Introduction; Chapter1

Department of Business Administration

SPRING 2016-2017

Chapter 1: Introduction to POM

MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1
Outline: What You Will Learn . . .
Define the term operations management
Identify the three major functional areas of organizations and
describe how they interrelate
Compare and contrast service and manufacturing operations
Describe the operations function and the nature of the
operations managers job
Differentiate between design and operation of production
systems
Describe the key aspects of operations management decision
making
Briefly describe the historical evolution of operations
management
Identify current trends that impact operations management
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 Introduction; Chapter1
Definition of Operations Management
Production/Operations Management is:
The management of that part of an organization that is
responsible for producing goods and/or services.
The management of systems or processes that create
goods and/or provide services.
i.e. Every book you read, every e-mail you send or every medical treatment you
receive involves the operation function of one or more organizations.
The aim of production and operations is to satisfy
peoples wants or needs.
Operations Management affects:
The collective success or failure of companies POM
Companies ability to compete
Nations ability to compete internationally 3
MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

Business Organization

The Three Basic Functions

Fig 1.1
Organization

Finance Operations Marketing

All business organizations have these three basic functions so it doesnt matter
the business a hospital, a manifacturing firm, a car wash etc.....
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 Introduction; Chapter1

Basic Concepts
Finance- is responsible for securing financial
resources at favourable prices as well as analysing
investment proposal and providing funds for
marketing and operations.
Marketing is responsible for assessing consumer
needs or wants and selling and promoting the
organizations goods and services.
Operations is responsible for producing the goods or
providing the services offered by the organization.

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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

Value-Added Process
The operations function involves the conversion
of inputs into outputs

Value added
Inputs
Transformation/ Outputs
Land
Conversion Goods
Labor
process Services
Capital
Feedback

Control
Figure 1.2
Feedback Feedback

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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

Basic Concepts
Input- Materials, labour, Data or unprocessed
information, technology, equipment, legal constraints,
government regulations etc....
What type of skill do the employees need?
What type of materials does the firm need?
Value-Added Activities- Performed with tools
machines, techniques, human skills etc....i.e.
Processing.
How will the firm use its resources to produce its products/
how can the firm improve its operations?
Output- Good and services.
what are their needs/what sort of products will be produced?
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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

Value-added
Value-added is the difference between the cost of inputs and
the value or price of outputs.
In non-profit organization, value-added of output is their
value to society.
The greater the value-added, the greater the effectiveness of
these operations (i.e. High way construction, state school
construction etc...).
In profit organization, value-added of output is measured by
prices that customers are willing to pay for those goods and
services.
Firms use the money generated by value-added for research
and development, worker salaries and profit.
The greater the value-added, The greater the amount of funds
available for these purposes.
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 Introduction; Chapter1

Is Goods-service combination a Continuum?

Goods Service

Surgery, teaching

Song writing, software development

Computer repair, restaurant meal

Automobile Repair, fast food

Home remodeling, retail sales

Figure 1.3
Automobile assembly, steel making

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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

Why Product Packages?

Because there are relatively few pure goods and pure

services and therefore companies sell Product
packages for their own benefit or interest.
Product packages are a combination of goods and
services.
Product packages can make a company more
competitive.

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 Introduction; Chapter1

Example of the transformation for Food Processor

Inputs Processing Outputs

Raw Vegetables Cleaning Canned
Metal Sheets Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment Table 1.2

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 Introduction; Chapter1

Example of the transformation for Hospital Process

Inputs Processing Outputs

Doctors, nurses Examination Healthy

Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy
Table 1.3

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 Introduction; Chapter1

Manufacturing or Service?

Tangible Act

Manufacturing and Service are often different in terms of

what is done but quite similar in terms of how it is done.
For example, manufacturers decide what size factory needed
and service organizations must decide what size building is
needed.
Manufacturing and Service differ cause manufacturing is
goods-oriented and service is act-oriented.
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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

Production of Goods vs. Delivery of Services

Production of goods tangible output
Delivery of services an act
Service job categories
Government (state, local, etc..)
Wholesale/retail (clothing, food, stationery,etc..)
Financial services (banking, insurance, etc..)
Healthcare (doctors, dentists, hospitals, etc..)
Personal services (laundry, dry cleaning, etc..)
Business services ( data processing, e-business, etc..)
Education (schools, colleges, etc..)
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 Introduction; Chapter1
Key Differences

1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of productivity
6. Production and delivery
7. Quality assurance
8. Amount of inventory
9. Evaluation of work
10. Ability to patent design
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 Introduction; Chapter1

Goods vs. Service

Characteristic Goods Service
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Output Tangible Intangible
Measurement of productivity Easy Difficult
Opportunity to correct problems High Low
Inventory Much Little
Evaluation Easier Difficult
Patentable Usually Not usual
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 Introduction; Chapter1

Goods vs. Service

U.S. Manufacturing vs. Service Employment

Year Mfg. Service
45
90 79 21 Mfg.
50
80 72 28
Service
55
70 72 28
60
60 68 32
Percent

65
50 64 36
70
40 64 36
75
30 58 42
80
20 44 46
85
10 43 57
90
0 35 65
95 25 55 60 7565
45 50 70 75 80 85 90 95 00 02 05
00 30 70
Year
02 25 75
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Figure 1.4
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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

Why Manufacturing Matters?

Over 18 million workers in manufacturing jobs

Accounts for over 70% of value of U.S. exports
Average full-time compensation about 20% higher
than average of all workers
Manufacturing workers more likely to have
benefits
Productivity growth in manufacturing in the last 5
years is more than double U.S. economy

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 Introduction; Chapter1

Why Manufacturing Matters?

More than half of the total R&D performed is in

the manufacturing industries
Manufacturing workers in California earn an
average of about $25,000 more a year than service
workers
When a California manufacturing job is lost, an
average of 2.5 service jobs are lost

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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

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
personal factors
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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

Key Decisions of Operations Managers

What
What resources/what amounts
When
Needed/scheduled/ordered
Where
Work to be done
How
Designed
Who
To do the work
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 Introduction; Chapter1

Types of Operations

Operations Examples
Goods Producing Farming, mining, construction,
manufacturing, power generation
Storage/Transportation Warehousing, trucking, mail
service, moving, taxis, buses,
hotels, airlines
Exchange Retailing, wholesaling, banking,
renting, leasing, library, loans
Entertainment Films, radio and television,
concerts, recording
Communication Newspapers, radio and television
newscasts, telephone, satellites
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 Introduction; Chapter1

Historical Evolution of Operations Management

System for P & O have existed since ancient times.

The great wall of China
Egyptian pyramids
i.e. More than 100000 workers for 20 years.
The ships of Roman empire
The roads and aqueducts of the Roman
These are all examples of the human ability to
organize for operation and production
These also show the roots of the Industrial
Revolution
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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

Historical Evolution of Operations Management

Industrial revolution (1770s)
Scientific management (1911)
Mass production
Interchangeable parts
Division of labor
Human relations movement (1920-60)
A psychologist focusing on human factor in work-tiredness and motivation.
Decision models (Harris 1915-inventory model, 1960-70s)
The factory movement was accompanied by the development of several
quantitative techniques. After ww II-the importance of military and
manifucturing sectors, the models of forecasting, inventory man., project
man were developed.
Influence of Japanese manufacturers
JIT production, quality revolution, continual improvement etc. 24
MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

The evolution of POM

Production of goods remained at a handicraft level untill the
Industrial revolution took place. In 1764, the Industrial
revolution began and James Watt invented the steam engine and
advanced the use of mecanical power to increase productivity.
Eli Whitney (1798) found out and introduced the concepts of
standardised parts and interchangeable parts. He then
developed musket system because the type of muskets were
handcrafted-he produced 10000 muskets by using the concept
of interchangeable parts.
By using the same concept, he allowed the manifacture of fire-
alarms, clocks, watchs, sewing machines etc..
Soon after, by conducting the concept of steam engine, Richard
Trevithick (1802) invented the first train and Richard Fulton
(1807) invented the first steam boat.
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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

The evolution of POM

The first steam boat and the first train indicate a long stream of
application in which human anad animal powers were replaced
by engine power.
The Industrial revolution was the transformation of a society
from peasant and local occupation into a society with world
wide connections in terms of great use of machinery and large-
scale commercial operations. This is the first step of factory
system.
This system replaced the traditional production system by the
concept of mass-production by bringing together large numbers
of semi-skilled workers.
Adam Smiths The wealth of nations (1776) pointed out the
importances and advantages of the division of labor where the
production process was broken down into series of small tasks
and each performed by a different worker. 26
MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

The evolution of POM

With aid of the concept of the division of labor:
Workers who continually perfomed the same task, they would
gain skill and experience.
Saving time or avoiding lost time due to changing jobs.
Workers concentration on the same job increased would lead to
the development of special tools and techniques for faster and
easier task.
Specialization jobs and division of labor began to take place. A
prominent mathematician and engineer Charles babbage (1832)
promoted an economic analysis of work and pay on the basis of
skill requirement.
In the earliest days of manufacturing, goods were produced using
craft production-highly skilled workers conducting simple,
flexible tools to produce small quantities customized goods .
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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

The evolution of POM

Frederick Taylor (1911) published the priciples of scientific
management. This helped to achieve wide tasks in industry.
Frank Gilber (principles of motion economy), Henry Gantt
(schudeling and charts design for system) and Herrington
Emerson (organizational efficiency) used Taylors ideas to
improve the system of operation and production management.
Influence of Japanese manufacturers
JIT production, quality revolution, continual improvement etc.
Using the concept of JIT production, Japanese manufacturers
changed the rules of production from Mass Production to Lean
Production.
Lean production prizes flexibility rather then efficiency, as well
as quality rather than quantity. This indicates the first step of Era
of Industrial globalization.
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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

The evolution of POM

Figure 1.5

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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

School of Management
The process school of management
was developed by Henry Fayol in 1900
management can be viewed as a continuous process
the function of planning, organizing and controlling
The behavioural school of management
was developed by Elton Mayo in 1920
human relation movement on production output
Productivity depends not only on the physical
environment but also on social norms and personal
feelings (i.e. Western Electrics Hawthorne plant)

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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

School of Management
The quantitative school of management
is concerned with decision making, mathematical
modeling as well as system theory
represents a productive system
In 1915, Harris developed an Economic Order
Quantity model for inventory management
In 1931, Shewhart developed a Quantity decision
model for use in Statistical quality control work
In 1947, George Dantzing developed PERT/CPM
In the late 1950s and early 1960s Edward Bowman,
Robert Fetter and Elwood Buffa developed the
concept called Modern poduction Management
As computers became available in the 1950s, the
power of opeartions research was multiplied
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 Introduction; Chapter1
School of Management
The School of Modern Management
In the late 1960s, MRP and CPR were introduced by Joseph
Orlicky and Oliver White
In the late 1970s, MRP II, JIT, TMQ and KANBAN
systems were developed
the School of Modern Management includes the system and
the contingency approaches.
these are also called new contemporary management
approaches
the system approach points out that an organization has
interdependent factors as such individuals, status, motives,
goals etc and must work together
the contingency approach reveals that organizations are
different so different and changing cases need to conduct
different approaches and techniques in reaching a solution
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 Introduction; Chapter1

Trends in Industrial globalization

Major trends
The Internet, e-commerce, e-business
Management technology
Globalization
Management of supply chains
Outsourcing
Agility
Ethical behavior

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 Introduction; Chapter1

Summary for Historical Evolution of Operations

Management

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 Introduction; Chapter1

Some Famous Scientists

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MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
 Introduction; Chapter1

Some Famous Scientists

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 Introduction; Chapter1

Some Famous Scientists

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 Introduction; Chapter1

Thanks

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