Introduction To Operations Management

Chapter 1
Introduction to
Operations
Management
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reproduction or distribution without the prior written consent of McGraw-
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Chapter 1: Learning Objectives
You should be able to:
LO 1.1 Define the terms operations management and supply chain
LO 1.2 Identify similarities and differences between production and service
operations
LO 1.3 Explain the importance of learning about operations management
LO 1.4 Identify the three major functional areas of organizations and explain
how they interrelate
LO 1.5 Summarize the two major aspects of process management
LO 1.6 Describe the operations function and the nature of the operations
manager’s job
LO 1.7 Explain the key aspects of operations management decision making
LO 1.8 Briefly describe the historical evolution of operations management
LO 1.9 Describe the current issues in business that impact operations
management
LO 1.10 Explain the need to manage the supply chain
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1-2
distribution without the prior written consent of McGraw-Hill Education
Operations Management
What is operations?
 The part of a business organization that is responsible for
producing goods or services
 The actions and decisions made by participants and members
of a business that affect the production, distribution, service,
management, etc. needed for a company to function that
requires the use of resources and assets.
How can we define operations management?
 The management of systems or processes that create
goods and/or provide services;
 is the administration of business practices to create the
highest level of efficiency possible within an organization.
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LO 1.1 without the prior written consent of McGraw-Hill Education
is concerned with converting materials and labor
into goods and services as efficiently as possible.
involves utilizing resources from staff, materials,

equipment, and technology. Operations managers
acquire, develop, and deliver goods to clients based
on client needs and the abilities of the company.
handles various strategic issues, including

determining the size of manufacturing plants and
project management methods and implementing
the structure of information technology networks.
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Other operational issues include the management of
inventory levels, including work-in-process levels and
raw materials acquisition, quality control, materials
handling, and maintenance policies.v
entails studying the use of raw materials and ensuring that

minimal waste occurs. Operations managers use numerous
formulas, such as the economic order quantity formula, to
determine when and how large an inventory order to
process and how much inventory to hold on hand.

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An operations management professional understands
local and global trends, customer demand, and
available resources for production.
approaches the acquisition of materials and the use of

labor in a timely, cost-effective manner to deliver
customer expectations. Inventory levels are monitored
to ensure that excessive quantities are on hand.
is responsible for finding vendors that supply the

appropriate goods at reasonable prices and have the
ability to deliver the product when needed.

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involves the delivery of goods to customers. This
includes ensuring that products are delivered within the
agreed time commitment.
also typically follows up with customers to ensure that
the products meet quality and functionality needs;
takes the feedback received and distributes the relevant

information to each department to use in process
improvement.

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Good or Service?
Goods are physical items that include raw materials,
parts, subassemblies, and final products.
• Automobile
• Computer
• Oven
• Shampoo
Services are activities that provide some combination of time,
location, form or psychological value.
• Air travel
• Education
• Haircut
• Legal counsel
Supply Chain
Supply chain – a sequence of activities and

organizations involved in producing and delivering
a good or service
Suppliers’ Direct Final

Producer Distributor
suppliers suppliers customers
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LO 1.1
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The Transformation Process
Value-Added
Inputs Transformation/ Outputs

• Land Conversion • Goods
• Labor • Services
• Capital
Process
• Information
Measurement
and Feedback
Measurement Measurement
and Feedback and Feedback
Control
Feedback = Measurements taken at various points in the transformation process

Control = The comparison of feedback against previously established
standards to determine if corrective action is needed
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consent of McGraw-Hill Education
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LO 1.1
Goods-service Continuum
Products are typically neither purely service- or purely goods-
based.
Goods Services
Surgery, Teaching
Songwriting, Software Development
Computer Repair, Restaurant Meal
Home Remodeling, Retail Sales
Automobile Assembly, Steelmaking
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LO 1.2 the prior written consent of McGraw-Hill Education
Manufacturing vs. Service
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
9. Evaluation of work
10. Ability to patent design
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LO 1.2 prior written consent of McGraw-Hill Education
Basic Functions of the Business Organization
Organization
Marketing Operations Finance
Function Overlap
 Finance & operations
 Budgeting
 Economic analysis of investment
proposals
 Provision of funds
 Marketing & operations
 Demand data
 Product and service design
 Competitor analysis
 Lead time data
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without the prior written consent of McGraw-Hill Education 1-15
LO 1.4
OM and Supply Chain Career Opportunities
 Operations manager
 Supply chain manager
 Production analyst
 Schedule coordinator
 Production manager
 Industrial engineer
 Purchasing manager
 Inventory manager
 Quality manager
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written consent of McGraw-Hill Education 1-16
Process Management
Process - one or more actions that transform inputs into outputs
Three Categories of Business Processes:

Upper-management processes These govern the operation of the entire
organization.
Operational processes These are core processes that make up the
value stream.
Supporting processes These support the core processes.
Supply & Demand
Operations &
Sales & Marketing
Supply Chains
Wasteful
Supply
> Demand Costly
Opportunity Loss
Supply
< Demand Customer
Dissatisfaction
Supply
= Demand Ideal
1-18
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written consent of McGraw-Hill Education
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Process Variation
Four Sources of Variation:
Variety of goods or services The greater the variety of goods and services
being offered offered, the greater the variation in production
or service requirements.
Structural variation in demand These are generally predictable. They are
important for capacity planning.
Random variation Natural variation that is present in all

processes. Generally, it cannot be influenced by
managers.
Assignable variation Variation that has identifiable sources. This
type of variation can be reduced, or eliminated,
by analysis and corrective action.
Variations can be disruptive to operations and supply chain processes.

They may result in additional costs, delays and shortages, poor quality,
and inefficient work systems.
- it ranges across the organization; includes all the activities
ScopeofOperationsManagement
necessary to plan, design, and manage the production and

distribution process.
The operations function includes many interrelated

activities such as:
 Forecasting
 Capacity planning
 Facilities and layout
 Scheduling
 Managing inventories
 Assuring quality
 Motivating employees
 Deciding where to locate facilities
 And more . . .
Role of the Operations Manager
The Operations function consists of all activities

directly related to producing goods or providing
services.
A primary function of the operations manager is to

guide the system by decision making.
 System design decisions
 System operation decisions
are involved in coordinating and developing new
processes while reevaluating current structures.
Organization and productivity are two key drivers of

being an operations manager, and the work often
requires versatility and innovation.

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Operations Managers Must Possess A Variety Of Skill Sets
• Technical expertise in areas such as production
automation, data entry, budget tracking, and design.
• Organizational ability and attention to detail to
include keeping track of project files, employee
reports, budgets, schedules, and other details
related to company processes.
• Motivational prowess in the form of strong
leadership skills that provide the expertise to
motivate others, inspire ideas, and foster a
supportive and diverse team.

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• Analytical aptitude, including skill in risk analysis and
mitigation when initiating new projects. Operations
managers also must analyze processes to identify
challenges and offer solutions in the event that
negative situations develop.
• Decision-making proficiency, especially under stress

when there is very little time to assess all factors.
• Ability to maintain quality standards, including as

they relate to raw materials, machinery, manufacturing
procedures, packaging, delivery processes, and the
finished product.
Modern operations management revolves around
four theories:
• Business process redesign (BPR), which is focused on
analyzing and designing workflow and business processes
within a company. The goal of BPR is to help companies
dramatically restructure the organization by designing the
business process from the ground up.
• Reconfigurable manufacturing systems, designed to
incorporate accelerated change in structure, hardware, and
software components. This allows systems to adjust rapidly to
the capacity to which they can continue production and how
efficiently they function in response to market or intrinsic
system changes.

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• Six Sigma, an approach that focuses on quality. The word
“six” references the control limits, which are placed at six
standard deviations from the normal distribution mean.
Tools used within the Six Sigma process include trending
charts, potential defect calculations, and other ratios.
• Lean manufacturing, which is the systematic elimination

of waste within the manufacturing process. This theory
sees resource use for any reason other than value
creation for customers as wasteful and seeks to eliminate
wasteful resource expenditures as much as possible.

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System Design Decisions
• System design
– Capacity
– Facility location
– Facility layout
– Product and service planning
– Acquisition and placement of equipment
• These are typically strategic decisions that

• usually require long-term commitment of resources
• determine parameters of system operation
System Operation Decisions
• System operation
• These are generally tactical and operational decisions
– Management of personnel
– Inventory management and control
– Scheduling
– Project management
– Quality assurance
• Operations managers spend more time on system operation
decision than any other decision area
• They still have a vital stake in system design
LO 1.6
OM Decision Making
 Most operations decisions involve many alternatives that can
have quite different impacts on costs or profits
 Typical operations decisions include:

 What: What resources are needed, and in what amounts?
 When: When will each resource be needed? When should the work be
scheduled? When should materials and other supplies be ordered?

 Where: Where will the work be done?
 How: How will he product or service be designed? How will the work be
done? How will resources be allocated?

 Who: Who will do the work?
For example
a child’s toy car is a model * automobile test
of a real automobile. It has tracks and crash
many of the same visual tests; formulas,
features (shape, relative graphs and charts;
proportions, wheels) that balance sheets and
make it suitable for the income
child’s learning and statements; and
playing. But the toy does financial ratios.
not have a real engine, it
cannot transport people,
and it does not weigh 2,000
pounds.
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Understanding Models
Keys to successfully using a model in decision
making
What is its purpose?

How is it used to generate results?
How are the results interpreted and used?
What are the model’s assumptions and
limitations?
LO 1.7
Classification of Models:
 Physical models look like their real-life counterparts. Examples
include miniature cars, trucks, airplanes, toy animals and trains, and
scale-model buildings. The advantage of these models is their visual
correspondence with reality.
 Schematic models are more abstract than their physical
counterparts; that is, they have less resemblance to the physical
reality. Examples include graphs and charts, blueprints, pictures, and
drawings. The advantage of schematic models is that they are often
relatively simple to construct and change. Moreover, they have some
degree of visual correspondence.
 Mathematical models are the most abstract: They do not look at all
like their real-life counterparts. Examples include numbers, formulas,
and symbols. These models are usually the easiest to manipulate, and
they are important forms of inputs for computers and calculators.
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Quantitative Approaches
A decision-making approach that frequently seeks
to obtain a mathematically optimal solution
to decision making in operations management (and in
other functional business areas) have been accepted
because of calculators and computers capable of
handling the required calculations. Computers have
had a major impact on OM.
it is important to note that managers typically use a
combination of qualitative and quantitative
approaches, and many important decisions are based
on qualitative approaches.
Metrics and Trade-Offs
 Performance metrics  Analysis of trade-offs

 All managers use metrics to  A trade-off is giving up one
manage and control operations thing in return for
 Profits something else
 Costs  Carrying more inventory
 Quality (an expense) in order to
 Productivity achieve a greater level of
 Flexibility
customer service
 Inventories
 Schedules
 Forecast accuracy
Decision makers sometimes deal with these decisions
by listing the advantages and disadvantages— the
pros and cons—of a course of action to better
understand the consequences of the decisions they
must make.

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Degree of Customization
 of products or services being offered to its customers.
 Providing highly customized products or services such as home
remodeling, plastic surgery, and legal counseling tends to be
more labor intensive than providing standardized products such
as those you would buy “off the shelf” at a mall store or a
supermarket or standardized services such as public utilities
and Internet services.
 production of customized products or provision of customized
services is generally more time consuming, requires more
highly skilled people, and involves more flexible equipment
than what is needed for standardized products or services.
 Customized processes tend to have a much lower volume of
output than standardized processes, and customized output
carries a higher price tag.
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Systems Approach
 System - a set of interrelated parts that must work together
 The business organization is a system composed of subsystems
 Marketing subsystem
 Operations subsystem
 Finance subsystem
 The systems approach

 Emphasizes interrelationships among subsystems
 Main theme is that the whole is greater than the sum of its parts
 The output and objectives of the organization take precedence over those of
any one subsystem
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Key Issues for Operations Managers Today
Economic conditions
Innovating
Quality problems
Risk management
Competing in a global economy
Environmental Concerns
Sustainability
 Using resources in ways that do not harm ecological
systems that support human existence
Sustainability measures often go beyond traditional
environmental and economic measures to include measures
that incorporate social criteria in decision making
All areas of business will be affected
 Product and service design
 Consumer education programs
 Disaster preparation and response
 Supply chain waste management
 Outsourcing decisions
Ethical Issues in Operations
Ethical issues that may arise in
many aspects of operations
management:
 Financial statements
 Worker safety
 Product safety
 Quality
 The environment
 The community
 Hiring and firing workers
 Closing facilities
 Workers’ rights
The Need for Supply Chain Management
In the past, organizations did little to manage the
supply chain beyond their own operations and
immediate suppliers which led to numerous problems:
 Oscillating inventory levels
 Inventory stockouts
 Late deliveries
 Quality problems
Supply Chain Issues
1. The need to improve operations
2. Increasing levels of outsourcing
3. Increasing transportation costs
4. Competitive pressures
5. Increasing globalization
6. Increasing importance of e-business
7. The complexity of supply chains
8. The need to manage inventories

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Chapter 1

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or

involves utilizing resources from staff, materials,

handles various strategic issues, including

entails studying the use of raw materials and ensuring that

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No

approaches the acquisition of materials and the use of

is responsible for finding vendors that supply the

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No

takes the feedback received and distributes the relevant

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No

Supply chain – a sequence of activities and

Suppliers’ Direct Final

Inputs Transformation/ Outputs

Feedback = Measurements taken at various points in the transformation process

Songwriting, Software Development

Computer Repair, Restaurant Meal

Home Remodeling, Retail Sales

Automobile Assembly, Steelmaking

Marketing Operations Finance

Process - one or more actions that transform inputs into outputs

Three Categories of Business Processes:

Random variation Natural variation that is present in all

Variations can be disruptive to operations and supply chain processes.

necessary to plan, design, and manage the production and

The operations function includes many interrelated

The Operations function consists of all activities

A primary function of the operations manager is to

Organization and productivity are two key drivers of

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No

• Decision-making proficiency, especially under stress

• Ability to maintain quality standards, including as

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No

• Lean manufacturing, which is the systematic elimination

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No

• These are typically strategic decisions that

 Typical operations decisions include:

scheduled? When should materials and other supplies be ordered?

done? How will resources be allocated?

What is its purpose?

 Performance metrics  Analysis of trade-offs

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No

 The systems approach

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