Chapter 1

INTRODUCTION TO OPERATIONS
MANAGEMENT

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Operations Management = OM
 Management of ANY activities/process that create goods and
provide services
» Exemplary Activities: Forecasting, Scheduling, Quality management
 Why to study OM
» At a typical manufacturing company
Profit 5%
OM Cost 21%

Marketing
Cost 26%

Manufacturing
Cost 48%
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Operations Management = OM
The management of systems or processes that create goods and/or
provide services

Organizatio
n

Finance Operations Marketing

The distinct –active- role of operations:

Inputs become Outputs after some
Transformation 3
 Operations example in Manufacturing:
Food Processing
INPUTS PROCESS OUTPUTS

Raw vegetables Cleaning Clean vegetables

Metal sheets Cutting/Rolling/Welding Cans

Energy, Vegetables Cutting Cut vegetables

Energy, Water, Cooking Boiled

Vegetables vegetables
Energy, Cans, Boiled Placing Can food
vegetables
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 Operations example in service:
Health care
Inputs Processing Outputs

Doctors, nurses Examination Healthy

Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy

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Types of Operations

Operation Examples

Goods producing Farming, mining, construction

Storage/transportation Warehousing, trucking, mail, taxis,

buses, hotels, location
Exchange Trade, retailing, wholesaling, renting,
leasing, loans
Entertainment Radio, movies, TV, concerts, recording

Communication Newspapers, journals, magazines, radio,

TV, telephones, satellite
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Why OM?
 Core of all business organizations
 Many areas interrelated with OM activities
 Management of operations is critical to create and
maintain competitive advantages

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Organization of Businesses
 Three basic functions
– Operations/Production
» Goods oriented (manufacturing and assembly)
» Service oriented (health care, transportation and retailing)
» Value-added (the essence of the operations functions)
– Finance-Accounting
» Budgets (plan financial requirements)
» Economic analysis of investment proposals
» Provision of funds (the necessary funding of the operations)

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 Organization of Businesses (Cont.)
– Marketing
» Selling
» Promoting
» Assessing customer wants and needs
» Communicating those needs to operations
 The need for working closely
Operations

Marketing Finance

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Operations Interfaces

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Systems (Holistic) Approach
 Emphasizes interrelations among subsystems.
 A systems approach is essential whenever something is being
designed, redesigned, implemented, or improved. It is
important to take into account the impact on all parts of the
system.

 Example: A new feature is added to a product.

 Designer must take into account how customers will view the
change, instruction for using new feature, the cost, training of
workers, production schedule, quality standard, advertising
must be informed about the new feature.

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

Suboptimization

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Value Added
Value added: The difference between cost of inputs and
price (??) of outputs.

Is this definition right? Should value added include profit?

Value added: The difference between the cost of inputs

and the (market or fair) value or price of outputs.

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 Value-Added

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

Control
Feedback Feedback

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Degree of Standardization !
 Standardized output
– Take advantage of standardized methods, less skilled
workers, materials…
» Example: Iron, Wheat, most of commodities

 Customized output
– Each job is different
– Workers must be skilled
» Example: Hair cut

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Manufacturing (=Goods) vs. Service operations
 Production of goods (goods oriented)
– Tangible products
» Automobile
» Refrigerator
 Services (TV and auto repair, lawn care)
» Government
» Regulatory bodies, FAA, FDA
» Wholesale/retail
» Financial services
» Education

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Goods vs. Service Operations (Cont)
 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

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Manufacturing vs. Service !
Characteristic Manufacturing Service
Output Tangible Intangible
Customer contact Low High
Uniformity of output High Low
Labor content Low High
Uniformity of input High Low
Measurement of Easy Difficult
productivity
Opportunity to correct Easy Difficult
quality problems

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 Goods-service Continuum

Steel production Home remodeling Auto Repair Maid Service Teaching

Automobile fabrication Retail sales Appliance repair Manual car wash Lawn mowing

High percentage goods Low percentage goods

Low percentage service High percentage service

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Manufacturing vs. Service Industries in US
Year Mfg. Service U.S. Manufacturing vs. Service Employment
45 79 21
50 72 28 100
55 72 28
60 68 32 80
65 64 36
Percent
60
70 64 36
75 58 42 40
80 44 46
85 43 57 20
90 35 65 0
95 32 68
45 50 55 60 65 70 75 80 85 90 95 00
00 30 70
Year

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Responsibilities of Operations Management
 Planning
– Capacity, utilization
– Location
– Choosing products or services
– Make or buy
– Layout
– Projects
– Scheduling
– Market share
– Plan for risk reduction, plan B?
– Forecasting
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Operations Managers
 Controlling
– Inventory
– Quality
– Costs
 Organization
– Degree of standardization
– Subcontracting
– Process selection
 Staffing
– Hiring/lay off
– Use of overtime
– Incentive plans
– Job assignments

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 Scope of Operations Management
Operations Management includes:
– Forecasting
– Capacity planning
– Scheduling
– Managing inventories
– Assuring quality
– Motivating employees
– Deciding where to locate facilities
– And more . . .

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Help comes from Models
 A structure which has been built purposefully to exhibit
features and characteristics of some other object.

Do not use “thing” or “something” in a definition.

 For
– Improved understanding and communication
– Experimentation
– Standardization for analysis
 Abstraction vs. computability
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Modeling !
 Use models
– Physical models (prototypes)
– Schematic models (Graphs, charts, pictures)
– Mathematical models,
» Statistical models
» Inventory models
» Linear programming
» Queuing techniques
» Project management models

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What type of models
 Simulation models : to test a proposed idea
– Monte Carlo Simulation
 Optimization models : to create an optimal idea
– Linear programming
 Pattern recognition models : to recognize a pattern
– Statistics, Forecasting, data mining

Other classes to learn the rest.

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Decision Making

Models
Quantitative approaches
Analysis of trade-offs
Systems approach

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Models Are Beneficial

Easyto use, less expensive

Require users to organize
– Increase understanding of the problem
– Consistent tool
– Standardized format
– Specific objectives
Systematic approach to problem solving
– Analysis of tradeoffs
– Enable “what if” questions
Power of mathematics
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 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?

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Historical Evolution of Operations Management

Industrial revolution (1770’s)

Scientific management (1911)
– Mass production
– Interchangeable parts
– Division of labor
Human relations movement (1920-60)
– Unemployment insurance
– Pension plans
Decision models (1915, 1960-70’s)
Influence of Japanese manufacturers (1970-1990)

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Trends in Business
Major trends
– The Internet, e-commerce, e-business
– Management technology
– Globalization
– Management of supply chains
– Agility

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Recent Trends !
 Worker involvement
 Environmental issues, emission reductions are popular after
Central European floods
 Service economy in US, foreign production
 E-business – information technology
 Supply chain management
 Total Quality Management
 Globalization, emerging markets, NAFTA
 Lean Production – see the next page

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Production systems classified
 Craft Production : System in which highly skilled workers use
simple, flexible tools to produce small quantities of customized
goods.
– Carpenter
 Lean production : System that uses minimal amounts of
resources to produce a high volume of high-quality goods with
some variety.
– Dell
 Mass production: System in which lower-skilled workers use
specialized machinery to produce high volumes of standardized
goods.
– Ford

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Production systems classified
Agile=Lean manufacturing
 It provides flexibility to switch quickly and economically from
one product design to another with little disruption. This
characteristic, in turn enables faster response to changes in
customer demand.
 A sophisticated computerized inventory control system allows
the plant to keep track of large number of parts.
 Keys to being an agile manufacturer are :
– Reduction in inventories,
– Reduction in turnaround times,
– Availability of automated flexible machinery,
– Rapid collection and processing of information

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 Simple Product Supply Chain

Suppliers’ Direct Final

Producer Distributor
Suppliers Suppliers Consumer

Supply Chain: A sequence of activities and

organizations involved in producing and delivering
a good or service

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 A Supply Chain for Bread

Stage of Production Value Added Value of

Product
Farmer produces and harvests wheat $0.15 $0.15

Wheat transported to mill $0.08 $0.23

Mill produces flour $0.15 $0.38

Flour transported to baker $0.08 $0.46

Baker produces bread $0.54 $1.00

Bread transported to grocery store $0.08 $1.08

Grocery store displays and sells bread $0.21 $1.29

Total Value-Added $1.29

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Other Important Trends

Ethicalbehavior
Operations strategy
Working with fewer resources
Cost control and productivity
Quality and process improvement
Increased regulation and product liability
Lean production

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Summary
 Definitionof OM
 OM’s relationship with Marketing, Finance and
Accounting
 Goods vs. service industries
 OM issues, trends and models
 Manufacturing systems

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