Introduction to Operations

Management

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 What Operations and Supply Chain
Managers Do
• What is Operations Management?
• design, operation, and improvement of productive systems
• What is Operations?
• a function or system that transforms inputs into outputs of greater
value
• What is a Transformation Process?
• a series of activities along a value chain extending from supplier
to customer
• activities that do not add value are superfluous and should be
eliminated

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 Transformation Process
• Physical: as in manufacturing operations
• Locational: as in transportation or warehouse
operations
• Exchange: as in retail operations
• Physiological: as in health care
• Psychological: as in entertainment
• Informational: as in communication

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 Operations as a
Transformation Process

INPUT
•Material
TRANSFORMATION OUTPUT
•Machines
•Goods
•Labor PROCESS
•Services
•Management
•Capital

Feedback & Requirements

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 The Transformation Process

Quality of inputs Quality of outputs

monitored monitored

Random disturbances

INPUTS Transformation OUTPUTS

Process

Feedback Mechanisms
 The Product/Process Continuum

Automobile
Photocopier retailers Banks Consultancies
Automobile manufacturers &
manufacturers service providers Restaurants Airlines Healthcare

Product Process
orientation orientation

Organizations on a
Product/Process Continuum
 Operations Function

• Operations
• Marketing
• Finance and
Accounting
• Human
Resources
• Outside
Suppliers

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 How is Operations Relevant
to my Major?
• Accounting • “As an auditor you must understand the
fundamentals of operations
management.”
• Information • “IT is a tool, and there’s no better place to
Technology apply it than in operations.”

• Management • “We use so many things you learn in an

operations class—scheduling, lean
production, theory of constraints, and
tons of quality tools.”

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 How is Operations Relevant
to my Major?
• Economics • “It’s all about processes. I live by
flowcharts and Pareto analysis.”
• Marketing • “How can you do a good job marketing a
product if you’re unsure of its quality or
delivery status?”
• Finance • “Most of our capital budgeting requests
are from operations, and most of our
cost savings, too.”

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 Evolution of Operations and
Supply Chain Management
• Craft production
• process of handcrafting products or services for
individual customers
• Division of labor
• dividing a job into a series of small tasks each
performed by a different worker
• Interchangeable parts
• standardization of parts initially as replacement parts;
enabled mass production

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 Evolution of Operations and
Supply Chain Management
• Scientific management
• systematic analysis of work methods
• Mass production
• high-volume production of a standardized product for
a mass market / American manufacturers; Ford Model
• Lean production
• adaptation of mass production that prizes quality and
flexibility; led by Japan

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 Historical Events in
Operations Management
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 Events in
Operations Management
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 Events in
Operations Management
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,
Reengineering 1990s
James Champy
Six Sigma 1990s GE, Motorola

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 Historical Events in
Operations Management
Era Events/Concepts Dates Originator
Internet Internet, WWW, ERP, 1990s ARPANET, Tim
Revolution supply chain management Berners-Lee SAP,
i2 Technologies,
ORACLE, Dell
E-commerce 2000s Amazon, Yahoo,
eBay, Google, and
others
Globalization WTO, European Union, 1990s China, India,
Global supply chains, 2000s emerging
Outsourcing, Service economies
Science

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 Historical Events in
Operations Management
Era Events/Concepts Dates Originator
Green Global warming, An Today Numerous
Revolution Inconvenient Truth, Kyoto scientists,
statesmen and
governments

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 Evolution of Operations and Supply
Chain Management
• Supply chain management
– management of the flow of information, products, and services across a
network of customers, enterprises, and supply chain partners

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 Globalization
• Why “go global”?
– favorable cost
– access to international markets
– response to changes in demand
– reliable sources of supply
– latest trends and technologies
• Increased globalization
– results from the Internet and falling trade barriers

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 Productivity and Competitiveness
• Competitiveness
• degree to which a nation can produce goods and
services that meet the test of international markets
• Productivity- the most common measure of competitiveness
• ratio of output to input
• Output
• sales made, products produced, customers served,
meals delivered, or calls answered
• Input
• labor hours, investment in equipment, material usage,
or square footage
Productivity indices helps us to streamline various
operations

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 Measures of Productivity

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• Osborne industries is compiling the monthly
productivity report for its Board of Directors.
From the following data, calculate;
• The labor productivity
• Machine productivity
• Multifactor productivity of dollars spent on
labor, machine, materials and energy.
The average labor rate is 15$ an hour, and the
average machine usage is 10$ an hour.

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 Osborne Industries

C6*C8

C7*C9

C5/C6

C5/C7

C5/C13
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 Problems
• Tried & True clothing has opened four new
stores in college towns across the state. Data on
monthly sales volume and labor hours are given
below. Which store location has the highest
productivity?
•

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 Store Annandale Blacksburg Charlottesville Danville

Sales volume $40,000 $12,000 $60,000 $25,000

Labor hours 250 60 500 200

Productivity $160 $200 $120 $125

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 Problems
• Omar industries maintains production facilities in
several locations around the globe. Average
monthly cost data and output levels are as follows:
• Calculate the labor productivity of each facility
• Calculate the multifactor productivity of each
facility
• If Omar needed to close one of its plants, which
one would you choose?

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 data
Units (in 000s) Cincinnati Frankfurt Gudalajara Beijing
FG 10,000 12,000 5,000 8,000
WIP 1000 2200 3000 6000

Costs (in Cincinnati Frankfurt Gudalajara Beijing

000s)
Labor $3500 $4200 $2500 $800
Material $3500 $3000 $2000 $2500
Energy $1000 $1500 $1200 $800
Transporta $250 $2500 $2000 $5000
tion
Overhead $1200 $3000 $2500 $500

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 Labor 3.14 3.38 3.20 17.50
productivity

Total 1.16 1.00 0.78 1.46

productivity

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 Problems
• A Post Office is evaluating the productivity of its
mail processing centers. The centers differ in
the degree of automation, the type of work that
can be performed and the skill of the workers.
• Calculate the multifactor productivity for each center.
• Workers in Center 1 are scheduled to receive a 10%
pay raise next month. How will that affect
productivity?
• A new processing machine is available for Center 3
that would increase the output to 5000 pieces an hour
at an additional overhead rate of $30 an hour. Should
the PO install the new processing machine?
Copyright 2011 John Wiley & Sons, Inc. 1-28
 data

Center 1 2 3 3c.

Pieces processed 1,000 2,000 3,000 5,000

Workers/hr 10 5 2 2

Hourly wage rate $5.50 $10 $12 $12

Overhead/hr $10 $25 $50 $80

Multifactor
productivity

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 Center 1 2 3 3c.

Pieces processed 1,000 2,000 3,000 5,000

Workers/hr 10 5 2 2

Hourly wage rate $5.50 $10 $12 $12

Overhead/hr $10 $25 $50 $80

Multifactor 15.38 26.67 40.54 48.08

productivity

a. Work center # 3 is the most productive.

b. With a 10% raise in center 1, productivity goes down to 14.18 pieces
per dollar spent.
c. With new equipment in center 3, productivity goes up to 48 pieces.
Install the new equipment.

Copyright 2011 John Wiley & Sons, Inc. 1-30

 MCQ 1
• Operations management is concerned with
• a. the design of a firm’s productive systems.
• b. the operation of a firm’s productive
systems.
• c. the improvement of a firm’s productive
systems.
• d. all of the above.

• Ans: d

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 MCQ 2
• The transformation process associated with
health care is best described as
• A. locational
• B. exchange
• C. physiological
• D. informational

• Ans: c

Copyright 2011 John Wiley & Sons, Inc. 1-32

 MCQ 3
• Dividing a job into a series of small tasks each
performed by a different worker is known as
• A. craft production
• B. scientific management
• C. division of labor
• D. interchangeable parts

• Ans: c.

Copyright 2011 John Wiley & Sons, Inc. 1-33

 MCQ 4
• The ratio of a firm’s monthly output to the
number of labor hours used in the same month
would be a measure of
a. labor productivity
b. capital productivity
c. machine productivity
d. multifactor productivity
• Ans: a

Copyright 2011 John Wiley & Sons, Inc. 1-34

 MCQ 5
• The degree of competitiveness in an industry
can affect
• A. product innovation
• B. technological investment
• C. operating strategy
• D. all of the above

• Ans: d

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 MCQ 6
• Mass production is well suited to all of the
following except
• A. producing large volumes of goods quickly
• B. adapting quickly to changes in market
demand
• C. producing standardized products for a large
market
• D. all of the above
• Ans: b

Copyright 2011 John Wiley & Sons, Inc. 1-36

 MCQ 7
• All of the following are responsibilities of
operations managers except
• A. acquiring financial resources
• B. managing inventories
• C. planning production
• D. scheduling production
 
• Ans: a

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 Strategy and Operations
• How the mission of a company is accomplished
• Provides direction for achieving a mission
• Unites the organization
• Provides consistency in decisions
• Keeps organization moving in the right direction

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 Strategic Planning

Mission
and Vision

Voice o i ce of t he
f the Vo
Busines r
s Corporate Custome
Strategy

Marketing Operations Financial

Strategy Strategy Strategy

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Relationship between Business Strategy and Operations Strategy

Corporate Mission

Company Strategic Analysis External

Strengths & & Choice Environment –
Weaknesses Threats &
Opportunities

Business
Long-term Grand
Objectives Strategy

Annual
Functional
Objectives
Strategies

Human
Marketing Financial
Operations Resources
Strategy Strategy
Strategy Strategy

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 Relationship between Business Grand Strategy and Operations
Strategy

• Corporate mission statement

• Identifies the scope of the firm in terms of the
products/services, markets which it operates and
technological areas it emphasizes
• Guiding philosophy for the strategic decision makers,
satisfies customers needs
• Strategically identifies the business grand strategies
from a set of options
• Duration of long term objectives varies with the
different industry types and they can be broken
down into annual objectives

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Relationship between Business Grand Strategy and
Operations Strategy

• Each department makes its functional strategies

with respect to annual and the business grand
strategies
• Operations strategies is a long term plan for the
production/operation function of a company
which act as a guide for the operations functions
to achieve annual business objectives

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 ..to define

Operations strategy is concerned with setting

broad policies and plans for using the
resources of a firm to best support its long
term competitive strategy
 Operations Strategy

Services Process
and
Products
Technology

Human
Resources Quality
Capacity

Facilities Sourcing Operating

Systems

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 Strategy Formulation

1. Defining a primary task

• What is the firm in the business of doing?
2. Assessing core competencies
• What does the firm do better than anyone else?
3. Determining order winners and order qualifiers
• What qualifies an item to be considered for
purchase?
• What wins the order?
4. Positioning the firm
• How will the firm compete?
5. Deploying the strategy

Copyright 2011 John Wiley & Sons, Inc. 1-45

 Order Winners
and Order Qualifiers

Source: Adapted from Nigel Slack, Stuart Chambers, Robert Johnston, and Alan
Betts, Operations and Process Management, Prentice Hall, 2006, p. 47

Copyright 2011 John Wiley & Sons, Inc. 1-46

 Positioning the Firm
• Cost - Cost of production
• Speed - Delivery speed and reliability, Speed in
introduction of new products/ features/models
• Quality - Product/service quality
• Flexibility

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 Positioning the Firm: Cost
• Waste elimination
• relentlessly pursuing the removal of all waste
• Examination of cost structure
• looking at the entire cost structure for reduction potential
• Lean production
• providing low costs through disciplined operations

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 Positioning the Firm: Speed

• Fast moves, Fast adaptations, Tight linkages

• Internet
• Customers expect immediate responses
• Service organizations
• always competed on speed (McDonald’s and
Federal Express)
• Manufacturers
• time-based competition: build-to-order production
and efficient supply chains

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 Positioning the Firm: Quality

• Minimizing defect rates or conforming to design

specifications
• Ritz-Carlton (Baldrige Award winner)
- one customer at a time
• Service system designed to “move heaven and earth”
to satisfy customer
• Employees empowered to satisfy a guest’s wish
• Teams set objectives and devise quality action plans
• Each hotel has a quality leader

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 Positioning the Firm: Flexibility
• Ability to adjust to changes in product mix,
production volume, or design
• Mass customization: the mass production of
customized parts
• National Bicycle Industrial Company
• offers 11,231,862 variations
• delivers within two weeks at costs only 10% above
standard models

Copyright 2011 John Wiley & Sons, Inc. 1-51

 Indigo Airlines: Measures for
Operational Excellence
• Airlines sector is going through several challenges ranging from
huge capital costs, low utilization, rising fuel costs, and customer
dissatisfaction on account of delays. As a result all the major Indian
airline companies are struggling to make profits, except Indigo. In
this sector, measures for timeliness, cost and resource productivity
are important. A closer look at some of the performance measures
that Indigo utilizes may partly provide some answers to this puzzle.
• In Indigo, check-in staff also doubles as a baggage handler, thereby
improving the responsiveness for the arriving customers at the
check-in counters. Such operational practices are very important to
handle peak hour demand. For example, 2800 passengers check
into about 16 flights leaving Delhi before 8am every day.

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 Indigo Airlines: Measures for
Operational Excellence
• Another measure pertains to baggage clearance. By the time
the passengers deplane and reach the baggage carousels, the
first consignment of bags must have already arrived. The
number of baggage handlers deployed is a function of this
measure of performance. Four handlers stack bags in hold to
save space and time. The number of employees per aircraft is
a measure of operational productivity.
• Indigo has 96 employees per aircraft compared to 250 of Air
India. Huge capital cost of the airplane requires measures to
ensure better utilization. In the case of Indigo, the ground crew
takes about 20 min to prepare the aircraft for the next flight.
This ensures that Indigo planes fly about 12 hours a day.

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