Operations

Management
Chapter 1 – Nature of
Operations
Management

© 2008 Prentice Hall, Inc. 1–1

 Chapter Outline
 Introduction
 Historical Development of OM
 Manufacturing Operations and Service Operations
• Manufacturing Operations
• Service Operations

 Operations Decision Making

 Productivity Measurement

© 2008 Prentice Hall, Inc. 1–2

 1.1. Introduction
 What Is Operations and Operations
Management?
 Organizing to Produce Goods and
Services
 Why Study OM?
 What Operations Managers Do?
 Scope of Operations Management
 Career Opportunities in OM
© 2008 Prentice Hall, Inc. 1–3
 Definition of OM
 Operations (production): The part of a
business organization that is
responsible for producing goods or
services
 OM: The management of systems or
processes that create goods and/or
provide services OR
 is the set of activities that creates value
in the form of goods and services by
transforming inputs into outputs

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 OM Adds Value

Value Added:
The difference between
the cost of inputs and the
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

© 2008 Prentice Hall, Inc. 1–6

 Organizing to Produce
Goods and Services
Essential functions of
any business:
 Marketing – generates demand
 Production/operations – creates
the product
 Finance/accounting – tracks how
well the organization is doing,
pays bills, collects the money

© 2008 Prentice Hall, Inc. 1–7

 Why Study OM?
1.OM is one of the three major
functions (marketing,
finance, and operations) of
any organization
2.We want (and need) to know
how goods and services are
produced
© 2008 Prentice Hall, Inc. 1–8
 Why Study OM?
3. We want to understand what
operations managers do
4. OM is such a costly part of an
organization
5.The three major functions of business
organizations overlap
6.Operations interacts with a number of
other supporting functional areas
© 2008 Prentice Hall, Inc. 1–9
 What Operation Managers
Do?
Responsibilities of OM: Basic functions
of management process
Planning
Organizing
Staffing
Leading
Controlling

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 Responsibilities of OM

 Planning: Capacity, Location, Products &

services, Make or buy, Layout, projects,
scheduling
 Organizing: Degree of Centralization, Process
Selection
 Staffing: Hiring/Laying Off, Use of Overtime

 Leading: Incentive plans, Issuance of work

orders, job assignments
 Controlling: Inventory, quality, cost,
productivity
© 2008 Prentice Hall, Inc. 1 – 11
 Scope of Operations
Management
• The scope of operations management ranges
across the organization. It includes:
– Forecasting
– Capacity planning
– Scheduling
– Managing inventories
– Assuring quality
– Motivating employees
– Deciding where to locate facilities
– And more . . .
© 2008 Prentice Hall, Inc. 1 – 12
 Career Opportunities in OM
Operations manager
Production analyst
Production manager
Industrial engineer
Time study analyst
Inventory manager
Quality analyst
Quality manager
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 1.2. Historical Development
of OM: significant events

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 Historical Development of
OM
Era Events/Concepts Dates Originator
Steam engine 1769 James Watt
Industrial
Division of labor 1776 Adam Smith
Revolution
Interchangeable parts 1790 Eli Whitney

Principles of scientific
1911 Frederick W. Taylor
management

Frank and Lillian

Scientific Time and motion studies 1911 Gilbreth
Management
Activity scheduling chart 1912 Henry Gantt

Moving assembly line 1913 Henry Ford

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 Historical Development of
OM
Era Events/Concepts Dates Originator
Hawthorne studies 1930 Elton Mayo
Human 1940s Abraham Maslow
Relations Motivation theories 1950s Frederick Herzberg
1960s Douglas McGregor
Linear programming 1947 George Dantzig
Digital computer 1951 Remington Rand
Simulation, waiting
Operations Operations research
line theory, decision 1950s
Research groups
theory, PERT/CPM
1960s, Joseph Orlicky, IBM
MRP, EDI, EFT, CIM
1970s and others
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 Historical Development of
OM
Era Events/Concepts Dates Originator

JIT (just-in-time) 1970s Taiichi Ohno (Toyota)

TQM (total quality W. Edwards Deming,

1980s
management) Joseph Juran

Quality Strategy and Wickham Skinner,

1980s
Revolution operations Robert Hayes

Michael Hammer,
Business process reengineering 1990s
James Champy

Six Sigma 1990s GE, Motorola

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 Historical Development of OM
Era Events/Concepts Dates Originator
Internet Internet, WWW, ERP, 1990s ARPANET, Tim
Revolution supply chain management Berners-Lee SAP,
i2 Technologies,
ORACLE
E-commerce 2000s Amazon, Yahoo,
eBay, Google, and
others
Globalization WTO, European Union, 1990s Numerous countries
and other trade 2000s and companies
agreements, global supply
chains, outsourcing, BPO,
Services Science
© 2008 Prentice Hall, Inc. 1 – 18
 1.3. Manufacturing Operations
and Service Operations
 Production of Goods Versus Delivery of
Services
 Goods are physical items that include raw
materials, parts, subassemblies, and final
products.
E.g. Automobile, Computer, Oven, Shampoo
 Services are activities that provide some
combination of time, location, form or
psychological value.
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 Production of Goods Versus
Delivery of Services
E.g. Air travel, Education, Haircut,
Legal counsel
 Production of goods – tangible
output
 Delivery of services – an act
 Service job categories- Government,
Wholesale/retail, Financial services,
Healthcare, Personal services,
Business services, Education
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 Characteristics of Goods
Tangible product
Consistent product definition
Production usually separate
from consumption
Can be inventoried
Low customer interaction
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 Characteristics of Service
 Intangible product
 Produced and consumed at same
time
 Often unique
 High customer interaction
 Inconsistent product definition
 Often knowledge-based
 Frequently dispersed
© 2008 Prentice Hall, Inc. 1 – 22
 SUMMARY!
Attributes of Goods
(Tangible Product)
Can be resold
Can be inventoried
Some aspects of quality
measurable
Selling is distinct from
production
Product is transportable
Site of facility important for cost
Often easy to automate
Revenue generated primarily
from tangible product
© 2008 Prentice Hall, Inc.
Attributes of Services
(Intangible Product)
Reselling is unusual
Difficult to inventory
Quality difficult to measure
Selling is part of service
Provider, not product, is
often transportable
Site of facility important for
customer contact
Often difficult to automate
Revenue generated primarily
from the intangible service
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 Production of Goods Versus
Delivery of Services
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 productivity Easy Difficult
Opportunity to correct High Low
quality problems
High

© 2008 Prentice Hall, Inc. 1 – 24

 The Goods Services
Continuum
Most goods contain a
service, and most
services contain a good.
Pure Service: a service
that does not include a
tangible product.

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 Decision-Making Environments
 Decision making under uncertainty
 Complete uncertainty as to which state
of nature may occur
 Decision making under risk
 Several states of nature may occur
 Each has a probability of occurring
 Decision making under certainty
 State of nature is known
© 2008 Prentice Hall, Inc. 1 – 26
 Decision Making Models
 A model is an abstraction of reality; a
simplified and representation of
something.
 E.g. a child’s toy car is a model of a real
automobile.
 Models can be classified as physical,
schematic and Mathematical models.
 Physical Models look like their real life
counterparts.
 E.g. miniature cars, trucks, airplanes etc
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 Decision Making Models
The advantage of these models is their
visual correspondence with reality.
Schematic Models: are more abstract
than their counterparts.
They have less resemblance to the
physical reality
E.g. graphs & charts, pictures, drawings
Advantage: Often relatively simple to
construct & change, and they have
some degree of visual correspondence
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 Decision Making Models
Mathematical Models: are the most
abstract
They do not look like at all their
real-life counterparts
E.g. numbers, formulas, symbols
These models are usually the
easiest to manipulate, and they are
important forms of inputs for
computers and calculators
© 2008 Prentice Hall, Inc. 1 – 29
 Benefits of Models
♣ Easy to use, less expensive
♣ Require users to organize
♣ Systematic approach to problem
solving
♣ Increase understanding of the
problem
♣ Enable “what if” questions
♣ Specific objectives
♣ Consistent tool
♣ Power of mathematics
♣ Standardized format
© 2008 Prentice Hall, Inc. 1 – 30
 Limitations of Models
1. Quantitative information may be
emphasized at the expense of
qualitative information
2. Models may be incorrectly
applied and the results
misinterpreted
3. The use of models does not
guarantee good decisions
© 2008 Prentice Hall, Inc. 1 – 31
 1.5. Productivity Measurement
Productivity is a measure of the effective
use of resources, usually expressed as
the ratio of output to input
Productivity ratios are used for
Planning workforce requirements
Scheduling equipment
Financial analysis
Tracking an operating unit’s
performance over time
Judging the performance of an
entire industry or country
© 2008 Prentice Hall, Inc. 1 – 32
 Productivity Measurement
Outputs
Productivity =
Inputs
Partial = Output
measures Single input

Multifactor = Output
measures Multiple inputs

Total = Output
measure Total inputs

© 2008 Prentice Hall, Inc. 1 – 33

 Productivity Measurement

Partial = Output , Output , Output , Output

measures Labor Machine Capital Energy

Multifactor = Output , Output

measures Labor + Machine Labor + Capital + Energy

Total = Goods or Services Produced

measure All inputs used to produce them

© 2008 Prentice Hall, Inc. 1 – 34

 Productivity Measurement (example)
7040 Units Produced

Sold for $1.10/unit What is the

multifactor
Cost of labor of $1,000 productivity?

Cost of materials: $520

Cost of overhead: $2000

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 Productivity Measurement (example)

MFP = Output
Labor + Materials + Overhead

MFP = (7040 units)*($1.10)

$1000 + $520 + $2000
MFP =2.20

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 Productivity Variables
 Labor - contributes
about 10% of the
annual increase
 Capital - contributes
about 38% of the
annual increase
 Management -
contributes about 52%
of the annual increase
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 Measurement Problems
Quality may change while the
quantity of inputs and outputs
remains constant
External elements may cause an
increase or decrease in
productivity
Precise units of measure may be
lacking
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 Factors Affecting Productivity

Capital Quality

Technology Management

© 2008 Prentice Hall, Inc. 1 – 39

 Improving Productivity
♥ Develop productivity measures
♥ Determine critical (bottleneck)
operations
♥ Develop methods for productivity
improvements
♥ Establish reasonable goals
♥ Get management support
♥ Measure and publicize improvements
♥ Don’t confuse productivity with
efficiency
© 2008 Prentice Hall, Inc. 1 – 40
 Key Variables for Improved
Labor Productivity

 Basic education appropriate for the

labor force
 Diet of the labor force
 Social overhead that makes labor
available
 Maintaining and enhancing skills in the
midst of rapidly changing technology
and knowledge

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 Service Productivity

 Typically labor intensive

 Frequently focused on unique
individual attributes or desires
 Often an intellectual task performed by
professionals
 Often difficult to mechanize
 Often difficult to evaluate for quality

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 Thank you

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