Lecture 5:

Introduction to Operations Management

 Outline
I. What is Operations Management?
II. The transformation system
III. Importance of Operations Management
IV. Operational objectives
V. Management by objectives
VI. Responsibilities of operations management
 I. What is Operations
Management?
1. Definitions:
• Operations Management is the business function
responsible for planning, coordinating, and controlling
the resources needed to produce products and/or
services of an organization, in order to create value.
(Reid & Sanders, 2010)
• Therefore, Operations Management is:
– A management function
– An organization’s core function
– In every organization whether in the sector of
• Service or Manufacturing
• Profit or Not for profit
•President or CEO 2. OM and other business
•Marketing
•V.P of Marketing
•Manage: customers functions:
• demands
•Generate: Sales of
• goods and
• services
•
•Operations
•V.P. of Operations
•Manage: people,
• equipment,
• technology,
• materials,
• information
•Produce: goods,
• and/or
• services
•Finance
•V.P. of Finance
•Manage: cash flow,
• current
• assets &
• capital
• investments
 2. OM and other business
functions (cont):
• Most businesses are supported
• The major functional areas must interact to achieve the organizational
goals
✔ Marketing is not fully able to meet customer needs if they do not
understand what operations can produce
✔ Finance cannot judge the need for capital investment if they do not
understand operations concepts and needs.
✔ Human resources must understand job requirements and workers’ skills to
match them
✔ Accounting needs to consider inventory management, capacity information,
and labor standards
3. OM and Vision, Mission?
II. OM’s transformation system:
1. The transformation role of OM
• To add value
– Increase product value at each stage
– Value added is the net increase between output product value
and input material value

• Provide an efficient transformation

– Efficiency – means performing activities well for lease possible
costs
• Operations as a transformation process:

Source: Meredith & Shafer, 2002

• An example of a transformation process of WINE

Source: FDC, 2012

• A transformation process of WINE (cont)
• Activity: Group discussion
• 2. Products vs. Services
1. Definitions:
– Products: physical items that include raw
materials, parts, subassemblies, and final
products.

– Services on the other hand are normally defined

as the activities that provide some combination
of time, location, form or physical value.
2. The Products – Services Continuum

Source: Liu, 2010

3. Similarities of Goods & Services organizations
• Both use technology
• Both have quality, productivity and response issues
• Both must forecast demand
• Both can have capacity, layout and location issues
• Both have customers, suppliers, scheduling and staffing
issues
4. Differences between Goods and Services
 III. The importance of
operation management
An effective operation can give four types of advantages to the
business:
• Operations management can reduce the cost of products and services by
being efficient
• Operations management can increase revenue through increased
customer satisfaction in producing quality goods and services
• Operations management can reduce the amount of investment (capital
employed) necessary to produce the goods and service by being effective
and innovative in the use of resources
• Operations management provides the basis for innovation by building a
solid base of operations and knowledge
 IV. The objectives of
operations
The objectives that are applicable to all operations are the:
• Quality objective
• Speed (time) objective
• Dependability objective
• Flexibility objective
• Cost objective
• 1. Quality objective
• What is quality?
– Conformance to specifications
– Fitness for use
• Value for price
• Support services
• Perception of buyer/user
• 2. Speed/time objective
Speed inside operations can also lead to
the following benefits:
• Speed reduces inventory
• Speed increases liquidity
• Speed reduces risk (uncertainty about future)
• Speed can create a competitive advantage
• Speed provides slack time
• 3. Dependability objective
Inside operations, dependability provides
various benefits, such as:
• Saving time;
• Saving money;
• Ensuring stability in operations;
• Easing scheduling of the input-transformation-
output process;
• Influencing perceptions, which in turn influences
the quality objective.
• 4. Flexibility objective
Inside operations, dependability
provides various benefits, such as:
• Saving time;
• Saving costs;
• Maintaining dependability;
• Speeding-up response to customer or
market needs.
• 5. Cost objective
• The above four operations objectives are very
important – but all of them influence the cost objective.
• The input into the transformation process needs to be
the correct quality (A-grade anthracite), at the right
time (Just in time – JIT), and the demand can vary
due to seasonal changes – but at the right price (cost).
• The lower the input cost (fixed cost and variable costs)
the higher the potential profits.
 V. Management by
objectives
1. The concept of MBO
• MBO is a process of defining objectives within an
organization so that management and employees
agree to the objectives and understand what they
need to do in the organization in order to achieve
them.
• This concept was originated by Peter Drucker in
the 1950s in his 1954 book, The Practice of
Management
The process of MBO
2. SMART Goal Setting
• While managing by objectives is not a foolproof
management strategy, there are ways to make the process
of setting your MBO objectives a little smoother.
• The SMART is one way to help break down the
characteristics of an effective set of objectives.
 •Is the objective precise
and well-defined?
Specific •Is it clear and can
everyone understand
it?
•How will the individual know
Measur when the task has been
able completed?
•What evidence is needed to
confirm?
Achieva •Is it within their capabilities?
•Are there sufficient resources
ble available to enable this to
happen?

Realisti •Is it possible for the individual to perform the task?

•How sensible is the objective in the current business context?
c •Does it fit to the overall pattern of the individual’s work?

•Is there a deadline and is it feasible to meet this deadline?

Time- •Is it appropriate to do this work right now?
related •Are there review dates?
3. Advantages and disadvantages of MBO
a. Advantages:
• Means of planning and controlling
• Superior and subordinate both set the goals together
• The means to achieve goal is discussed
• MBO aids in structural changes wherever it seems
necessary and transforms the structure for good.
a. Disadvantages:
MBO may fail because of the factors such as
• Unrealistic expectations regarding results
• Lack of objective clarity (quantity vs. quality enhancement?
For organization or for individual?)
• Lack of commitment by top management
• An inability or unwillingness by management to allocate
rewards based on goal accomplishment
 VI. Responsibilities of OM

The responsibilities of OM in the effective and efficient

production of goods and services can be divided into:
• Direct responsibility - for the activities which produces and
delivers products and services.
• Indirect responsibility – for the activities of the other
functions of the organization.
• Broad responsibility – to respond to the emerging
challenges of OM in the future
• 1. Direct responsibilities
• Understanding the strategic objectives of the
organization
• Developing an operations strategy for the organization
• Designing the products, services and processes for the
organization
– Design physical product, process and work place
• Management tasks for operations
– Planning, controlling, sequencing (will study in lecture 7)
• Improving the performance of operations
– Benchmarking, Total quality management (will study in lecture 8)
• 2. Indirect responsibilities
• 3. Broader responsibilities
• Increasingly recognize that organizations and their
activities have a set of broader responsibilities.
• Some are long-term focused, while others focus on other
stakeholders of the organization.
• Organization interpret these responsibilities in different
ways – but the following are of particular relevance to
operations management:
– Globalization
– Environmental protection
– Social responsibility
– Technology awareness
– Knowledge management
 Highlights of lecture 6
• OM is the business function that is responsible for
managing and coordinating the resources needed to
produce a company’s products and services.
• The role of OM is to transform organizational inputs into
company’s products or services outputs.
• OM is responsible for a wide range of decisions, ranging
from strategic to tactical.
• Organizations can be divided into manufacturing and
service organizations, which differs in the tangibility of the
product or service.