Production/

Operations Management

ESTRELLA Y. YU, DBM

Production/Operation Management
Course outline
• Introduction on production and
operation management
• Competitiveness, strategy and
productivity
• CVP relationship/Forecasting
• Management of quality
• Quality control
What is Operations Management
Operations
 is that part of business
organization that is
responsible for
producing goods and
services.
 Operations Management
Production is the
creation of goods and
services.

Operations management
(OM) is the set of
activities that creates
value in the form of
goods and services by
transforming inputs into
outputs.
Operations Management
Involves :
◦ Planning
◦ Organizing
◦ Supervising processes
 to make necessary
improvement for higher
profitability .
 Operations Management
The ideal
situation for
business
organization is to
achieve a match of
supply and
demand.
 Reasons to understand OM
1. core of all business organizations
2. 50% or more of all jobs are in OM
3. Activities in all other areas of business
organizations are all interrelated with OM
4. To know how goods and services are
produced.
5. To understand what operations managers
do.
Functions of business organization
three basic functions of business
organization

Organization

Finance Operations Marketing

Simplified Organizational Chart

Lead Time – the time necessary to

deliver an order or perform a
service.
Information Flows
Business Operations Overlap

Operations

Finance
Marketing
 Information Flows
To & From Operations
 Operations Interfaces
Industrial
Engineering
Distribution
Maintenance
Purchasing

Operations Public
Relation
Legal

Personnel

Accounting
MIS
 Finance
Functions:
Securing resources
Allocating resources
Activities: (finance & operations)
 Budgeting
 Economic analysis of investment
 Provision of funds
 Marketing
Functions:
 Selling & promoting the goods/service
 Assess customer wants and needs
 Feeds information about demand

Lead Time – the time necessary to deliver

an order or perform a service.
Multidisciplinary Nature
OM is a multidisciplinary functional areas
in a company. [finance and marketing]
◦ It makes sure the materials and labor, or any
input is used in the most effective and efficient
way possible within and organization.
 Maximize the output
Operations management
*Operations Manager has to know:
About the common strategic policies
Basic material planning
Manufacturing and production systems
Cost control principles

Operations manager must be someone who is

able to navigate industrial labor relations.
Required Skills
*The most important skills are:
Organizational abilities.
◦ set of skills
 planning and prioritizing
 through execution to monitoring.
◦ Help manager achieve productivity and efficiency
Analytical capabilities/understanding of
process
◦ Helpful to go deeper in the analysis
Required skills [cont]
Coordination of processes
◦ Analysis and understanding of processes optimize
maximum efficiency.
◦ Quick decision making is an advantage
◦ Clear focus on problem solving is also an advantage
People skills.-
◦ To properly navigate the fine lines with colleagues.
◦ Clear communication of the tasks and goals serves as
great motivation and to give purpose for everyone.
Required skills [cont]
Creativity.
◦ Creative approach is essential in problem solving
skills if things are not in the right direction.
◦ Helps find new ways to improve corporate
performance.
Tech-savviness.
◦ Technology is an affinity that cannot be
underestimated.
◦ OM have to be familiar with technologies used in
industries
◦ Have a deeper understanding of the specific
operation technology at their organization.
The major Principles of OM
Ten Principles by Randall Schaeffer
Reality. OM should focus on the problem, instead of
the techniques.
Organization. Processes in manufacturing are
interconnected.
Fundamentals. The Pareto rule is also applicable to
operations.
◦ 8O% of success comes from a strict adherence to precisely
maintaining records and disciplines,
◦ 2O% comes from applying new techniques to the
processes.
The major Principles of OM
Accountability.
◦ Managers are expected to set rules and the metrics.
◦ Define responsibilities of their subordinates
◦ Regularly check if the goals are met.
Variance. Variance of processes has to be
encouraged
Causality. Problems are symptoms: effects of
underlying causes. Unless the causes are
attacked the same problems will appear again.
The major Principles of OM
Managed passion. The passion of employees can
be a major driver of company growth, and it can
be instilled by the managers if not coming
naturally.
Humility. Managers should acknowledge their
limitations and get help to move on.
Success. Success change but always consider the
interest of the customer.
Change. New theories and solutions come you
should stick to one, but embrace change, and
manage for stability in the long term.
The major Principles of OM
The 16 principles of operations management by Dr.
Richard Schonberger:[customer focus]
Team up with customers. Know what they buy and use,
and organize product families accordingly.
Continual, rapid improvement. Aim for non-stop
improvement to always deliver the best quality,
◦ aim for a quicker response to customer demand, and always offer
maximum flexibility. Thus, it gives more value, in a more flexible way.
Unified purpose. Involve frontline employees in
strategic discussions to make sure they understand the purpose
of their work and have their say in what to change.
The major Principles of OM
Know the competition. Know their customers, their
best practices, and their competitive edges.
Focus. Allow no variations that the customers don’t buy
or demand.
Organize resources. Set priorities in organizing
resources in a way the operations are close to the customer
rate of use or demand.
Invest in HR. Offer cross-training options,
job rotation, and improvements in work safety and
health. Also offer more rewards and recognitions.
The major Principles of OM
Maintain equipment. Always think of improvement of
current assets first, instead of a new purchase.
Simple “best” equipment. Keep the equipment as simple
and flexible as possible, at a reasonable cost.
Minimize human error. Improve the equipment and keep
frontline workers accountable.
Cut times. Shorten product path to customer by making
processes and delivery faster.
Cut setup. Be prepared to support different processes and
get all information and tools ready for on-demand production
The major Principles of OM
Pull system. Improve the workflow and cut the waste by
producing on demand.
Total quality control. Use only the best materials,
processes, and partners.
Fix causes. Focus on controlling the root causes that
really affect cost and performance.
Visibility management. Promote corporate
achievements, let the market know about your
improvements in competence or productivity
The Role of OM in the Business
 Value Added Defined

Value Added by Process

Transformation Outputs
Inputs
Process

difference between the cost of inputs

and the value or price of outputs

Value Added
 Scope of OM
System Design is the decision concerning
- location
- arrangement of departments
- product and service planning
- acquisition and placement of
equipment
 Decision Making
System operation is the decision concerning:
- personnel
- inventory
- scheduling
- project
- management
- quality assurance
Differentiating features of
operations
Degree of standardization
Type of operation
Production of goods vs. services
 Degree of Standardization
Standardized output – there is a high
degree of uniformity in goods or services.

Customized output – that the product or

service is designed for a specific case or
individual.
 Types of Operation
Project – a set of activities directed
towards a unique goal, usually large scale
with a limited time frame.
◦ Development of new product
◦ Installation of a computerized production line
◦ Transfer of equipment to a new facility
◦ Construction of a hospital
 Type of operations
Job shop – an organization that renders
unit or lot production or service with
varying specifications, according to
customer needs
◦ Perform to customer specification
◦ Jobs tend to vary according to the needs of
customer
 Types of operations
Batchprocessing – a system used to produce
moderate volumes of similar items.
◦ Processing requirements and equipment are the same
Repetitive production – a production system
that renders one or a few highly standardized
products or services.
Continuous processing – a system that
produces highly uniform products or
continuous services often performed by
machines.
Manufacturing or Service?

Tangible Act
Production of Goods vs. Delivery of Services

Production of goods – tangible output

Delivery of services – an act
Service job categories
◦ Government
◦ Wholesale/retail
◦ Financial services
◦ Healthcare
◦ Personal services
◦ Business services
◦ Education
 Key Differences

1. Degree of 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
 Manufacturing vs Service

Characteristic Manufacturing Service

Output Tangible Intangible
Customer Contact Low High
Uniformity of input High Low
Labor Content Low High
Uniformity of output High Low
Measurement of Easy Difficult
Productivity
Quality Problem High Low
Scope of Operations management
Operations management are involved in:
Product and service design
Process selection, selection and
management of technology
Design of work system
Location planning
Facilities planning
Quality improvement
Scope of Operations Management

Operations function includes interrelated

activities:
◦ Forecasting
◦ Capacity planning
◦ Scheduling
◦ Managing inventories
◦ Assuring quality
◦ Motivating employees
◦ Deciding where to locate facilities, etc
 Responsibilities of Operations Management

Planning Controlling/ Organizing Staffing Directing

improving
Capacity Inventory Degree of Hiring Incentive
centralization plans
Location Quality Process Laying off Issuance of
selection work orders
Products & Costs Use of Job
services overtime assignment
Make/ buy productivity
Layout
Projects
scheduling
 Key Decisions of Operations
Managers
What
When
Where
How
Who
 Decision Making

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

A model is an abstraction of reality

– Physical
– Schematic
– Mathematical

What are the pros and cons of models?

 Models
Physical models look like their real-life
counterparts
Schematic models are more abstract than
their physical counterparts; they have less
resemblance to the physical reality.
◦ Simple to construct and change
◦ Degree of visual correspondence
Mathematical models are the most abstract;
they do not look at all like their real-life
counterparts
 Models Are Beneficial
Easy to use, less expensive
Require users to organize & quantify
information
Systematic approach to problem solving
Increase understanding of the problem
Enable “what if” questions
Specific objectives
Consistent tool
Power of mathematics
Standardized format for analyzing a problem
Limitations on the use of models

Quantitative information may be

emphasized at the expense of qualitative
information;
Models may be incorrectly applied and
the results misinterpreted;
Model building can become an end in
itself.
 Quantitative Approaches

 Linear programming
 Queuing Techniques
 Inventory models
 Project models [PERT/CPM]
 Statistical models
 Linear programming

Linear programming -
 is a method to achieve
the best outcome (such
as maximum profit or
lowest cost) in a
mathematical model 
whose requirements are
represented
by linear relationships.
 Queuing techniques 
Queuing techniques are
systems put in place to
serve customers in an
orderly manner.
 Queuing techniques
prevent chaos in
customer service by
ensuring the company
can serve one at a time,
on an equitable basis.
Inventory models
 inventory model is a
mathematical model that FixedReorder
helps business in Quantity System
determining the optimum
level of inventories that
Fixed Reorder
should be maintained in a
production process, Period System.
managing frequency of
ordering, deciding on
quantity of goods or raw
materials to be stored,
tracking flow of supply of
raw materials and goods to
provide ...
Project models
Analysis of Tradeoff

Tradeoffs
Systems Approach

“The whole is greater than

the sum of the parts.”

Suboptimization
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?

 Major Historical Developments
Industrial Revolution Late 1700s
Scientific Management Early 1900s
Human Relations Movement 1930s to 1960s
Management Science Mid-1900s
Computer Age 1970s
Just-In-Time Systems 1980s
Total Quality Management (TQM) 1980s
Reengineering 1980s
Flexibility 1990s
Time-based Competition 1990s
Supply Chain Management 1990s
Global Competition 1990s
Environmental Issues 1990s
Electronic Commerce Late 1990s – Early 21st Century
Historical Background
Operations management was previously
called production management,
 clearly showing its origins in manufacturing.
it all began with the division of production,
starting as early as the times of ancient
craftsmen,
adding the concept of interchangeability
of parts in the eighteenth century,
ultimately sparking the industrial revolution.
Historical Evolution of Operations Management

Industrial revolution (1770’s)

Scientific management (1911)
◦ Mass production
◦ Interchangeable parts
◦ Division of labor
Human relations movement (1920-60)
Decision models (1915, 1960-70’s)
Influence of Japanese manufacturers
Industrial Revolution
Late 1700s
Replaced traditional craft methods
Substituted machine power for labor
Major contributions:
◦ James Watt (1764): steam engine
◦ Adam Smith (1776): division of labor
◦ Eli Whitney (1790): interchangeable parts

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 Industrial Revolution
James Watt introduced engine
Adam Smith introduced the economic
benefit of division of labor
◦ Breaking up of production process into small
tasks
◦ Specialization of labor
Eli Whitney
◦ Concept of interchangeable parts
Scientific Management
Early 1900s
Separated ‘planning’ from ‘doing’
Management’s job was to discover
worker’s physical limits through
measurement, analysis & observation
Major contributors:
◦ Fredrick Taylor: stopwatch time studies
◦ Henry Ford: moving assembly line

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 Scientific Management
Brought the changes to the management of
factories.
Frederick W. Taylor – “father of scientific
management”
◦ Work method
◦ Management is responsible for planning,
selecting and training of workers
◦ Management activities separate from work
activities
Scientific Management

Frank Gilbreth- “father of motion study”

◦ Developed principles of motion economy
Lilian Gilbreth
◦ Emphasized the human factor in work
Henry Gantt
◦ Recognized the value of nonmonetary
rewards to motive workers
◦ Developed the system for schedule –
Gannt Chart
 Scientific Management

Harrington Emerson
◦ Encourage the use of experts to
improve organizational efficiency
Henry Ford
◦ Introduced mass production
◦ Moving assembly line to the
automobile industry
Human Relations Movement
1930s to 1960s
Recognition that factors other than money
contribute to worker productivity
Major contributions:
◦ Understanding of the Hawthorn effect:
Study of Western Electric plant in Hawthorn, Illinois intended to
study impact of environmental factors (light & heat) on
productivity, but found workers responded to management’s
attention regardless of environmental changes
◦ Job enlargement
◦ Job enrichment
Management Science
Mid-1900s
Developed new quantitative techniques
for common OM problems:
◦ Major contributions include: inventory
modeling, linear programming, project
management, forecasting, statistical sampling,
& quality control techniques
◦ Played a large role in supporting American
military operations during World War II

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Computer Age
1970s
Provided the tool necessary to support the
widespread use of Management Science’s
quantitative techniques – the ability to process
huge amounts of data quickly & relatively
cheaply
Major contributions include the development of
Material Requirements Planning (MRP) systems
for production control

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 Developments: 1980s
Japanese Influence

Just-In-Time (JIT):
◦ Techniques designed to achieve high-volume production
using coordinated material flows, continuous
improvement, & elimination of waste
Total Quality Management (TQM):
◦ Techniques designed to achieve high levels of product
quality through shared responsibility & by eliminating the
root causes of product defects
Business Process Reengineering:
◦ ‘Clean sheet’ redesign of work processes to increase
efficiency, improve quality & reduce costs
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Developments: 1990s
Flexibility:
◦ Offer a greater variety of product choices on a mass
scale (mass customization)
Time-based competition:
◦ Developing new product designs & delivering
customer orders more quickly than competitors
Supply Chain Management
◦ Cooperating with suppliers & customers to reduce
overall costs of the supply chain & increase
responsiveness to customers

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 Developments: 1990s

Global competition:
◦ International trade agreements open new markets for
expansion & lower barriers to the entry of foreign competitors
(e.g.: NAFTA & GATT)
◦ Creates the need for decision-making tools for facility
location, compliance with with local regulations, tailoring
product offerings to local tastes, managing distribution
networks, …
Environmental issues:
◦ Pressure from consumers & regulators to reduce, reuse &
recycle solid wastes & discharges to air & water
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Electronic Commerce
Internet
& related technologies enable new
methods of business transactions:
◦ E-tailing creates a new outlet for retail goods &
services with global access and 24-7 availability
◦ Internet provides a cheap network for coordinating
supply chain management information
Developing influence of broadband & wireless

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 Trends in Business

Major trends
◦ The Internet, e-commerce, e-business
◦ Management technology
◦ Globalization
◦ Management of supply chains
◦ Agility
 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