What is “Operations Management”?

“Operations Management” is the study of the transformation of inputs into outputs in

organizations (associations, charities, firms, NGOs, government agencies, armed forces,
etc.) Operations Management is concerned with the planning and control of the
production of goods or services.

“Operations Management” is the only sub-field of Management where something is

actually, physically created to add value to society. The transformation of inputs into
outputs may create “value” by any of:
1) structurally altering,
2) transporting,
3) storing and/or protecting, and
4) inspecting.

A transformation that adds value by “structurally altering” may involve any of:
a) a physical alteration (as in manufacturing a car, or a T-shirt),
b) a sensual alteration (as in air conditioning a building), or
c) a psychological alteration (as in awarding a university degree).

These are not mutually exclusive alteration types. An organization that structurally alters
its inputs to create some output(s) may simultaneously be physically and/or sensually
and/or psychologically altering at least some of its inputs, all at the same time.

Transporting may create value for society by:

a) delivering goods or services where they were unavailable (e.g., UPS), or
b) discarding undesirable materials (e.g., garbage removal).

Storing (e.g., as in kennels for dogs) and protecting (e.g. safety boxes in banks) can also
be means of creating value.

Inspection (e.g., medical exams by doctors, or audits by accountants) can also create
value.

An organization may be creating value by any combination of these transformation

mechanisms. For instance, a bank not only offers storage and protection (of cash and
non-cash assets) but also physically alters some of these assets (grows customer
deposits via interest payments) while also offering transportation of cash assets (by
making your cash available to you at any ATM or branch at any location).

Operations Management (OM) studies the means of adding value by these transformation
means. OM therefore involves the management of (i.e., planning and control of) the
inputs and resources needed (e.g., planning the bed-capacity of a hospital, or planning
the monthly employment levels at a manufacturing plant), the management of the
transformation mechanisms iteself (e.g., planning which faculty member will teach which
courses at a university, or planning the production and inventory levels of different power
drills at a BOSCH plant, or determining in which sequence a set of DNA tests will be
performed at a lab), and the management of outputs produced (e.g., setting and
maintaining various quality standards for different products, or coordinating and
evaluating the performances of the wholesalers of our outputs, etc.).

Historically, OM has concentrated on physical “goods” as outputs (and in particular, on

their creation, transportation, and storage/protection). However, with the wide-spread
growth of the services industries since the 1970’s, a significant portion of the OM field
today is directed towards the study of the production of “services” as outputs.
Products versus Services

The following are the primary differences between products and services:

Products Services

Tangible
Equipment-intense production
Production w/ minimal customer contact
Delayed consumption
Quality easily measured
Intangible
Labor-intense production
Production w/ extensive customer contact
Immediate consumption
Quality difficult to measure

INDUSTRY-SPECIFIC EXAMPLES OF “TRANSFORMATIONS”

Organization Inputs/Resources Transformation Outputs

Bank Deposits, Safekeeping, storage, Loans, interest,

installments, investment, statements
tellers, transportation
branches, ATMs,
computers,
electricity,
armored carriers…

Cinema Movies, Ticket sales, Entertainment,

theatre (hall), projection, food prep Happy customers
foods, snacks
PA system,
projectionist,
ushers …

Hospital Doctors, nurses, Surgery, patient care, Cures, lab tests,

operating rooms, drug delivery healthy customers
beds, ambulances

School Teachers, library, Learning, counseling, Education, skills,

classrooms, motivation research
sports fields, ...

Post Office Trucks, postmen, Transportation, printing Safe deliveries,

post offices, paper, stamps
ink

Manufacturer Raw materials, Cutting, forming, joining, Products

parts, machines, mixing, welding, etc.
workers, ...

Operations Management, as the study of the transformation systems that change inputs
and resources into products, contrasts with the other fields of management (such as
marketing, finance, personnel, accounting, etc.) in that it is the field of management
that’s actually concerned with creating value added and improving the productivity of
organizations.
Topics covered range from long-term, strategic issues such as production technology
selection (e.g., the selection by banks of alternative service delivery means - such as
branches versus ATMs versus online-banking) or the determination of the location of a
new hospital, to tactical issues such as “supply chain management” (e.g., deciding on
which parts suppliers should be used by a manufacturer) or production planning (e.g.,
coordinating the monthly production targets with the uncertain and seasonal demand in
the textile industry), or to operational, daily scheduling issues (e.g., queuing of orders
received at a McDonalds, or planning and scheduling meetings between students and
academic advisors at a university).

HISTORICAL ROOTS OF “OPERATIONS MANAGEMENT”

Historically, the “scientific management” efforts of Frederick Taylor, Frank and Lillien
Gilbreth, and others in the late 19th and early 20th centuries continued during World War
II, and were amplified in the form of “Operations Research” groups, largely initiated and
funded by government and quasi-governmental organizations in USA and UK:

1) Industrial revolution of the 1770’s:

- Division of labor (Adam Smith)
- Invention of steam engine (James Watt)
- Use of interchangeable parts (Eli Whitney).

2) Publication of the “Principles of Scientific Management” (Frederick Taylor) :

- Managers as “planners”
- Workers need to be selected, trained & developed
- Division of labor between managers and workers
- Cooperation between managers & workers.

3) World War II and its logistics problems

↓
Birth of the “Operations Research” (OR) field -- concerned with the research &
development of new mathematical and statistical tools for analysis and optimization of
complex systems. These mission-focused Mathematicians modeled various classes of
war-related problems (such as convoy composition or bombardment planning) and
developed the foundational theories to address them. The dominant paradigm of these
OR groups was optimization of system performance in the presence of constraints. The
development of new mathematical approaches such as linear programming, network
flow problems, dynamic programming, queuing networks, game theory are examples of
such work.
↓
leading to:
↓
4) Applications and extensions of OR knowledge to business problems:

Right after WW II, the OR knowledge developed purely for military purposes was
imported into and applied in the industry. By 1953, so-called Management Science
(MS) groups were developing various OR applications to business, attempting to create
and design a “science of management” that lived up to the standards of good science.

Originally, MS was intended to be a new science, whereas OR would merely be the

practical application of that science. During the 1960s, many researchers in many
business schools had already begun to study scientific approaches for decision making.
During the late 1960s through the 1970s, however, data storage and computation speed
problems remained as practical hurdles to the implementation of many OR algorithms to
solve managerial problems. Also, in some cases, the OR models did not keep pace with
the evolution of business practices. Many operations researchers thus moved into
functional management areas to better understand the real nature of these problems.
This migration led to the differentiation of the field of MS from OR: MS research and
practice became focused on adopting existing OR models, or developing new
models, algorithms, heuristics and methodologies specifically to solve particular
management problems.
↓
Thus WWII and its logistics problems have resulted in:
A) “Managemet Science” as research and development of new techniques for
solving marketing, finance, production related business problems.

B) Specifically “production” related applications of techniques:

- Industrial/Factory Management (1950s), leading to
- Production Management (1960s), leading to
- Operations Management (1970s).

Many of the mathematical or methodological MS/OR developments were actually

historically motivated by production management problems and were described in
those contexts. Production management directly implied a manufacturing emphasis.
However, with the spread of the services starting in early 1970s, the term “operations
management” was gradually adapted to extend the coverage of the production
management field to value creation processes in service organizations such as banks,
hospitals, hotels, media, consulting firms, etc. Today, at most 2% of US undergraduate
or graduate management programs still insist on using the term “production
management”.

Within the academic community, most of the OR research initially took place in
engineering departments. In 1960s, OR courses made their way into business curricula.
But by the 1980s, most corporate groups focused on operations research had shrunk or
disappeared. Researchers began examining operations management issues using non-
operations research perspectives, such as empirical approaches or Toyota’s holistic
system of physical and human processes. Today, you can hardly find any OR courses
offered in modern schools of management!

SOME (OPINIONATED) REMARKS

1) The generic term “business administration” has gradually disappeared from our
universities to be replaced with the term “management” as we have come to realize that
the knowledge created in this field does not relate to running only “businesses”, but also
non-profit local or international organizations, charities, NGOs, local and state
governments, etc.

2) “Management” is now accepted as a generic (general) term. “Finance” or “Accounting” or

“Human Resources” or “Marketing” are now ALL considered to be parts of
“management”! That’s why the world’s universities are full of “Schools (or Colleges) of
Management” while “Schools of Business” are disappearing fast. These “Schools of
Management” house all the sub-fields - such as Operations, Finance, Marketing, Human
Resources, etc. That’s in fact why we have terms like “Finance Managers” or “Marketing
Managers” or “Human Resource Managers” in various organizations.
3) “Management” fields can be divided into “functional” versus “supporting” fields. The
functional areas of Management are those that relate to proper functions of an
organizations. The supporting areas consist of those areas that provide the manager with
the “tools” necessary to conduct those functions.

4) Fields such as Mathematics, Statistics, Economics, Information Systems, Computer

Sciences, Operations Research or Management Science, and Accounting merely provide
the managers with specific “tools” they can use to manage well. These fields, although
typically part of the “management” curricula, are not “functional areas” of management,
per se. The “functional areas” of management are merely those that directly relate to the
“purpose” of the organization in question: finding out the needs and interests of the
population to be served, putting together the capital assets and human resources needed to
serve them, and to design, develop, produce and distribute to them what they demand.
That is, the “functional areas” of Management merely consist of Marketing, Finance, and
Operations (and maybe Human Resources).

5) Among these fields, “Operations Management” is the only sub-field of Management

where something is actually, physically created to add value to society. The other
functional areas of Management (Marketing, Finance, and Human Resources) are
basically all there to support and help this value creation process. This is true even if you
consider a “marketing consulting firm” or an “retirement equity fund” or an “employment
agency”. (Explain why this last statement is true.) * Of course, “Operations Management”
could not exist and would even be futile without the support of any of these other
“functional” fields (and the “supporting” fields).

* For example, a “marketing consulting” firm’s main function is not to market itself, but to design and offer
consulting services by somehow transforming its inputs and resources (market researchers, advertising and
promotion experts, software, databases, experience and know-how) into services useful to their customers
(market studies, forecasts, slogans, ad campaigns, etc.)

OM in interaction with other fields

Of course, no management field exists in a vacuum by itself. In any organization, there

may be considerable interation between all of the management fields, and even between
management fields and non-management fields (such as engineering). Occasionally, this
interation takes the form of simultaneous planning and decision making. At other times,
the interaction is in the form of information flow between departments, for instance, as
one field dictating certain minimum performance requirements or needs to another field.

The following diagram shows the interations between Operations Management on the one
hand, and Finance, Marketing, Accounting, Human Resources, Informations Systems,
Design Engineering, and Manufacturing Engineering, on the other hand.

The fact that OM appears to be located “centrally” in the diagram below is only incidental.
You could construct a similar diagram with, say, the Accounting field located centrally, to
show the interations between the accountants and all the other fields relavant to
managing organizations.
The diagram above illustrates the interactions between OM and the different fields related
to “management”, and shows examples of the flow of information between these fields. It
is important for the student to mentally revisit this diagram throughout the semester,
every time the coverage of a new OM topic is completed, to refine the type of interation
that exists between OM and other fields specifically in the context of the topic studied.