Chapter 1

INTRODUCTION TO OPERATIONS
MANAGEMENT

Operations Management = OM

Management of ANY activities/process that create goods and

provide services
Exemplary Activities: Forecasting, Scheduling, Quality management

Why to study OM
At a typical manufacturing company

Profit 5%

OM Cost 21%
Marketing
Cost 26%

Manufacturing
Cost 48%
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Operations Management = OM
The management of systems or processes that create goods and/or
provide services

Organizatio
n
Finance

Operations

The distinct active- role of operations:

Inputs become Outputs after some
Transformation

Marketing

Operations example in Manufacturing:

Food Processing
INPUTS

PROCESS

OUTPUTS

Raw vegetables

Cleaning

Metal sheets

Cutting/Rolling/Welding Cans

Energy, Vegetables

Cutting

Energy, Water,
Cooking
Vegetables
Energy, Cans, Boiled Placing
vegetables

Clean vegetables

Cut vegetables
Boiled
vegetables
Can food
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Operations example in service:

Health care
Inputs
Doctors, nurses
Hospital
Medical Supplies
Equipment
Laboratories

Processing

Outputs

Examination
Surgery
Monitoring
Medication
Therapy

Healthy
patients

Types of Operations
Operation

Examples

Goods producing

Farming, mining, construction

Storage/transportation

Warehousing, trucking, mail, taxis,

buses, hotels, location

Exchange

Trade, retailing, wholesaling, renting,

leasing, loans

Entertainment

Radio, movies, TV, concerts, recording

Communication

Newspapers, journals, magazines, radio,

TV, telephones, satellite
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Why OM?
Core of all business organizations
Many areas interrelated with OM activities
Management of operations is critical to create and
maintain competitive advantages

Organization of Businesses
Three

basic functions

Operations/Production
Goods oriented (manufacturing and assembly)
Service oriented (health care, transportation and retailing)
Value-added (the essence of the operations functions)

Finance-Accounting
Budgets (plan financial requirements)
Economic analysis of investment proposals
Provision of funds (the necessary funding of the operations)

Organization of Businesses (Cont.)

Marketing

The

Selling
Promoting
Assessing customer wants and needs
Communicating those needs to operations

need for working closely

Operations

Marketing

Finance
9

Operations Interfaces

10

Systems (Holistic) Approach

Emphasizes interrelations among subsystems.

A systems approach is essential whenever something is being
designed, redesigned, implemented, or improved. It is
important to take into account the impact on all parts of the
system.
Example: A new feature is added to a product.
Designer must take into account how customers will view the
change, instruction for using new feature, the cost, training of
workers, production schedule, quality standard, advertising
must be informed about the new feature.
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Systems Approach
The whole is greater than
the sum of the parts.

Suboptimization
12

Value Added
Value added: The difference between cost of inputs and
price (??) of outputs.
Is this definition right? Should value added include profit?
Value added: The difference between the cost of inputs
and the (market or fair) value or price of outputs.

13

Value-Added

Value added
Inputs
Land
Labor
Capital

Transformation/
Conversion
process

Outputs
Goods
Services

Feedback

Control
Feedback

Feedback
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Degree of Standardization !

Standardized output
Take advantage of standardized methods, less skilled
workers, materials
Example: Iron, Wheat, most of commodities

Customized output
Each job is different
Workers must be skilled
Example: Hair cut
15

Manufacturing (=Goods) vs. Service operations

Production of goods (goods oriented)

Tangible products
Automobile
Refrigerator

Services (TV and auto repair, lawn care)

Government
Regulatory bodies, FAA, FDA
Wholesale/retail
Financial services
Education

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Goods vs. Service Operations (Cont)

Differences
1.
2.
3.
4.
5.
6.
7.
8.

Customer contact
Uniformity of input
Labor content of jobs
Uniformity of output
Measurement of productivity
Production and delivery
Quality assurance
Amount of inventory

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Manufacturing vs. Service !

Characteristic

Manufacturing

Service

Output

Tangible

Intangible

Customer contact

Low

High

Uniformity of output

High

Low

Labor content

Low

High

Uniformity of input

High

Low

Measurement of
productivity

Easy

Difficult

Opportunity to correct
quality problems

Easy

Difficult

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Goods-service Continuum

Steel production
Home remodeling
Auto Repair
Maid Service
Teaching
Automobile fabrication
Retail sales
Appliance repair Manual car wash Lawn mowing

High percentage goods

Low percentage service

Low percentage goods

High percentage service

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Manufacturing vs. Service Industries in US

U.S. Manufacturing vs. Service Employment
100
80
Percent

Year Mfg. Service

45
79
21
50
72
28
55
72
28
60
68
32
65
64
36
70
64
36
75
58
42
80
44
46
85
43
57
90
35
65
95
32
68
00
30
70

60
40
20
0
45

50 55

60

65 70

75

80 85

90

95 00

Year

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Responsibilities of Operations Management

Planning

Capacity, utilization
Location
Choosing products or services
Make or buy
Layout
Projects
Scheduling
Market share
Plan for risk reduction, plan B?
Forecasting
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Operations Managers

Controlling
Inventory
Quality
Costs

Organization
Degree of standardization
Subcontracting
Process selection

Staffing

Hiring/lay off
Use of overtime
Incentive plans
Job assignments

22

Scope of Operations Management

Operations

Management includes:

Forecasting
Capacity planning
Scheduling
Managing inventories
Assuring quality
Motivating employees
Deciding where to locate facilities
And more . . .

23

Help comes from Models

A structure which has been built purposefully to exhibit

features and characteristics of some other object.

Do not use thing or something in a definition.

For
Improved understanding and communication
Experimentation
Standardization for analysis

Abstraction vs. computability

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Modeling !

Use models
Physical models (prototypes)
Schematic models (Graphs, charts, pictures)
Mathematical models,

Statistical models
Inventory models
Linear programming
Queuing techniques
Project management models

25

What type of models

Simulation models : to test a proposed idea

Monte Carlo Simulation

Optimization models : to create an optimal idea

Linear programming

Pattern

recognition models : to recognize a pattern

Statistics, Forecasting, data mining

Other classes to learn the rest.

26

Decision Making
Models
Quantitative

approaches
Analysis of trade-offs
Systems approach

27

Models Are Beneficial

Easy

to use, less expensive

Require users to organize
Increase understanding of the problem
Consistent tool
Standardized format
Specific objectives
Systematic

approach to problem solving

Analysis of tradeoffs
Enable what if questions
Power

of mathematics
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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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Historical Evolution of Operations Management

Industrial

revolution (1770s)
Scientific management (1911)
Mass production
Interchangeable parts
Division of labor
Human

relations movement (1920-60)

Unemployment insurance
Pension plans
Decision

models (1915, 1960-70s)

Influence of Japanese manufacturers (1970-1990)

30

Trends in Business
Major

trends

The Internet, e-commerce, e-business

Management technology
Globalization
Management of supply chains
Agility

31

Recent Trends !
Worker involvement
Environmental issues, emission reductions are popular after

Central European floods

Service economy in US, foreign production

E-business information technology
Supply chain management
Total Quality Management
Globalization, emerging markets, NAFTA
Lean Production see the next page

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Production systems classified

Craft Production : System in which highly skilled workers use

simple, flexible tools to produce small quantities of customized
goods.
Carpenter

Lean production : System that uses minimal amounts of

resources to produce a high volume of high-quality goods with
some variety.
Dell

Mass production: System in which lower-skilled workers use

specialized machinery to produce high volumes of standardized
goods.
Ford

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Production systems classified

Agile=Lean manufacturing

It provides flexibility to switch quickly and economically from

one product design to another with little disruption. This
characteristic, in turn enables faster response to changes in
customer demand.
A sophisticated computerized inventory control system allows
the plant to keep track of large number of parts.
Keys to being an agile manufacturer are :

Reduction in inventories,
Reduction in turnaround times,
Availability of automated flexible machinery,
Rapid collection and processing of information

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Simple Product Supply Chain

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

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

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Other Important Trends

Ethical

behavior
Operations strategy
Working with fewer resources
Cost control and productivity
Quality and process improvement
Increased regulation and product liability
Lean production

37

Summary
Definition of OM
OMs relationship with Marketing, Finance and
Accounting
Goods vs. service industries
OM issues, trends and models
Manufacturing systems

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