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Introduction to Operations Management

McGraw-Hill/Irwin

Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
Define the term operations management Identify the three major functional areas of organizations and describe how they interrelate Compare and contrast service and manufacturing operations Describe the operations function and the nature of the operations managers job

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Learning Objectives
Differentiate between design and operation of production systems Describe the key aspects of operations management decision making Briefly describe the historicalevolution of operations management Identify current trends that impact operations management

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Operations Management
Operations Management is: The management of systems or processes that create goods and/or provide services

Operations Management affects:

Companies ability to compete Nations ability to compete internationally

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The Organization
Figure 1.1

The Three Basic Functions

Organization

Finance

Operations

Marketing

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Value-Added Process
Figure 1.2

The operations function involves the conversion of inputs into outputs

Value added
Inputs Land Labor Capital Transformation/ Conversion process
Feedback

Outputs Goods Services

Control
Feedback Feedback

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Value-Added & Product Packages

Value-added is the difference between the cost of inputs and the value or price of outputs. Product packages are a combination of goods and services. Product packages can make a company more competitive.

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Goods-service Continuum
Figure 1.3

Goods

Service Surgery, teaching Song writing, software development Computer repair, restaurant meal

Automobile Repair, fast food Home remodeling, retail sales Automobile assembly, steel making

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Food Processor
Table 1.2

Inputs
Raw Vegetables Metal Sheets Water Energy Labor Building Equipment

Processing
Cleaning Making cans Cutting Cooking Packing Labeling

Outputs
Canned vegetables

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Hospital Process
Table 1.2

Inputs
Doctors, nurses Hospital Medical Supplies Equipment Laboratories

Processing
Examination Surgery Monitoring Medication Therapy

Outputs
Healthy patients

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Manufacturing or Service?

Tangible

Act

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Production of Goods vs. Delivery of Services

Production of goods tangible output Delivery of services an act Service job categories
Government Wholesale/retail Financial services Healthcare Personal services Business services Education
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Key Differences
1. Customer contact 2. Uniformity of input 3. Labor content of jobs 4. Uniformity of output 5. Measurement of productivity

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Key Differences
6. Production and delivery 7. Quality assurance 8. Amount of inventory 9. Evaluation of work 10. Ability to patent design

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Goods vs Service
Characteristic Customer contact Uniformity of input Labor content Uniformity of output Output Measurement of productivity Opportunity to correct problems Inventory Evaluation Patentable Goods Low High Low High Tangible Easy High Much Easier Usually Service High Low High Low Intangible Difficult Low Little Difficult Not usual 1-15

Scope of Operations Management

Operations Management includes:
Forecasting Capacity planning Scheduling Managing inventories Assuring quality Motivating employees Deciding where to locate facilities Supply chain management And more . . .
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Types of Operations
Table 1.4

Operations
Goods Producing

Examples

Farming, mining, construction, manufacturing, power generation Storage/Transportation Warehousing, trucking, mail service, moving, taxis, buses, hotels, airlines Exchange Retailing, wholesaling, banking, renting, leasing, library, loans Entertainment Films, radio and television, concerts, recording Communication Newspapers, radio and television newscasts, telephone, satellites
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Figure 1.4

U.S. Manufacturing vs. Service Employment

Year Mfg. Service 45 79 21 90 Mfg. 50 72 28 80 Service 55 72 28 70 60 68 32 60 65 64 36 50 70 64 36 40 75 58 42 30 80 44 46 20 85 43 57 10 90 35 65 0 95 25 75 45 50 55 60 65 70 75 80 85 90 95 00 02 05 00 30 70 Year 25 75

02

Percent

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Decline in Manufacturing Jobs

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

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Why Manufacturing Matters

Over 18 million workers in manufacturing jobs Accounts for over 70% of value of U.S. exports Average full-time compensation about 20% higher than average of all workers Manufacturing workers more likely to have benefits Productivity growth in manufacturing in the last 5 years is more than double U.S. economy
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Why Manufacturing Matters

More than half of the total R&D performed is in the manufacturing industries Manufacturing workers in California earn an average of about $25,000 more a year than service workers When a California manufacturing job is lost, an average of 2.5 service jobs are lost

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Challenges of Managing Services

Service jobs are often less structured than manufacturing jobs Customer contact is higher Worker skill levels are lower Services hire many low-skill, entry-level workers Employee turnover is higher Input variability is higher Service performance can be affected by workers personal factors

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Operations Management Decision Making

Models Quantitative approaches Analysis of trade-offs Systems approach Establishing priorities Ethics

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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
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Decision Making
System Design
capacity location arrangement of departments product and service planning acquisition and placement of equipment

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Decision Making
System operation
personnel inventory scheduling project management quality assurance

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Decision Making
Models Quantitative approaches Analysis of trade-offs Systems approach

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Models
A model is an abstraction of reality.
Physical Schematic Mathematical

Tradeoffs

What are the pros and cons of models?

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Models Are Beneficial

Easy to use, less expensive Require users to organize Increase understanding of the problem Enable what if questions Consistent tool for evaluation and standardized format Power of mathematics

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Limitations of Models
Quantitative information may be emphasized over qualitative Models may be incorrectly applied and results misinterpreted Nonqualified users may not comprehend the rules on how to use the model Use of models does not guarantee good decisions

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Quantitative Approaches
Linear programming Queuing Techniques Inventory models Project models Statistical models

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Analysis of Trade-Offs
Decision on the amount of inventory to stock
Increased cost of holding inventory

Vs.
Level of customer service

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Systems Approach
The whole is greater than the sum of the parts.

Suboptimization

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Pareto Phenomenon
A few factors account for a high percentage of the occurrence of some event(s). 80/20 Rule - 80% of problems are caused by 20% of the activities.

How do we identify the vital few?

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Ethical Issues
Financial statements Worker safety Product safety Quality Environment Community Hiring/firing workers Closing facilities Workers rights
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Business Operations Overlap

Figure 1.5

Operations

Marketing

Finance

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Operations Interfaces
Industrial Engineering Maintenance

Distribution

Purchasing

Operations

Public Relations

Legal

Personnel
Accounting MIS
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Table 1.7

Historical Evolution of Operations Management

Industrial revolution (1770s) Scientific management (1911)

Mass production Interchangeable parts Division of labor

Human relations movement (1920-60) Decision models (1915, 1960-70s) Influence of Japanese manufacturers
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Trends in Business
Major trends
The Internet, e-commerce, e-business Management technology Globalization Management of supply chains Outsourcing Agility Ethical behavior

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Management Technology
Technology: The application of scientific discoveries to the development and improvement of goods and services Product and service technology Process technology Information technology

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Simple Product Supply Chain

Figure 1.7 Suppliers Suppliers

Direct Suppliers

Producer

Distributor

Final Consumer

Supply Chain: A sequence of activities And organizations involved in producing And delivering a good or service

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A Supply Chain for Bread

Stage of Production
Farmer produces and harvests wheat Wheat transported to mill Mill produces flour Flour transported to baker

Value Added
$0.15 $0.08 $0.15 $0.08

Value of Product
$0.15 $0.23 $0.38 $0.46

Baker produces bread

Bread transported to grocery store Grocery store displays and sells bread Total Value-Added

$0.54
$0.08 $0.21 $1.29

$1.00
$1.08 $1.29

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Other Important Trends

Ethical behavior Operations strategy Working with fewer resources Revenue management Process analysis and improvement Increased regulation and product liability Lean production

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