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Introduction to
Operations
Management
CHAPTER 1
What is Operations What is Operations
Management?Management?
3 Basic Functions of Business Organizations
Ensure and allocate financial
resources
Produce goods or services
Assess consumer needs, and sell /
promote goods or services
Operations Management
Operations ManagementOperations Management::
Design, operation, and improvement of the systems that create and deliver the firm’s primary products and services.
OM is the management of processes that produce and distribute products and/or services to customers.
OM’s objective is to make sure that the processes work effectively and efficiently.
Operations: A Transformation Process
Transformation process:Transformation process:
System by which resources are used to convert inputs into desired output.
IInputsnputs OutputOutput
Operations and
processes
ResourcesResources
Physical -- manufacturing
Location -- transportation
Exchange -- retailing
Storage -- warehousing
Physiological -- health care
Informational -- telecommunications
Different Types of Transformations
Input-Transformation-Output Relationships
Exhibit 1.2
Goods
Services
A service service is an intangible process with direct customer involvement in the transformation process. The location of the service facility is important.
A good good is the physical output of some process with little customer involvement in the transformation process.
Many overlaps between Service Processes and Good Processes:
Manufacturers provide services as part of their products.
Services manufacture the physical products they deliver to their customers or consume goods in creating the service (e.g., McDonald’s).
Differences between Services and Goods?
Operations Management (Cont.)
Operations Management:Operations Management:
Design, operation, and improvement of the systems that create and deliver the firm’s primary products and services.
OM is the management of processes that produce and distribute products and/or services to customers.
OM’s objective is to make sure that the processes work effectively and efficiently.
Efficiency and Effectiveness
Efficiency:Efficiency: Doing something at the lowest possible cost.
Effectiveness:Effectiveness: Doing the right things to create the most value for the firm.
Efficiency Effectiveness
Value:Value: Ratio of quality to price paid.Competitive “happiness” is being able to increase quality and reduce price while maintaining or improving profit margins.
This is a way that operations can directly increase customer retention and gain market share.
Quality
Price
Typical Operations Decisions and Their Hierarchy
Strategic levelBroad scope, long term
Operational levelNarrow scope, short
term
Tactical levelModerate scope, medium term
An Example
Rita is a high school student. She would like to have a career in business, have a good job, and earn enough income to live comfortably
• Strategy: Obtain a college education
• Tactics: Select a college and a major
• Operations: Register, buy books, take courses, study, graduate, get job
OM in the Organization
ChartExhibit 1.3
Operations as Services
An emerging model in
industry
Core services + value-added
services
Every organization is in the service business, T or F?
Core Services
Basic things that customers (internal or external) want
from products they purchase: To be made correctly
Customized to customer needs
Delivered on time
Priced competitively
Somewhat easier to emulate or copy
Performance Objectives
OperationsManagement
Flexibility
Quality
Price (or cost Reduction)
Speed
Value-Added Services
Services that differentiate the organization from competitors and build relationships that bind customers to the firm in a positive way
Information
Problem solving
Sales support
Field support
Significantly more difficult to copy and implement
OperationsManagement
Information
Problem Solving
Sales Support
Field Support
Value-Added Service Categories
Reasons to Study Operations Management
A business education is incomplete without an understanding of modern approaches to managing operations.
OM provides a systematic way of looking at organizational process.
OM presents interesting career opportunities: Supply chain management Quality assurance Purchasing And more
The concepts and tools of OM are widely used in managing other functions of a business.
Productivity
Measurement
CHAPTER 2
Key Performance Indicators (KPI)
Key performance indicators (KPI):Key performance indicators (KPI): A set of measures that help managers evaluate a company’s economic performance and spot the need for changes in operations.
Financial measures: day’s cash on hand, operating income by units or division, etc.
Nonfinancial metrics: average time to respond to service calls, lead time to fill customer orders, percentage of sales from new products, etc.
A basic KPI -- Productivity
Productivity
ProductivityProductivity is a common measure on how well resources are being used. In the broadest sense, it can be defined as the following ratio:
One of the primary responsibilities of an operations manager is to achieve best use of an organization's resources.
Input:Input: labor, capital, materials, energy, and others.
Output:Output: goods and services.
Productivit
y
=OutputsInputs
Examples of Productivity Measures
Multifactor Output Output
measure Labor + Capital + Energy Labor + Capital +
Materials
Partial Output Output Output Output measure Labor Capital Materials Energy
Exhibit 2.6
Total Output Goods and services produced
Measure Inputs All inputs used
Example 1
Input and output production data ($)Input and output production data ($)
Output:Output:
1. Finished units $10,000
2. Work in process $2,500
3. Dividends $1,000
Total output $13,500
Input:Input:
1. Human $3,000
2. Material $153
3. Capital $10,000
4. Energy $540
5. Other expenses $1,500
Total input $15,193
Productivity measure Productivity measure examplesexamples
Total measure:Total measure:
Total output 13,500 Total input 15,193
Multifactor measure:Multifactor measure:
Total output 13,500 Human + Material 3,153
Finished units 10,000 Human + Material 3,153
Partial measure:Partial measure:
Total output 13,500 Energy 540
Finished units 10,000 Energy 540
= = 0.89
=
=
= 4.28
= 3.17
=
=
= 25
= 18.52
Productivity Measures (other than $)
Business Productivity Measure
Restaurant Customers (meals) per labor hour
Retail store Sales per square foot
Chicken farm Lb. of meat per lb. of feed
Utility plant Kilowatts per ton of coal
Paper mill Tons of paper per cord of woodOnly partial measures of productivity can be used.
Example 2
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.
a) Which productivity measure should be used?
Answer: Could be classified as a Partial Measure.
b) Is productivity increasing or decreasing?
Answer:
Last week’s productivity = 480/2000 = 0.24 forms/hr
This week’s productivity = 560/2400 = 0.23 forms/hr
So, productivity is decreasing slightly.
Example 3 (Page 32, problem 4)
Two types of cars (Deluxe and Limited) were produced by a car manufacturer in 2005. Quantities sold, price per unit, and labor hours follow.
Quantity $/Unit
Deluxe car 4,000 units sold$8,000/car
Limited car 6,000 units sold$9,500/car
Labor, Deluxe 20,000 hrs $12/hr
Labor, Limited 30,000 hrs$14/hrWhat is the labor productivity for each car?
Explain the problem (s) associated with the labor productivity.
Solution to Example 3
A conventional measure of productivity. May not provide all of the necessary information that is
needed. For example, increases in productivity could result from decreases in quality, and/or increases in material cost.
Labor Productivity – units/hourunits/hour
Model Output in Units
Input in Labor Hours
Productivity (Output/Input)
Deluxe Car 4,000 20,000 0.20
Limited Car 6,000 30,000 0.20
Labor Productivity – dollarsdollarsModel Output
in DollarsInput in Dollars
Productivity (Output/Input)
Deluxe Car 4,000($8,000)=$32,000,000
20,000($12.00)=$240,000
133.33
Limited Car
6,000($9,500)=$57,000,000
30,000($14.00)=$420,000
135.71
Recap
Operations management
Transformation process
Services vs. goods
Efficiency
Effectiveness
Value
Operations decisions
hierarchy
Core services
Value-added services
KPI
Productivity
Partial / Multifactor / Total
measure
Dollars / non-dollars
