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An Introduction to Operations


What is Operations management (OM)?

OM is the science and art of ensuring that goods and
services are created and delivered successfully to
OM is defined as the design, operation, and
improvement of the systems that create and deliver
the firms primary products and services
The principles of OM help one to view a business
enterprise as a total system, in which all activities are
coordinated not only vertically throughout the
organization, but also horizontally across multiple

Operations as a System
Production System



Historical Evolution of Operations Management

Industrial revolution
Scientific management
Mass production
Interchangeable parts
Division of labour

Human relations movement

Decision models
Influence of Japanese manufacturers
The Services and IT Revolution

Characteristic Parameters of an Operations System

Value / Supply Chain perspective

The underlying purpose of every organization is to

provide value to its customer and stakeholders.
Value is the perception of the benefits associated with a
good, service, or bundle of goods and services (i.e., the
customer benefit package) in relation to what buyers
are willing to pay for them.
The decision to purchase a good or service or a
customer benefit package is based on an assessment by
the customer of the perceived benefits in relation to its

Differences Between Goods and Services

1. Goods are tangible while services are intangible.

2. Customers participate in many service processes,
activities, and transactions.
3. The demand for services is more difficult to predict than
the demand for goods.
4. Services cannot be stored as physical inventory.
5. Service management skills are paramount to a
successful service encounter.
6. Service facilities typically need to be in close proximity
to the customer.
7. Patents do not protect services

Scope of Operations Management

Operations Management includes:

Capacity planning
Managing inventories
Assuring quality
Managing projects
Location and layout of facilities
Supply chain management
And more . . .


Productivity =
Partial measures

output/(single input)

Multi-factor measures

output/(multiple inputs)

Total measure

output/(total inputs)

Productivity, Profitability and Performance

Triple P Model

(Source:Tangen, 2005)

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.

Factors Affecting Todays

Global Business Conditions

Global competition
Quality, customer service, and cost challenges
Rapid expansion of advanced technologies
Continued growth of the service sector
Scarcity of operations resources
Social responsibility issues


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.

Developing Operations Strategy

of Global

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


Product Screening Tool

Break-Even Analysis


Break-even analysis considers two functions of Q

Total cost = sum of fixed and variable cost
Total cost = F + (VC)*Q
Revenue = amount of money brought in from sales
Revenue = (SP) * Q
Q = number of units sold

Break-Even Analysis: Graphical Approach

Compute quantity of goods that

must be sold to break-even
Compute total revenue at an
assumed selling price
Compute fixed cost and variable
cost for several quantities
Plot the total revenue line and
the total cost line
Intersection is break-even
Sensitivity analysis can be done
to examine changes in all of the
assumptions made


Product Screening Tool

Break-Even Analysis

QBE Break even quantity

F Fixed costs
SP Selling price/unit
VC Variable cost


Computes the quantity of goods company needs to

sell to cover its costs
QBE = F/ (SP - VC)

Break-Even Question:


A company is planning to establish a chain of movie

theaters. It estimates that each new theater will
cost approximately $1 Million. The theaters will
hold 500 people and will have 4 showings each day
with average ticket prices at $10.The variable costs
in labor and material are estimated to be $6 per
patron. They will be open 300 days each year.
What must average occupancy be to break-even?