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Introduction to Introduction to Operations ManagementOperations Management
Operations is the production activities that go on in the organization, regardless of whether the end product is a good or a service
What is Operations?What is Operations?
Operations management is defined as the design, operation, and improvement of the systems that create the firm’s primary products and services
Operations management is the management of systems or processes that creates value in the form of goods and services by transforming inputs into desired outputs
What Is Operations ManagementWhat Is Operations Management (OM) (OM)??
Operations as a transformation processOperations as a basic functionOperations as the technical core
The Operations FunctionThe Operations Function
Inputs:•Materials•Machines•Labor•Management•Capital
Transformation/Conversion
Process
Outputs: Goods
Services
Control
Feedback
FeedbackFeedback
Value added
Operations as a Transformation ProcessOperations as a Transformation Process
What is Value Added?What is Value Added?
Value added is the difference between the cost of intputs and the value or price of outputs.
The essence of operations function is to add value during the transformation process
Firms use the money generated Firms use the money generated by value added for:by value added for:
R&DInvestment in new facilities and equipmentPaying workersPaying for materialsPaying for general expensesProfits
Transformation Process of aTransformation Process of a Canned Canned Food ProcessorFood Processor
Inputs Processing Outputs• Cleaning Canned
vegetables• Making cans• Cutting• Cooking• Packing• Labeling
• Raw vegetables• Metal sheets • Water• Energy• Labor• Building• Equipment
Transformation Process of a Transformation Process of a HospitaHospitall
Inputs Processing Outputs
• Doctors, nurses • Examination Healthy patients• Hospital • Surgery
• Medical Supplies • Monitoring• Equipment • Medication• Laboratories • Therapy
ExamplesExamples of of Various Various OperationsOperations
Operations ExamplesGoods Producing Farming, mining, construction ,
manufacturing, power generationStorage/Transportation
Warehousing, trucking, mailservice, moving, taxis, buses,hotels, airlines
Exchange Retailing, wholesaling, banking,renting, leasing, library, loans
Entertainment Films, radio and television,concerts, recording
Communication Newspapers, radio and televisionnewscasts, telephone, satellites
Types of Transformation ProcessesTypes of Transformation ProcessesPhysical- manufacturingLocational- transportationExchange- retailingStorage- warehousingPhysiological- health careInformational- telecommunicationsPsychological- entertainment
Marketing Generates demand gets
customers
Operations creates product or service
Finance/Accounting Obtains funds Tracks organizational
performance
Operations as a Basic FunctionOperations as a Basic Function
Business Business FunctionsFunctions Overlap Overlap
Operations
FinanceMarketing
Business Business Functions Functions -- Bank Bank(1 of 3)(1 of 3)
Operations Finance/Accounting
Marketing
CheckClearing
TellerScheduling
Transactions
ProcessingSecurity
Commercial Bank© 1984-1994 T/Maker Co.
Business Business Functions – AirlineFunctions – Airline(2 of 3)(2 of 3)
Operations Finance/Accounting
Marketing
GroundSupport
FlightOperations
FacilityMaintenance
Catering
Airline
Business Business Functions – ManufacturerFunctions – Manufacturer(3 of 3)(3 of 3)
Operations Finance/Accounting
Marketing
ProductionControl
Manufacturing QualityControl
Purchasing
Manufacturing
Operations
Finance/Accounting
Human Resources
Marketin
gSu
pp
lier
s
Production andInventory data
Capital budgeting requestsCapacity expansion and
Technology plans
BudgetsCost analysisCapital investmentsStockholder requirements
Orders for materialsProduction and delivery
Schedules QualityRequirements Design/
Performance specs
Material availabilityQuality data
Delivery schedulesDesigns
Product/ServiceAvailability
Lead-time estimatesStatus of order
Delivery schedules
Sales forecastsCustomer orders
Customer feedbackPromotions
Personnel needsSkill sets
Performance evaluationsJob design/work
measurement
Hiring/firingTrainingLegal requirementsUnion contract negotiations
Operations as the Technical CoreOperations as the Technical Core
Importance of OMImportance of OM(Why Study OM?) (Why Study OM?) (1 of 2)(1 of 2)
Operations is one of the three major functions (marketing, finance and operations) of an organization
OM affects 1) the companies’ ability to compete and 2) the nation’s ability to compete internationally
Nearly half of the employed people over the world have jobs in operations
OM is a costly part of an organization
Importance of OMImportance of OM(Why Study OM?) – (Why Study OM?) – (2 of 2)(2 of 2)
Offers a major opportunity for an organization to improve its productivity and profitability
The OM function is responsible for a major portion of the assets of most organizations
The concepts, tools and techniques of OM are widely used in managing other functions.
Presents career opportunities
Options for Increasing ContributionOptions for Increasing Contribution Marketing
Option Finance &
Accounting Option
OM Option
Current Sales Revenue :
+50%
Finance Costs: -50%
Production Costs: -20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of Goods Sold
-80,000 -120,000 -80,000 -64,000
Gross Margin
20,000 30,000 20,000 36,000
Finance Costs
-6,000 -6,000 -3,000 -6,000
Net Margin
14,000 24,000 17,000 30,000
Taxes @ 25%
-3,500 -6,000 -4,250 -7,500
Contribution 10,500 18,000 12,750 22,500
Production of Goods Production of Goods vs.vs.
Delivery of ServicesDelivery of Services
Tangible Act
Manufacturing or ServiceManufacturing or Service
Goods vs. Services Goods vs. Services (1 of 2)(1 of 2)Characteristics Goods Service
Customer contact Low HighUniformity of inputs and outputs High LowLabor content Low HighAutomation Easy Generally difficultOutput Tangible Intangible, often uniqueMeasurement of productivity Easy DifficultOpportunity to correct problems High LowInventory Much LittleQuality evaluation Easier DifficultProduction activities Obvious Not so obvious
Goods vs. ServicesGoods vs. Services (2 of 2)(2 of 2)Characteristics Goods Service
Production and consumption Separate Generally take place at the same time
Location Centralized Generally dispersed
Locational factors to be considered Cost-oriented Revenue-oriented
Reselling Possible Not possible
Patentability Usually Not usually
Activities Smooth and efficient
Slower and awkward
Inventoriability andTransportability Inventoriable &Transportable
Non inventoriable and so nontransportable
Service Job Categories Service Job Categories (1 of 2)(1 of 2)
Governmental servicesMunicipal servicesTrade services (wholesale/retail)Finance, insurance, real estateMedical (healthcare)Personal services
Service Job Categories Service Job Categories (2 of 2)(2 of 2)
Business servicesEducationFood, lodging and entertainmentUtilities and transportationLegal, consultingRepair
Goods Contain Services / Goods Contain Services / Services Contain GoodsServices Contain Goods
0 25 50 75 100255075100
Automobile assembly, steel makingComputer
Home remodeling, retail salesFast-food Meal
Restaurant MealAuto RepairHospital Care
Advertising AgencyInvestment Management
Consulting ServiceSurgery, Teaching,Counseling
Percent of Product that is a Good Percent of Product that is a Service
Steel productionAutomobile fabrication
House buildingRoad constructio
Auto RepairAppliance repair
DressmakingFarming
Maid ServiceManual car wash
TeachingLawn mowing
High goods contentLow service content
Goods-serviceGoods-servicess Continuum Continuum
Low goods contentHigh service content
1-29
Year Mfg. Service45 79 2150 72 2855 72 2860 68 3265 64 3670 64 3675 58 4280 44 4685 43 5790 35 6595 25 7500 30 70
02 25 75
U.S. Manufacturing vs. Service Employment
0102030405060708090
45 50 55 60 65 70 75 80 85 90 95 00 02 05
Year
Per
cent
Mfg.
Service
1-30
Decline in Manufacturing JobsDecline in Manufacturing Jobs
ProductivityIncreasing productivity allows companies to
maintain or increase their output using fewer workers
OutsourcingSome manufacturing work has been outsourced
to more productive companies
1-31
Challenges of Managing ServicesChallenges of Managing Services
Service jobs are often less structured than manufacturing jobs
Customer contact is higherWorker skill levels are lowerServices hire many low-skill, entry-level workersEmployee turnover is higherInput variability is higherService performance can be affected by worker’s
personal factors
Services in ManufacturingServices in Manufacturing
In manufacturing, services can be divided into two groups:
Core ServicesValue-added Services
Core services are basic things that customers want from products they purchase
Core ServicesCore Services
Core Services Performance ObjectivesCore Services Performance Objectives
OperationsManagement
Flexibility
Quality
Speed
Price (or cost Reduction)
Value-added services differentiate the organization from competitors and build
relationships that bind customers to the firm in a positive way
Value-Added ServicesValue-Added Services
Value-Added Service CategoriesValue-Added Service Categories
OperationsManagement Information
Problem Solving
Sales Support
Field Support
The Scope of OM: The Scope of OM: What Operations Managers DoWhat Operations Managers Do??
Plan - Organize - Staff - Lead - Control
Critical OM DecisionsCritical OM Decisions
Critical Critical OM OM DecisionsDecisions Service, product design Process, capacity design Planning of the technology Location Layout design Human resources, job design Production planning and scheduling Supply chain management Inventory management Maintenance Quality management
Operations Management and Operations Management and Decision MakingDecision Making
Models Quantitative approaches Analysis of tradeoffs Systems approach Establishing priorities
ModelsModelsA model is an abstraction of reality.
– Physical
– Schematic
– Mathematical
Types of models:
Why Models are Beneficial?Why Models are Beneficial?Easy to use, less expensiveRequire users to organize informationSystematic approach to problem solvingIncrease understanding of the problemEnable “what if” questionsSpecific objectivesConsistent toolPower of mathematicsStandardized format
Limitations of Models:Limitations of Models:
Quantitative information may be emphasized at the expense of qualitative information
May be incorrectly applied and results may be misinterpreted
Quantitative ApproachesQuantitative Approaches(Analytical Tools used in OM)(Analytical Tools used in OM)
Linear programmingQueuing techniquesInventory modelsProject modelsStatistical modelsSimulationDecision analysis
Tradeoffs
Decision on the amount of inventory to stock
Increased cost of holding inventoryvs.
Level of customer service
Systems ApproachSystems Approach
“The whole is greater than the sum of the parts.”
SuboptimizationSuboptimization
Establishing Priorities:Establishing Priorities:Pareto PhenomenonPareto 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?
The HThe Historical Evolution of istorical Evolution of Operations Management Operations Management
Significant Events in Operations Significant Events in Operations ManagementManagement
Historical Events in OM Historical Events in OM The Industrial Revolution (1770s) Scientific Management (1911) Human Relations Movement (1920-1960) Decision Models – Management Science (1915,
1940-70s) Quality Revolution (1970s-1990s ) Globalization (1970s- ) Information Age/Internet Revolution (1990s-)
Historical Events in OMHistorical Events in OM (1 of 4): (1 of 4): Industrial Revolution and Scientific Management
Industrial RevolutionSteam engine 1769 James WattDivision of labor 1776 Adam SmithInterchangeable parts 1790 Eli Whitney
Scientific ManagementPrinciples 1911 Frederick W. TaylorTime and motion studies 1911 Frank & Lillian GilbrethActivity scheduling chart 1912 Henry GantMoving assembly line 1913 Henry Ford
Historical Events in OM Historical Events in OM (2 of 4)(2 of 4) : : Human Relations and Management Science
Human RelationsHawthorne studies 1930 Elton MayoMotivation theories 1940s Abraham Maslow
1950s Frederick Hertzberg1960s Douglas McGregor
Management ScienceLinear programming 1947 George DantzigDigital computer 1951 Remington RandSimulation, PERT/CPM, 1950s Operations researchWaiting line theory groupsMRP 1960s Joseph Orlicky, IBM
Historical Events in OMHistorical Events in OM (3 of 4):(3 of 4):Quality Revolution and Globalization
Quality RevolutionJIT1970s Taiichi Ohno, ToyotaTQM 1980s W. Edwards Deming,
Joseph Juran, et. al.Strategy and operations Skinner, HayesReengineering 1990s Hammer, ChampyWorld Trade Organization 1990s Numerous countries
and companies
GlobalizationEuropean Union and 1970s IBM and othersother trade agreementsEDI, EFT, CIM 1980s
Historical Events in OM Historical Events in OM (4 of 4) (4 of 4) : : Information Age/Internet Revolution
Information Age/Internet Revolution
Internet, WWW, ERP 1990s ARPANET, TimSupply chain Berners-Lee, SAP, i2management, Technologies,
ORACLE,E-commerce PeopleSoft, Amazon,
Yahoo, eBay,and others
Exciting New Challenges in Exciting New Challenges in Operations ManagementOperations Management
New Concepts and Trends in OMNew Concepts and Trends in OM
Mass Customization Supply Chain ManagementOutsourcingLean manufacturingAgilityElectronic Commerce
New Concepts and Trends(1 of 6): New Concepts and Trends(1 of 6): Mass CustomizationMass Customization
The rapid, low cost production of goods and services that fulfill constantly changing and increasingly unique customer desires.
New Concepts and Trends (2 of 6): New Concepts and Trends (2 of 6): Supply Chain ManagementSupply Chain Management
The management of the sequence of organizations- their facilities, functions and activities- that are involved in producing and delivering a product or service
SCM requires the application of a systems approach to managing the flow of information, materials and services from raw material suppliers through factories and warehoses to the end user (customer)
Suppliers’ Suppliers
DirectSuppliers Producer Distributor Final
Consumer
Simple Product Supply ChainSimple Product Supply Chain
Stage of ProductionValue Added
Value of Product
Farmer produces and harvests wheat $0.15 $0.15
Wheat transported to mill $0.08 $0.23
Mill produces flour $0.15 $0.38
Flour transported to baker $0.08 $0.46
Baker produces bread $0.54 $1.00
Bread transported to grocery store $0.08 $1.08
Grocery store displays and sells bread $0.21 $1.29
Total Value-Added $1.29
A Supply Chain for BreadA Supply Chain for Bread
New Concepts and Trends New Concepts and Trends (3 of 6)(3 of 6) : : OutsourcingOutsourcing
Buying goods or services rather than producing goods or performing services within the organization
New Concepts and Trends New Concepts and Trends (4 of 6):(4 of 6): Lean ManufacturingLean Manufacturing
Systems that use minimal amounts of resources - less space, less inventory, fewer workers, fewer levels of management- to produce a high volume of high-quality goods with some variety
An adaptation of mass production that prizes quality and flexibility
Incorporates advantages of mass production (high volume, low unit cost) and craft production (variety and flexibility)
New Concepts and Trends New Concepts and Trends (5 of 6):(5 of 6): AgilityAgility
The ability of an organization to respond quickly to demands or opportunities.
Involves maintaining a flexible system that can quickly respond to changes in either the volume of demand or changes in product/service offerings
New Concepts and Trends New Concepts and Trends (6 of 6):(6 of 6): Electronic CommerceElectronic Commerce
The use of computer networks, primarily the internet, to buy and sell products, services, and information.
Other Trends (1 of 2)Other Trends (1 of 2)
Enhancing Value-Added ServicesManagement of TechnologyEmphasis on Operations StrategyIncreasing Emphasis on Cost Control and
Productivity ImprovementQuality and Process ImprovementsIncreasing emphasis on business and social
responsibility
Other Trends (2 of 2)Other Trends (2 of 2)
Developing flexible supply chains to enable mass customization of products and services
Achieving the Service Factory
GlobalizationGlobalization
Globalization can take the form Globalization can take the form of:of:
Selling in foreign markets Producing in foreign lands Purchasing from foreign suppliers Partnering with foreign firms
Reasons to Globalize Operations Reasons to Globalize Operations (1 of 2)(1 of 2)
To take advantage of favorable costsTo gain access to and attract international
marketsTo build reliable sources of supply To improve the supply chainTo be more responsive to changes in demand
Reasons to Globalize OperationsReasons to Globalize Operations (2 of 2)(2 of 2)
To provide better goods and servicesTo learn to improve operationsTo attract and retain global talentTo keep abreast of the latest trends and
technologies
Examples of Global StrategiesExamples of Global Strategies
Boeing – both sales and production are worldwide.
Benetton – moves inventory to stores around the world faster than its competitor by building flexibility into design, production, and distribution
Sony – purchases components from suppliers in Thailand, Malaysia, and around the world
GM is building four similar plants in Argentina, Poland, China, and Thailand
Some Some Multinational CorporationsMultinational Corporations (1 of 3)(1 of 3)
CountryCountry Foreign SalesForeign SalesCompanyCompany of Originof Origin as % of Totalas % of Total
Nestlé Switzerland 98.2Nokia Finland 97.6Philips Netherlands 94.0Bayer Germany 89.8ABB Germany 87.2SAP Germany 80.0Exxon Mobil United States 79.6Royal Dutch/Shell Netherlands 73.3IBM United States 62.7McDonald’s United States 61.5
Some Multinational CorporationsSome Multinational Corporations (2 of 3)(2 of 3)
WorkforceCompany Home
Country% SalesOutsideHomeCountry
% AssetsOutsideHomeCountry
% Foreign
Colgate-Palmolive
USA 72 63 NA
DowChemical
USA 60 50 NA
Gillette USA 62 53 NA
Honda Japan 63 36 NA
IBM USA 57 47 51
Citicorp USA 34 46 NA
Some Multinational CorporationsSome Multinational Corporations (3 of 3)(3 of 3)
WorkforceCompany Home
Country% SalesOutsideHomeCountry
% AssetsOutsideHomeCountry
% Foreign
ICI Britain 78 50 NA
Nestlé Switzerland 98 95 97
Philips Netherlands 94 85 82
Siemens Germany 51 NA 38
Electronics
Unilever Britain & Netherlands
95 70 64
Boeing Suppliers (777)Boeing Suppliers (777)
Firm Country PartsAlenia Italy Wing flaps
AeroSpaceTechnologies
Australia Rudder
CASA Spain Ailerons
doors, wing sectionFuji Japan Landing gear
GEC Avionics United Kingdom Flight computersKorean Air Korea Flap supports
Menasco Aerospace Canada Landing gears
Short Brothers Ireland Landing gear doors
SingaporeAerospace
Singapore Landing gear doors