Operations Management

Definition
Operations management is defined
as the design, operation, and
improvement of the systems that
create and deliver the firms primary
products and services.

Irwin/McGraw-Hill

Why Study Operations Management?

Systematic Approach
to Org. Processes

Business Education/
Career Opportunities

Operations
Management

Increase Competitive
Advantage/Survival

Cross-Functional
Applications
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Current Trends

96 of the top 100 industries in the U.S. have large $

worth of exports. Exporting industries are
characterized by early ongoing investments in
advanced product and process technologies.

Productivity is increasing and has become a basis

for competition. Success domestically and globally
is dependent on the ability to compete on many
fronts, including operations (e.g., internet - easy to
find potential customers, but hard to deliver)

Outsourcing of manufacturing and services (e.g.,

India and China) is accelerating.

Irwin/McGraw-Hill

WS8

Factors Affecting a Firm's Ability to Ward off Imports and/or Export

Economic/Political
exchange rates
trade barriers
capital costs
inflation
capital availability
social costs/legal
funds flows
savings rate
interest rates
minimum wage

Corporate

Environmental/social
environmental protection
health costs
labor unions
education system
consumer tastes
retailing capabilities
employee

Technological

strategy
R&D
risk avoidance
engineering
role of functions
product development
Fin-Mktg-Mfg-Eng-R&D
process development
balance sheet
new products
financial capacity
development process
marketing policies
export sales competencies
Technological sophistication of mgt

External
transportation costs
logistics resources
labor supply, capabilities
training resources
communications
public infrastructure

Operations

Suppliers

costs/productivity
quality
delivery cycle
delivery reliability
flexibility for prod change
flexibility for vol. change
New product introduction
inventory mgt.
Prod. Planning Control
Equip. & process tech
#, size, location of facilities
logistics
customer service
information technology

abilities
coordination
location
competition
cooperation

**Wickham Skinner: The Role of the Industrial Managers in the Massive U.S. Negative Trade Balance, April 2000

WS6

Operations Decision Making

Marketplace
Corporate Strategy

Finance Strategy

Operations
Strategy

Marketing
Strategy

Operations
Management

People
Materials &
Customers

Input
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Plants

Parts

Planning and
Control

Processes
Products &
Services

Output
4
The Transformation Process (value adding)

Key OM Concepts

Efficiency - Doing something at the lowest

possible cost

Effectiveness - Doing the right things to

create the most value for the organization

Value - Quality divided by price

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Transformations

Physical--manufacturing

Locational--transportation

Exchange--retailing

Storage--warehousing

Physiological--health care

Informational--telecommunications

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Examples of Production Systems

System

Inputs

Conversion

Output
(desired)

Hospital

Patients
MDs, Nurses
Medical Supplies
Equipment

Health Care

Healthy
Individuals

Restaurant

Hungry Customers Prepare Food

Food, Chef
Serve Food
Servers
Atmosphere

Automobile
Plant

Sheet Steel
Engine Parts
Tools, Equipment
Workers

University

High School Grads Transferring

Teachers, Books
of Knowledge
Classroom
and Skills

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Satisfied
Customers

Fabrication
High Quality
and Assembly Automobiles
of Cars
Educated
Individuals

Service or Good?

If you drop it on your foot, it wont hurt

you. (Good or service?)

Services never include goods and

goods never include services. (True or
false?)

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What about McDonalds?

Service or Manufacturing?

The company certainly manufactures tangible

products

Why then would we consider McDonalds a

service business?

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Front and Back Office

Back Office

Service Provider
Front Office

Customer

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Core Factory Services

Core Services are basic things that
customers want from products that they
purchase.

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Quality

Flexibility

Speed

Price (or production cost)

10

Value-Added Services
Value-added services differentiate the
organization from competitors and build
relationships that bind customers to the firm
in a positive way.

Information

Problem Solving and Field Support

Sales Support

Irwin/McGraw-Hill

11

History of Operations

Cottage System

<1700
Industrial Revolution 1700 - 1800
1850s
Civil War
Scientific Management 1890s

Moving Assembly Line 1910s

Hawthorne Studies 1930s
Operations Research 1940s
Global Competition 1970s
1980s
Service Revolution
Mass Customization 1990s

Irwin/McGraw-Hill

TIME

12

Development of OM as a Field The Names

and Emphasis Change, but the Elements
Remain Basically the
Same!
Manufacturing
TQM &
Scientific
Management

Strategy

Six Sigma

Moving Assembly
Line

JIT/Lean
Manufacturing

Business Process
Reengineering

Hawthorne
Studies

Manufacturing
Resources Planning

Electronic
Enterprise

Operations
Research

Service Quality
and Productivity

Global Supply
Chain Mgt.

Historical
Underpinnings
Irwin/McGraw-Hill

OMs Emergence
as a Field

13

Some Current Issues

Implementing/sustaining Quality Management initiatives

Consolidating operations resulting from mergers

Speeding up the time to get new products to market

Developing flexible production systems to enable mass

customization of products and services

Developing and integrating new technologies

Managing global supplier, production and distribution

networks

Outsourcing

Irwin/McGraw-Hill

14

Purchasing Managers
Index

Began 1931
Measures:

New Manufacturing Orders

Production Volume
Deliveries
Inventory Levels
Employment

Index Measures Economic Activity

Irwin/McGraw-Hill

>50.0% Expanding
<42.7% Contracting
15

Purchasing Managers
Index

A Leading Indicator since:

- Manufacturing must order materials in
advance of production
- The indicator is based on plans of
supply management (purchasing)
executives
Source: Institute for Supply Management
(ISM) ism.org (previously National
Association of Purchasing Management)

Irwin/McGraw-Hill

15

Purchasing Managers
Index

Irwin/McGraw-Hill

Operations Management - Overview

Process Analysis
and Design

Process Control
and Improvement

Operations
Strategy

Quality
Management

Process Analysis

Statistical
Process Control

Project
Management

Supply Chain
Strategy
Just in Time
Planning for Production

Job Design

Manufacturing

Supply Chain
Management

Consulting and
Reengineering

Facility Layout

Services
Waiting Line Analysis and
Simulation

Capacity Management
Aggregate
Planning
Inventory Control
Materials Requirement Planning

Operations Strategy
Strategy Process

Example

Customer Needs

More Product

Corporate Strategy

Increase Org.
Size

Operations Strategy

Increase Production Capacity

Decisions on Processes
and Infrastructure

Build New Factory

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Competitive Dimensions

Cost
Quality and Reliability
Delivery

Coping with Changes in Demand

New Product Introduction

Irwin/McGraw-Hill

Flexibility
Speed
Reliability

Speed
Flexibility

Dealing with Trade-offs

For
Forexample,
example, ififwe
wereduce
reducecosts
costsby
byreducing
reducingproduct
product
quality
quality inspections,
inspections, we
wemight
might reduce
reduceproduct
product quality.
quality.
Example
ExampleII,
II, ififwe
weimprove
improve
customer
customer service
serviceproblem
problem
solving
solvingby
bycross-training
cross-training
personnel
personnelto
todeal
deal with
withaa
wider-range
wider-rangeof
of problems,
problems,
they
theymay
maybecome
becomeless
less
efficient
efficientat
atdealing
dealingwith
with
commonly
commonlyoccurring
occurring
problems.
problems.
Irwin/McGraw-Hill

Cost
Flexibility

Delivery
Quality

Order Qualifiers and Winners

Order Qualifiers: Screening criterion
that permits a firms products or
services to be considered as possible
candidates for purchase
Order Winners: Criterion that
differentiates the products or services
of one firm from another
Irwin/McGraw-Hill

Strategy Begins with Priorities

Consider the personal computer assembler

1. How would we segment the market according to
product group?
2. How would we identify product requirements,
demand patterns, and profit margins for each group?
3. How do we identify order winners and order
qualifiers for each group?
4. How do we convert order winners into specific
performance requirements?

Competition
(Them)

Us
Differentiation (Core competencies)

Manufacturings Role in
Corporate Strategy
Stage I--Internally Neutral - minimize potential
manufacturing negative

Stage II--Externally Neutral - achieve parity with

competitors

Stage III--Internally Supportive - support business strategy

Stage IV--Externally Supportive - manufacturing based

competitive strategy

Irwin/McGraw-Hill

Four Stages of Service Firm

Competitiveness

Stage I. Available for Service

Stage II. Journeyman

Stage III. Distinctive Competence Achieved

Stage IV. World Class Service Delivery

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U. S. Competitiveness Drivers

Product Development

Waste Reduction (JIT Philosophy)

WIP, space, tool costs, and human effort

Improved Customer-Supplier Relationships

speed development & enhance

manufacturability

borrowed from Japanese Keiretsu

Improved Leadership

strong, independent boards of directors

Irwin/McGraw-Hill

Execution!!

Unless you translate big thoughts into concrete steps for action, theyre pointless.
(Larry Bossidy)

Strategy is execution. (Louis Gerstner)

In the business world, having a good objective means nothing if you implement it
badly. (Fareed Zakaria)

You cannot have an execution culture without robust dialogue - one that brings
reality to the surface through openness, candor, and informality. Robust dialogue
starts when people go in with open minds. You cannot set realistic goals until
youve debated the assumptions behind them.

Irwin/McGraw-Hill

Productivity
Outputs
Productivity =
Inputs

Partial measures

Multi-factor measures

output/(multiple inputs)

Total measure

Irwin/McGraw-Hill

output/(single input)

output/(total inputs)

Example
10,000 Units Produced
Sold for $10/unit
500 labor hours

What is the
labor productivity?

Labor rate: $9/hr

Cost of raw material: $5,000
Cost of purchased material: $25,000
Irwin/McGraw-Hill

Example--Labor Productivity
10,000 units/500hrs = 20 units/hour ...
... or we can arrive at a unitless figure
(10,000 unit*$10/unit)/(500hrs*$9/hr) = 22.22

Irwin/McGraw-Hill

Example:
Productivity Measurement

You have just determined that your

service employees have used a total of
2400 hours of labor this week to process
560 insurance forms. Last week the
same crew used only 2000 hours of labor
to process 480 forms.

Is productivity increasing or decreasing?

Irwin/McGraw-Hill

Balanced Scorecard
1.

Financial perspective

2.

Internal perspective

3.

Customer perspective

4.

Innovation and learning perspective

Irwin/McGraw-Hill