1

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

Outputs
Goods
Services

Feedback

Control
Feedback

Feedback

1-6

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

Processing

Outputs

Raw Vegetables
Metal Sheets
Water
Energy
Labor
Building
Equipment

Cleaning
Making cans
Cutting
Cooking
Packing
Labeling

Canned
vegetables

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Hospital Process
Table 1.2

Inputs
Doctors, nurses
Hospital
Medical Supplies
Equipment
Laboratories

Processing

Outputs

Examination
Surgery
Monitoring
Medication
Therapy

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 usual1-15

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

Examples

Goods Producing

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

Percent

U.S. Manufacturing vs. Service Employment

02

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

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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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Historical Evolution of Operations

Management

Table 1.7

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

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
Revenue management
Process analysis and improvement
Increased regulation and product liability
Lean production

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