performance
Caterpillar’s after-sale service
on heavy equipment……………....AFTER-SALE SERVICE
Fidelity Security’s broad
line of mutual funds………….BROAD PRODUCT LINE
Differentiation
(Better)
Response
(Faster)
Cost
leadership
(Cheaper)
Strategy Development and Implementation
SWOT analysis
Mission
Internal
Strengths
External
Opportunities
Analysis
Internal
Weaknesses
External
Threats
Strategy
Four International Operations Strategies
International
Strategy
High
Cost Reduction Considerations
 Import/export or
license existing
product
Examples
U.S. Steel
Harley Davidson
Low
Low
High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
Four International Operations Strategies
Cost Reduction Considerations
High
International Strategy
 Import/export or
license existing
product
Examples
U.S. Steel
Harley Davidson
Low
Low
High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
Four International Operations Strategies
Global
Strategy
High
Cost Reduction Considerations
 Standardized
product
 Economies of scale
 Cross-cultural
learning
Examples
 Import/export or
license existing
Texas Instruments
product
Examples Caterpillar
U.S. Steel
Otis Elevator
Harley Davidson
International Strategy
Low
Low
High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
Four International Operations Strategies
High
Global Strategy
Cost Reduction Considerations
 Standardized product
 Economies of scale
 Cross-cultural learning
Examples
Texas Instruments
Caterpillar
Otis Elevator
International Strategy
 Import/export or
license existing
product
Examples
U.S. Steel
Harley Davidson
Low
Low
High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
Four International Operations Strategies
Multidomestic
Strategy
High
 Use existing
 Standardizeddomestic
product
model
 Economies of scale
 Cross-cultural learning
globally
Examples
Franchise, joint
Texas 
Instruments
Caterpillar
Otis Elevatorventures,
subsidiaries
Cost Reduction Considerations
Global Strategy
International Strategy
Examples
Heinz
Examples McDonald’s
U.S. Steel
Harley Davidson
The Body Shop
Hard Rock Cafe
 Import/export or
license existing
product
Low
Low
High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
Four International Operations Strategies
High
Global Strategy
Cost Reduction Considerations
 Standardized product
 Economies of scale
 Cross-cultural learning
Examples
Texas Instruments
Caterpillar
Otis Elevator
International Strategy
 Import/export or
license existing
product
Multidomestic Strategy
 Use existing
domestic model globally
 Franchise, joint ventures,
subsidiaries
Examples
U.S. Steel
Harley Davidson
Examples
Heinz
The Body Shop
McDonald’s Hard Rock Cafe
Low
Low
High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
Four International Operations Strategies
Transnational
Strategy
High
 Move material,
people, ideas
Examples
across national
Texas Instruments
Caterpillar boundaries
Otis Elevator
 Economies of scale
 Cross-cultural
International Strategy
Multidomestic Strategy
 Use existing
learning
 Import/export
or
domestic model globally
Global Strategy
Cost Reduction Considerations
 Standardized product
 Economies of scale
 Cross-cultural learning
license existing
product
Examples
Coca-Cola
Nestlé
Examples
U.S. Steel
Harley Davidson
Low
 Franchise, joint ventures,
subsidiaries
Examples
Heinz
The Body Shop
McDonald’s Hard Rock Cafe
Low
High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
Four International Operations Strategies
Cost Reduction Considerations
High
Global Strategy
Transnational Strategy
 Standardized product
 Economies of scale
 Cross-cultural learning
 Move material, people, ideas
across national boundaries
 Economies of scale
 Cross-cultural learning
Examples
Texas Instruments
Caterpillar
Otis Elevator
Examples
Coca-Cola
Nestlé
International Strategy
 Import/export or
license existing
product
Multidomestic Strategy
 Use existing
domestic model globally
 Franchise, joint ventures,
subsidiaries
Examples
U.S. Steel
Harley Davidson
Examples
Heinz
The Body Shop
McDonald’s Hard Rock Cafe
Low
Low
High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)