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Introduction to Operations Management

What is Operations?
Operations is the production activities that go on in the organization, regardless of whether the end product is a good or a service

What Is Operations Management (OM)?


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

Operations management is the management of systems or processes that creates value in the form of goods and services by transforming inputs into desired outputs

The Operations Function


Operations as a transformation process Operations as a basic function Operations as the technical core

Operations as a Transformation Process


Value added
Inputs:
Materials Machines Labor Management Capital

Transformation/ Conversion Process


Feedback

Outputs:
Goods

Services

Control
Feedback Feedback

What is Value Added?


Value added is the difference between the cost of intputs and the value or price of outputs. The essence of operations function is to add value during the transformation process

Firms use the money generated by value added for:


R&D Investment in new facilities and equipment Paying workers Paying for materials Paying for general expenses Profits

Transformation Process of a Canned Food Processor


Inputs Raw vegetables Metal sheets Water Energy Labor Building Equipment Processing Cleaning Making cans Cutting Cooking Packing Labeling Outputs Canned vegetables

Transformation Process of a Hospital


Outputs Doctors, nurses Examination Healthy patients Hospital Surgery Medical Supplies Monitoring Equipment Medication Therapy Laboratories Inputs Processing

Examples of Various Operations


Operations
Goods Producing Storage/ Transportation Exchange Entertainment

Examples
Farming, mining, construction , manufacturing, power generation Warehousing, trucking, mail service, moving, taxis, buses, hotels, airlines Retailing, wholesaling, banking, renting, leasing, library, loans Films, radio and television, concerts, recording Newspapers, radio and television newscasts, telephone, satellites

Communication

Types of Transformation Processes


Physical- manufacturing Locational- transportation Exchange- retailing Storage- warehousing Physiological- health care Informational- telecommunications Psychological- entertainment

Operations as a Basic Function


Marketing
Generates demand gets customers

Operations
creates product or service

Finance/Accounting
Obtains funds Tracks organizational performance

Business Functions Overlap


Operations

Marketing

Finance

Business Functions - Bank (1 of 3)


Commercial Bank
1984-1994 T/Maker Co.

Marketing

Operations

Finance/ Accounting

Teller Scheduling

Check Clearing

Transactions Processing

Security

Business Functions Airline (2 of 3)


Airline
Finance/ Accounting

Marketing

Operations

Flight Operations

Ground Support

Facility Maintenance

Catering

Business Functions Manufacturer (3 of 3)


Manufacturing
Finance/ Accounting

Marketing

Operations

Manufacturing

Production Control

Quality Control

Purchasing

Operations as the Technical Core


Finance/Accounting
Production and Inventory data Capital budgeting requests Capacity expansion and Technology plans Orders for materials Production and delivery Schedules Quality Requirements Design/ Performance specs Budgets Cost analysis Capital investments Stockholder requirements

Suppliers

Product/Service Availability Lead-time estimates Status of order Delivery schedules

Marketing

Operations
Material availability Quality data Delivery schedules Designs Personnel needs Skill sets Performance evaluations Job design/work measurement Sales forecasts Customer orders Customer feedback Promotions Hiring/firing Training Legal requirements Union contract negotiations

Human Resources

Importance of OM (Why Study OM?) (1 of 2)


Operations is one of the three major functions (marketing, finance and operations) of an organization OM affects 1) the companies ability to compete and 2) the nations ability to compete internationally Nearly half of the employed people over the world have jobs in operations OM is a costly part of an organization

Importance of OM (Why Study OM?) (2 of 2)


Offers a major opportunity for an organization to improve its productivity and profitability The OM function is responsible for a major portion of the assets of most organizations The concepts, tools and techniques of OM are widely used in managing other functions. Presents career opportunities

Options for Increasing Contribution


Marketing Option Current Sales Cost of Goods Sold Gross Margin Finance Costs Net Margin Taxes @ 25% Contribution $100,000 -80,000 20,000 -6,000 14,000 -3,500 10,500 Sales Revenue : +50% $150,000 -120,000 30,000 -6,000 24,000 -6,000 18,000 Finance & OM Option Accounting Option Finance Production Costs: -50% Costs: -20% $100,000 -80,000 20,000 -3,000 17,000 -4,250 12,750 $100,000 -64,000 36,000 -6,000 30,000 -7,500 22,500

Production of Goods vs. Delivery of Services

Manufacturing or Service

Tangible

Act

Goods vs. Services (1 of 2)


Characteristics Customer contact Goods Low Service High Low High Uniformity of inputs and outputs High Labor content Low Automation Output Measurement of productivity

Easy Generally difficult Tangible Intangible, often unique Easy Difficult Low Little Difficult Not so obvious

Opportunity to correct problems High Inventory Much Quality evaluation Production activities Easier Obvious

Goods vs. Services (2 of 2)


Characteristics
Production and consumption

Goods
Separate

Service
Generally take place at the same time Generally dispersed Revenue-oriented Not possible Not usually Slower and awkward

Location Locational factors to be considered Reselling Patentability Activities Inventoriability andTransportability

Centralized Cost-oriented Possible Usually Smooth and efficient

Inventoriable & Non inventoriable Transportable and so nontransportable

Service Job Categories (1 of 2)


Governmental services Municipal services Trade services (wholesale/retail) Finance, insurance, real estate Medical (healthcare) Personal services

Service Job Categories (2 of 2)


Business services Education Food, lodging and entertainment Utilities and transportation Legal, consulting Repair

Goods Contain Services / Services Contain Goods


Automobile assembly, steel making Home remodeling, retail sales

Computer

Fast-food Meal Restaurant Meal Auto Repair Hospital Care Advertising Agency Investment Management Consulting Service 0

Surgery, Teaching,Counseling
Percent of Product that is a Service

100

Percent of Product that is a Good

75

50

25

25

50

75

100

Goods-services Continuum
Steel production Automobile fabrication House building Road constructio Auto Repair Appliance repair Dressmaking Farming Maid Service Manual car wash Teaching Lawn mowing

High goods content Low service content

Low goods content High service content

U.S. Manufacturing vs. Service Employment


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
1-29

02

Percent

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
1-30

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 1-31 personal factors

Services in Manufacturing
In manufacturing, services can be divided into two groups: Core Services Value-added Services

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

Core Services Performance Objectives


Quality

Flexibility

Operations Management

Speed

Price (or cost Reduction)

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

Value-Added Service Categories


Problem Solving

Information

Operations Managemen t

Sales Support

Field Support

The Scope of OM: What Operations Managers Do?


Plan - Organize - Staff - Lead - Control

Critical OM Decisions

Critical OM Decisions
Service, product design Process, capacity design Planning of the technology Location Layout design Human resources, job design Production planning and scheduling Supply chain management Inventory management Maintenance Quality management

Operations Management and Decision Making


Models Quantitative approaches Analysis of tradeoffs Systems approach Establishing priorities

Models
A model is an abstraction of reality. Types of models:
Physical Schematic

Mathematical

Why Models are Beneficial?


Easy to use, less expensive Require users to organize information Systematic approach to problem solving Increase understanding of the problem Enable what if questions Specific objectives Consistent tool Power of mathematics Standardized format

Limitations of Models:
Quantitative information may be emphasized at the expense of qualitative information May be incorrectly applied and results may be misinterpreted

Quantitative Approaches (Analytical Tools used in OM)


Linear programming Queuing techniques Inventory models Project models Statistical models Simulation Decision analysis

Tradeoffs
Decision on the amount of inventory to stock
Increased cost of holding inventory vs. Level of customer service

Systems Approach
The whole is greater than the sum of the parts.

Suboptimization

Establishing Priorities: 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?

The Historical Evolution of Operations Management

Significant Events in Operations Management

Historical Events in OM
The Industrial Revolution (1770s) Scientific Management (1911) Human Relations Movement (1920-1960) Decision Models Management Science (1915, 1940-70s) Quality Revolution (1970s-1990s ) Globalization (1970s- ) Information Age/Internet Revolution (1990s-)

Historical Events in OM (1 of 4):


Industrial Revolution and Scientific Management

Industrial Revolution
Steam engine Division of labor Interchangeable parts 1769 1776 1790 James Watt Adam Smith Eli Whitney

Scientific Management
Principles Time and motion studies Activity scheduling chart Moving assembly line 1911 1911 1912 1913 Frederick W. Taylor Frank & Lillian Gilbreth Henry Gant Henry Ford

Historical Events in OM (2 of 4) :
Human Relations and Management Science

Human Relations
Hawthorne studies Motivation theories 1930 1940s 1950s 1960s Elton Mayo Abraham Maslow Frederick Hertzberg Douglas McGregor

Management Science
Linear programming Digital computer Simulation, PERT/CPM, Waiting line theory MRP 1947 1951 1950s 1960s George Dantzig Remington Rand Operations research groups Joseph Orlicky, IBM

Historical Events in OM (3 of 4):


Quality Revolution and Globalization Quality Revolution
JIT 1970s TQM Strategy and operations Reengineering World Trade Organization Taiichi Ohno, Toyota 1980s W. Edwards Deming, Joseph Juran, et. al. Skinner, Hayes 1990s Hammer, Champy 1990s Numerous countries and companies

Globalization
European Union and other trade agreements EDI, EFT, CIM 1970s 1980s IBM and others

Historical Events in OM (4 of 4) :
Information Age/Internet Revolution Information Age/ Internet Revolution
Internet, WWW, ERP Supply chain management, E-commerce 1990s ARPANET, Tim Berners-Lee, SAP, i2 Technologies, ORACLE, PeopleSoft, Amazon, Yahoo, eBay, and others

Exciting New Challenges in Operations Management

New Concepts and Trends in OM


Mass Customization Supply Chain Management Outsourcing Lean manufacturing Agility Electronic Commerce

New Concepts and Trends(1 of 6): Mass Customization


The rapid, low cost production of goods and services that fulfill constantly changing and increasingly unique customer desires.

New Concepts and Trends (2 of 6): Supply Chain Management


The management of the sequence of organizationstheir facilities, functions and activities- that are involved in producing and delivering a product or service SCM requires the application of a systems approach to managing the flow of information, materials and services from raw material suppliers through factories and warehoses to the end user (customer)

Simple Product Supply Chain

Suppliers Suppliers

Direct Suppliers

Producer

Distributor

Final Consumer

A Supply Chain for Bread


Stage of Production
Farmer produces and harvests wheat Wheat transported to mill Mill produces flour Flour transported to baker Baker produces bread Bread transported to grocery store Grocery store displays and sells bread

Value Added
$0.15 $0.08 $0.15 $0.08 $0.54 $0.08 $0.21

Value of Product
$0.15 $0.23 $0.38 $0.46 $1.00 $1.08 $1.29

Total Value-Added

$1.29

New Concepts and Trends (3 of 6) : Outsourcing


Buying goods or services rather than producing goods or performing services within the organization

New Concepts and Trends (4 of 6): Lean Manufacturing


Systems that use minimal amounts of resources less space, less inventory, fewer workers, fewer levels of management- to produce a high volume of high-quality goods with some variety

An adaptation of mass production that prizes quality and flexibility


Incorporates advantages of mass production (high volume, low unit cost) and craft production (variety and flexibility)

New Concepts and Trends (5 of 6): Agility


The ability of an organization to respond quickly to demands or opportunities. Involves maintaining a flexible system that can quickly respond to changes in either the volume of demand or changes in product/service offerings

New Concepts and Trends (6 of 6): Electronic Commerce


The use of computer networks, primarily the internet, to buy and sell products, services, and information.

Other Trends (1 of 2)
Enhancing Value-Added Services Management of Technology Emphasis on Operations Strategy Increasing Emphasis on Cost Control and Productivity Improvement Quality and Process Improvements Increasing emphasis on business and social responsibility

Other Trends (2 of 2)
Developing flexible supply chains to enable mass customization of products and services
Achieving the Service Factory

Globalization

Globalization can take the form of:


Selling in foreign markets Producing in foreign lands Purchasing from foreign suppliers Partnering with foreign firms

Reasons to Globalize Operations (1 of 2)


To take advantage of favorable costs To gain access to and attract international markets To build reliable sources of supply To improve the supply chain To be more responsive to changes in demand

Reasons to Globalize Operations (2 of 2)


To provide better goods and services To learn to improve operations To attract and retain global talent To keep abreast of the latest trends and technologies

Examples of Global Strategies


Boeing both sales and production are worldwide. Benetton moves inventory to stores around the world faster than its competitor by building flexibility into design, production, and distribution Sony purchases components from suppliers in Thailand, Malaysia, and around the world GM is building four similar plants in Argentina, Poland, China, and Thailand

Some Multinational Corporations (1 of 3)


Company Country of Origin Foreign Sales as % of Total

Nestl Nokia Philips Bayer ABB SAP Exxon Mobil Royal Dutch/Shell IBM McDonalds

Switzerland Finland Netherlands Germany Germany Germany United States Netherlands United States United States

98.2 97.6 94.0 89.8 87.2 80.0 79.6 73.3 62.7 61.5

Some Multinational Corporations (2 of 3)


Company Home Country
USA USA USA USA Japan USA

% Sales Outside Home


Country 34 72 60 62 63 57

% Assets Outside Home


Country 46 63 50 53 36 47

% Foreign Workforce
NA NA NA NA NA 51

Citicorp ColgatePalmolive Dow Chemical Gillette Honda IBM

Some Multinational Corporations (3 of 3)


Company Home Country % Sales Outside Home Country
78
98 94 51
95

% Assets Outside Home Country


50
95 85 NA
70

% Foreign Workforce

ICI
Nestl Philips Electronics Siemens Unilever

Britain
Switzerland Netherlands Germany
Britain & Netherlands

NA
97 82 38
64

Boeing Suppliers (777)


Firm
Alenia
AeroSpace Technologies CASA Fuji GEC Avionics Korean Air Menasco Aerospace Short Brothers Singapore Aerospace

Country
Italy
Australia

Parts
Wing flaps
Rudder

Spain Japan
United Kingdom Korea Canada Ireland Singapore

Ailerons Landing gear doors, wing section Flight computers Flap supports Landing gears
Landing gear doors Landing gear doors