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Chapter

Chapter 1
1
Introduction to Operations
Management

Introduction
Operations management is the management of an
organizations productive resources or its production
system.
A production system takes inputs and converts them
into outputs.
The conversion process is the predominant activity of
a production system.
The primary concern of an operations manager is the
activities of the conversion process.

Organizational Model
Finance
Sales

HRM

OM
QA

Marketing

Engineering

MIS

Accounting

Studying Operations
Management
Operations as a System
Decision Making in OM

Operations as a System
Production System
Inputs

Conversion
Subsystem
Control
Subsystem

Outputs

Inputs of an Operations System


External
Legal, Economic, Social, Technological
Market
Competition,
Info.

Customer

Desires,

Primary Resources
Materials, Personnel, Capital, Utilities

Product

Conversion Subsystem
Physical (Manufacturing)
Locational Services (Transportation)
Exchange Services (Retailing)
Storage Services (Warehousing)
Other Private Services (Insurance)
Government Services (Federal)

Outputs of an Operations System


Direct
Products
Services
Indirect
Waste
Pollution
Technological Advances

Goods & Services

Manufacturing
Tangible product

Services
Intangible product

Product can be inventoried

Product cannot be
inventoried

Low customer contact

High customer contact

Longer response time

Short response time

Capital intensive

Labor intensive

Examples of Production Systems


System

Inputs

Conversion

Output
(desired)

Hospital

Patients
MDs, Nurses
Medical Supplies
Equipment

Health Care

Healthy
Individuals

Restaurant

Hungry Customers
Food, Chef
Servers
Atmosphere

Prepare Food
Serve Food

Satisfied
Customers

Automobile
Plant

Sheet Steel
Engine Parts
Tools, Equipment
Workers

Fabrication
and Assembly
of Cars

High Quality
Automobiles

University

High School Grads


Teachers, Books
Classroom

Transferring
of Knowledge
and Skills

Educated
Individuals

Decision Making in OM

Strategic Decisions
Operating Decisions
Control Decisions

Strategic Decisions
These decisions are of strategic importance and
have long-term significance for the organization.
Examples include deciding:
the design for a new products production
process
where to locate a new factory
whether to launch a new-product development
plan

Operating Decisions
These decisions are necessary if the ongoing
production of goods and services is to satisfy
market demands and provide profits.
Examples include deciding:
how much finished-goods inventory to carry
the amount of overtime to use next week
the details for purchasing raw material next
month

Control Decisions
These decisions concern the day-to-day activities
of workers, quality of products and services,
production and overhead costs, and machine
maintenance.
Examples include deciding:
labor cost standards for a new product
frequency of preventive maintenance
new quality control acceptance criteria

What Controls the Operations System?


Information
about
the
outputs,
the
conversions, and the inputs is fed back to
management.
This
information
is
matched
with
managements expectations
When there is a difference, management must
take corrective action to maintain control of
the system

Operations Management Functions

Design of
Operations

Product Design & Development


Process Design
Quality Management
Location and Layout of facilities
Capacity Planning

Operational Control of
Operations

Forecasting
Production Planning and Control
Supply Chain Management
Maintenance Management
Continuous improvement of operations

Design issues in Operations Management lay down overall


constraints under which the operations system functions
Operational Control issues focuses on optimizing the use of
available resources in the short-term while delivering goods
and services as per plan under the given design constraints

Operations
OperationsStrategies
Strategies

Developing Operations Strategy


Assessment
of Global
Business
Conditions

Corporate Mission
Business Strategy
Product/Service Plans
Competitive Priorities
Operations Strategy

Distinctive
Competencies
or
Weaknesses

Corporate
Corporate Mission
Mission
A corporate mission is a set of long-range
goals and including statements about:
the kind of business the company wants to
be in
who its customers are
its basic beliefs about business
its goals of survival, growth, and profitability

Business Strategy
Business strategy is a long-range game plan of
an organization and provides a road map of
how to achieve the corporate mission.
Inputs to the business strategy are
Assessment of global business conditions social, economic, political, technological,
competitive
Distinctive competencies or weaknesses workers, sales force, R&D, technology,
management

Competitive Priorities
Low Production Costs
Definition
Unit cost (labor, material, and overhead) of each
product/service
Some Ways of Creating
Redesign of product/service
New technology
Increase in production rates
Reduction of scrap/waste
Reduction of inventory

Competitive Priorities
Delivery Performance
Definition
a) Fast delivery b) On-time delivery
Some Ways of Creating
afaster production rates) larger finished-goods
inventory
a) quicker shipping methods
b) more-realistic promises
c) better control of production of orders
d) better information systems

Competitive Priorities
High-Quality Products/Services
Definition
Customers perception of degree of excellence
exhibited by products/services
Some Ways of Creating
Improve product/services
Appearance
Performance and function
Wear, endurance ability
After-sales service

Competitive Priorities
Customer Service and Flexibility
Definition
Ability to quickly change production to other
products/services. Customer responsiveness.
Some Ways of Creating
Change in type of processes used
Use of advanced technologies
Reduction in WIP through lean manufacturing
Increase in capacity

Operations Strategy
Operations strategy is a long-range game plan
for
the
production
of
a
companys
products/services, and provides a road map
for the production function in helping to
achieve the business strategy.

Elements of Operations Strategy


Positioning the production system
Product/service plans
Outsourcing plans
Process and technology plans
Strategic allocation of resources
Facility plans: capacity, location, and layout

Positioning the Production


System
Select the type of product design
Standard
Custom
Select the type of production processing system
Product focused
Process focused
Select the type of finished-goods inventory policy
Produce-to-stock
Produce-to-order

Product/Service Plans
As a product is designed, all the detailed
characteristics of the product are established.
Each product characteristic directly
affects how the product can be made.
How the product is made determines
the design of the production system.

Stages in a Products Life Cycle


Introduction- Sales begin, production and marketing
are developing, profits are negative.
Growth - sales grow dramatically, marketing efforts
intensify, capacity is expanded, profits begin.
Maturity - production focuses on high-volume,
efficiency,
low
costs;
marketing
focuses
on
competitive sales promotion; profits are at peak.
Decline - declining sales and profit; product might be
dropped or replaced.

Stages of a Products Life Cycle


Automobile
Fax Machine
Cell Phone

Dot-Matrix
Printer

Video Recorder
Internet Radio

Introduction

Color Copier

Growth

CD Player

Maturity

B&W TV

Decline

Outsourcing Plans
Outsourcing refers to hiring out or subcontracting
some of the work that a company needs to do.
This strategy is being used more and more as
companies strive to operate more efficiently.
Companies try to determine the best level of outsourcing to achieve their operations & business goals.
Outsourcing
has
disadvantages.

many

advantages

and

More outsourcing requires a company to have less


equipment, fewer employees, and a smaller facility.

Outsourcing Plans
A company might outsource any of the following
manufacturing related functions:
Designing the product
Purchasing the basic raw materials
Processing the subcomponents, subassemblies,
major assemblies, and finished product
Distributing the product

Strategic Allocation of Resources


For most companies, the vast majority of the
firms
resources
are
used
in
production/operations.
Some or all of these resources are limited.
The resources must be allocated to products,
services, projects, or profit opportunities in
ways that maximize the achievement of the
operations objectives.

Facility Plans
How to provide the long-range capacity to produce
the firms products/services is a critical strategic
decision.
The location of a new facility may need to be
decided.
The internal arrangement (layout) of workers,
equipment, and functional areas within a facility
affects the ability to provide the desired volume,
quality, and cost of products/services.

Competitive Priorities for


Services
The
competitive
priorities
listed
earlier
manufacturers apply to service firms as well

for

Low production costs


Fast and on-time delivery
High-quality products/services
Customer service and flexibility
Providing all the priorities
customers is seldom possible.

simultaneously

to

Positioning Strategies for


Services

Type of Service Design


Standard or custom products

Amount of customer contact


Mix of physical goods and intangible services
Type of Production Process
Quasi manufacturing
Customer-as-participant
Customer-as-product

Positioning Strategies for


Services
Example: McDonalds
Highly standardized service design
Low amount of customer contact
Physical
goods
dominating
services
Quasi-manufacturing approach
room production process

intangible
to

back-

Forming
Forming Operations
Operations Strategies
Strategies
Support the product plans and competitive
priorities defined in the business strategy.
Adjust to the evolving positioning strategies.
Link to the marketing strategies.
Look at alternative operations strategies.

Evolution of Positioning
Strategies
The characteristics of production systems tend to
evolve as products move through their product life
cycles.
Operations strategies must include plan for modifying
production systems to a changing set of competitive
priorities as products mature.
The capital and production technology required to
support these changes must be provided.

Life
Stage

Evolution of Positioning
Strategies
Early
Late

Intro.

Growth
Slightly
Standard

Growth
Standard

Maturity

Highly
Standard
Very
High

Product

Custom

Volume

Very
Low

Low

High

Focus

Process

Process

Product

Product

Fin.Gds.

To-Order

To-Order

To-Stock

To-Stock

Batch
Size

Very
Small

Small

Large

Very
Large

Linking Operations and


Marketing Strategies
Operations Strategy
Product-focused
Make-to-stock
Standardized products
High volume
Marketing Strategy
Low production cost
Fast delivery of products
Quality
Example: TV sets

Linking Operations and


Marketing Strategies
Operations Strategy
Product-focused
Make-to-order
Standardized products
Low volume
Marketing Strategy
Low production cost
Keeping delivery promises
Quality
Example: School buses

Linking Operations and


Marketing Strategies
Operations Strategy
Process-focused
Make-to-stock
Custom products
High volume
Marketing Strategy
Flexibility
Quality
Fast delivery of products
Example: Medical instruments

Linking Operations and


Marketing Strategies
Operations Strategy
Custom products
Process-focused
Make-to-order
Low volume
Marketing Strategy
Keeping delivery promises
Quality
Flexibility
Example: Large supercomputers

No Single Best Strategy


Start-up and Small Manufacturers
Usually prefer positioning strategies with:
Custom products
Process-focused production
Produce-to-order policies
These systems are more flexible and require
less
capital.

No Single Best Strategy


Start-up and Small Services
Successfully compete with large corporations
by:
Carving out a specialty niche
Emphasizing close, personal customer
service
Developing a loyal customer base

No Single Best Strategy


Technology-Intensive Business
Production systems must be capable of
producing new products and services in high
volume soon after introduction
Such companies must have two key
strengths:
Highly capable technical people
Sufficient capital

Competitiveness
Competitiveness:
How effectively an organization meets the wants
and needs of customers relative to others that
offer similar goods or services
Organizations compete through some combination
of their marketing and operations functions
What do customers want?
How can these customer needs best be
satisfied?
2-48

Businesses Compete Using Operations


1. Product and service design
2. Cost
3. Location
4. Quality
5. Quick response
6. Flexibility
7. Inventory management
8. Supply chain management
9. Service
10. Managers and workers

Why Some Organizations Fail


1. Neglecting operations strategy
2. Failing to take advantage of strengths and
opportunities and/or failing to recognize competitive
threats
3. Too much emphasis on short-term financial
performance at the expense of R&D
4. Too much emphasis in product and service design
and not enough on process design and improvement
5. Neglecting investments in capital and human
resources
6. Failing to establish good internal communications and
cooperation

Time-Based Competition
Strategies
Time-based strategies
Strategies that focus on the reduction of
time needed to accomplish tasks
It is believed that by reducing time, costs
are lower, quality is higher, productivity is
higher, time-to-market is faster, and
customer service is improved

Time-Based Competition
Strategies
Areas where
reductions:

organizations

have

Planning time
Product/service design time
Processing time
Changeover time
Delivery time
Response time for complaints

achieved

time