Why Study Operations Management?

Systematic Approach
to Org. Processes

Business Education/
Operations
Increase Competitive
Career Opportunities Management Advantage/Survival

Cross-Functional
Applications
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 Current Trends
 96 of the top 100 industries in the U.S. have large $
worth of exports. Exporting industries are
characterized by early ongoing investments in
advanced product and process technologies.
 Productivity is increasing and has become a basis
for competition. Success domestically and globally
is dependent on the ability to compete on many
fronts, including operations (e.g., internet - easy to
find potential customers, but hard to deliver)
 Outsourcing of manufacturing and services (e.g.,
India and China) is accelerating.

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 Factors Affecting a Firm's Ability to Ward off Imports and/or Export

Economic/Political Environmental/social External

exchange rates environmental protection transportation costs
trade barriers health costs logistics resources
capital costs labor unions labor supply, capabilities
inflation education system training resources
capital availability consumer tastes communications
social costs/legal retailing capabilities public infrastructure
funds flows employee
savings rate
interest rates
minimum wage

Corporate Technological Operations Suppliers

strategy R&D costs/productivity abilities
risk avoidance engineering quality coordination
role of functions product development delivery cycle location
Fin-Mktg-Mfg-Eng-R&D process development delivery reliability competition
balance sheet new products flexibility for prod change cooperation
financial capacity development process flexibility for vol. change
marketing policies New product introduction
export sales competencies inventory mgt.
Technological sophistication of mgt Prod. Planning Control
Equip. & process tech
#, size, location of facilities
logistics
customer service
information technology
**Wickham Skinner: The Role of the Industrial Managers in the Massive U.S. Negative Trade Balance, April 2000 WS6
 Operations Decision Making
Marketplace

Corporate Strategy

Finance Strategy Operations Strategy Marketing Strategy

Operations Management

People Plants Parts Processes

Materials & Products &
Customers Services
Planning and Control

Input Output

Irwin/McGraw-Hill The Transformation Process (value adding) 4

 Key OM Concepts
 Efficiency - Doing something at the lowest
possible cost

 Effectiveness - Doing the right things to

create the most value for the organization

 Value - Quality divided by price

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 Transformations
 Physical--manufacturing
 Locational--transportation
 Exchange--retailing
 Storage--warehousing
 Physiological--health care
 Informational--telecommunications

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 Examples of Production Systems
System Inputs Conversion Output
(desired)
Hospital Patients Health Care Healthy
MDs, Nurses Individuals
Medical Supplies
Equipment
Restaurant Hungry Customers Prepare Food Satisfied
Food, Chef Serve Food Customers
Servers
Atmosphere
Automobile Sheet Steel Fabrication High Quality
Plant Engine Parts and Assembly Automobiles
Tools, Equipment of Cars
Workers
University High School Grads Transferring Educated
Teachers, Books of Knowledge Individuals
Classroom and Skills

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 Service or Good?

 “If you drop it on your foot, it won’t hurt

you.” (Good or service?)

 “Services never include goods and

goods never include services.” (True or
false?)

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 What about McDonald’s?
 Service or Manufacturing?

 The company certainly manufactures tangible

products

 Why then would we consider McDonald’s a

service business?

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 Front and Back Office

Back Office

Service Provider

Front Office

Customer

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 Core “Factory Services”
Core Services are basic things that
customers want from products that they
purchase.
 Quality
 Flexibility
 Speed
 Price (or production cost)

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 Value-Added Services
Value-added services differentiate the
organization from competitors and build
relationships that bind customers to the firm
in a positive way.
 Information
 Problem Solving and Field Support
 Sales Support

Irwin/McGraw-Hill
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 History of Operations
 Cottage System <1700 TIME
 Industrial Revolution 1700 - 1800
 Civil War 1850s
 Scientific Management 1890s
 Moving Assembly Line 1910s
 Hawthorne Studies 1930s
 Operations Research 1940s
 Global Competition 1970s
 Service Revolution 1980s
 Mass Customization 1990s
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 Development of OM as a Field – The Names
and Emphasis Change, but the Elements
Remain Basically the Same!

Scientific Manufacturing TQM &

Management Strategy Six Sigma

Moving Assembly JIT/Lean Business Process

Line Manufacturing Reengineering

Hawthorne Manufacturing Electronic

Studies Resources Planning Enterprise

Operations Service Quality Global Supply

Research and Productivity Chain Mgt.

Historical OM’s Emergence

Underpinnings as a Field
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 Some Current Issues
 Implementing/sustaining Quality Management initiatives
 Consolidating operations resulting from mergers
 Speeding up the time to get new products to market
 Developing flexible production systems to enable mass
customization of products and services
 Developing and integrating new technologies
 Managing global supplier, production and distribution
networks
 Outsourcing

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 Purchasing Managers Index
 Began 1931
 Measures:
 New Manufacturing Orders
 Production Volume
 Deliveries
 Inventory Levels
 Employment
 Index Measures Economic Activity
 >50.0% Expanding
 <42.7% Contracting

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 Purchasing Managers Index
 A “Leading Indicator” since:
- Manufacturing must order materials in
advance of production
- The indicator is based on plans of supply
management (purchasing) executives
 Source: Institute for Supply Management
(ISM) – ism.org (previously National
Association of Purchasing Management)

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 Purchasing Managers Index
Dec-05 55.6 42.7 50
Jan-06 54.8 42.7 50
Feb-06 56.7 42.7 50
Mar-06 55.2 42.7 50
Apr-06 57.3 42.7 50
May-06 54.4 42.7 50
Jun-06 53.8 42.7 50
Jul-06 54.7 42.7 50
Aug-06 54.5 42.7 50
Sep-06 52.9 42.7 50
Oct-06 51.2 42.7 50
Nov-06 49.5 42.7 50

Irwin/McGraw-Hill
 Operations Management - Overview

Process Analysis Process Control Supply Chain Project

and Design and Improvement Management Management

Operations Quality Supply Chain

Strategy Management Strategy

Process Analysis Statistical Just in Time

Process Control
Job Design Planning for Production
Consulting and
Manufacturing Reengineering Capacity Management

Facility Layout Aggregate

Planning

Services Inventory Control

Waiting Line Analysis and Materials Requirement Planning

Simulation
 Operations Strategy
Strategy Process Example

Customer Needs More Product

Corporate Strategy Increase Org. Size

Operations Strategy Increase Production Capacity

Decisions on Processes
Build New Factory
and Infrastructure
Irwin/McGraw-Hill
 Competitive Dimensions
 Cost
 Quality and Reliability
 Delivery
 Flexibility
 Speed
 Reliability
 Coping with Changes in Demand
 New Product Introduction
 Speed
 Flexibility
Irwin/McGraw-Hill
 Dealing with Trade-offs
For example, if we reduce costs by reducing product
quality inspections, we might reduce product quality.

Example II, if we improve

customer service problem
solving by cross-training Cost
personnel to deal with a
wider-range of problems,
Flexibility Delivery
they may become less
efficient at dealing with
commonly occurring Quality
problems.

Irwin/McGraw-Hill
 Order Qualifiers and Winners

Order Qualifiers: Screening criterion

that permits a firm’s products or
services to be considered as possible
candidates for purchase
Order Winners: Criterion that
differentiates the products or services
of one firm from another

Irwin/McGraw-Hill
 Strategy Begins with Priorities
 Consider the personal computer assembler
1. How would we segment the market according to
product group?
2. How would we identify product requirements,
demand patterns, and profit margins for each group?
3. How do we identify order winners and order
qualifiers for each group?
4. How do we convert order winners into specific
performance requirements?

Competition Us
(Them) Differentiation (Core competencies)
 Manufacturing’s Role in
Corporate Strategy
 Stage I--Internally Neutral - minimize
potential manufacturing negative

 Stage II--Externally Neutral - achieve parity

with competitors

 Stage III--Internally Supportive - support

business strategy

 Stage IV--Externally Supportive -

manufacturing based competitive strategy
Irwin/McGraw-Hill
 Four Stages of Service Firm
Competitiveness
 Stage I. Available for Service

 Stage II. Journeyman

 Stage III. Distinctive Competence Achieved

 Stage IV. World Class Service Delivery

Irwin/McGraw-Hill
 U. S. Competitiveness Drivers
 Product Development
 speed development & enhance
manufacturability
 Waste Reduction (JIT Philosophy)
 WIP, space, tool costs, and human effort
 Improved Customer-Supplier Relationships
 borrowed from Japanese Keiretsu
 Improved Leadership
 strong, independent boards of directors
Irwin/McGraw-Hill
 Execution!!
• Unless you translate big thoughts into concrete
steps for action, they’re pointless. (Larry Bossidy)

• Strategy is execution. (Louis Gerstner)

• In the business world, having a good objective

means nothing if you implement it badly. (Fareed
Zakaria)

• You cannot have an execution culture without

robust dialogue - one that brings reality to the
surface through openness, candor, and informality.
Robust dialogue starts when people go in with
open minds. You cannot set realistic goals until
you’ve debated the assumptions behind them.
Irwin/McGraw-Hill
 Productivity
Outputs
Productivi ty =
Inputs

 Partial measures
 output/(single input)
 Multi-factor measures
 output/(multiple inputs)
 Total measure
 output/(total inputs)

Irwin/McGraw-Hill
 Example
10,000 Units Produced

Sold for $10/unit

500 labor hours What is the

labor productivity?
Labor rate: $9/hr

Cost of raw material: $5,000

Cost of purchased material: $25,000

Irwin/McGraw-Hill
 Example--Labor Productivity

10,000 units/500hrs = 20 units/hour ...

... or we can arrive at a unitless figure

(10,000 unit*$10/unit)/(500hrs*$9/hr) = 22.22

Irwin/McGraw-Hill
 Example:
Productivity Measurement

 You have just determined that your service

employees have used a total of 2400 hours
of labor this week to process 560 insurance
forms. Last week the same crew used only
2000 hours of labor to process 480 forms.
 Is productivity increasing or decreasing?

Irwin/McGraw-Hill
 Balanced Scorecard

1. Financial perspective

2. Internal perspective

3. Customer perspective

4. Innovation and learning perspective

Irwin/McGraw-Hill