Introduction to Operations Management

Operations is the production activities that go on in the organization, regardless of whether the end product is a good or a serviceWhat is Operations?

Operations management is defined as the design, operation, and improvement of the systems that create the firms 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 Management (OM)?

Operations as a transformation processOperations as a basic functionOperations as the technical coreThe Operations Function

Operations as a Transformation Process

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 by value added for:R&DInvestment in new facilities and equipmentPaying workersPaying for materialsPaying for general expensesProfits

Transformation Process of a Canned Food ProcessorInputsProcessingOutputs Raw vegetables Metal sheets Water Energy Labor Building Equipment

Transformation Process of a HospitalInputs ProcessingOutputs

Examples of Various Operations

Types of Transformation ProcessesPhysical- manufacturingLocational- transportationExchange- retailingStorage- warehousingPhysiological- health careInformational- telecommunicationsPsychological- entertainment

MarketingGenerates demand gets customersOperationscreates product or serviceFinance/AccountingObtains fundsTracks organizational performanceOperations as a Basic Function

Business Functions OverlapOperationsFinanceMarketing

Business Functions - Bank(1 of 3)

Business Functions Airline(2 of 3)

Business Functions Manufacturer(3 of 3)

Operations as the Technical Core

Importance of OM(Why Study OM?) (1 of 2)Operations is one of the three major functions (marketing, finance and operations) of an organizationOM affects 1) the companies ability to compete and 2) the nations ability to compete internationallyNearly half of the employed people over the world have jobs in operationsOM is a costly part of an organization

Importance of OM(Why Study OM?) (2 of 2)Offers a major opportunity for an organization to improve its productivity and profitabilityThe OM function is responsible for a major portion of the assets of most organizationsThe concepts, tools and techniques of OM are widely used in managing other functions.Presents career opportunities

Options 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 vs. Delivery of Services

Manufacturing or Service

Goods vs. Services (1 of 2)

Goods vs. Services (2 of 2)

CharacteristicsGoods ServiceProduction and consumption SeparateGenerally take place at the same timeLocationCentralizedGenerally dispersedLocational factors to be consideredCost-orientedRevenue-orientedResellingPossible Not possiblePatentabilityUsuallyNot usuallyActivitiesSmooth and efficientSlower and awkwardInventoriability andTransportabilityInventoriable &TransportableNon inventoriable and so nontransportable

Service Job Categories (1 of 2)Governmental servicesMunicipal servicesTrade services (wholesale/retail)Finance, insurance, real estateMedical (healthcare)Personal services

Service Job Categories (2 of 2)Business servicesEducationFood, lodging and entertainmentUtilities and transportationLegal, consultingRepair

Goods Contain Services / Services Contain GoodsAutomobile assembly, steel makingComputerHome remodeling, retail salesFast-food MealRestaurant MealAuto RepairHospital CareAdvertising AgencyInvestment ManagementConsulting ServiceSurgery, Teaching,CounselingPercent of Product that is a GoodPercent of Product that is a Service

Steel production Automobile fabricationHouse building Road constructio

Auto RepairAppliance repairDressmakingFarmingMaid ServiceManual car washTeachingLawn mowingHigh goods contentLow service contentGoods-services ContinuumLow goods contentHigh service content

Chart1

7921

7228

7228

6832

6436

6436

5842

4446

4357

3565

3268

3070

Mfg.

Service

Year

Percent

U.S. Manufacturing vs. Service Employment

Sheet1

YearMfg.Service

457921

507228

557228

606832

656436

706436

755842

804446

854357

903565

952575

003070

022575

052080

Sheet1

Mfg.

Service

Year

Percent

U.S. Manufacturing vs. Service Employment

Sheet2

Sheet3

Decline in Manufacturing JobsProductivityIncreasing productivity allows companies to maintain or increase their output using fewer workersOutsourcingSome manufacturing work has been outsourced to more productive companies

Challenges of Managing ServicesService jobs are often less structured than manufacturing jobsCustomer 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 workers personal factors

Services in ManufacturingIn manufacturing, services can be divided into two groups:Core ServicesValue-added Services

Core services are basic things that customers want from products they purchaseCore Services

Core Services Performance ObjectivesOperationsManagement

Value-added services differentiate the organization from competitors and build relationships that bind customers to the firm in a positive wayValue-Added Services

Value-Added Service CategoriesOperationsManagement

The Scope of OM: What Operations Managers Do?Plan - Organize - Staff - Lead - Control

Critical OM Decisions

Critical OM DecisionsService, product designProcess, capacity designPlanning of the technologyLocationLayout designHuman resources, job designProduction planning and schedulingSupply chain managementInventory managementMaintenanceQuality management

Operations Management and Decision Making Models Quantitative approaches Analysis of tradeoffs Systems approach Establishing priorities

ModelsA model is an abstraction of reality.Types of models:

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:Quantitative information may be emphasized at the expense of qualitative informationMay be incorrectly applied and results may be misinterpreted

Quantitative Approaches(Analytical Tools used in OM)Linear programmingQueuing techniquesInventory modelsProject modelsStatistical modelsSimulationDecision analysis

TradeoffsDecision on the amount of inventory to stock

Increased cost of holding inventoryvs.Level of customer service

Systems ApproachThe whole is greater than the sum of the parts.

Establishing Priorities:Pareto PhenomenonA 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 Historical Evolution of Operations Management

Significant Events in Operations Management

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 OM (1 of 4): Industrial Revolution and Scientific ManagementIndustrial RevolutionSteam engine1769James WattDivision of labor1776Adam SmithInterchangeable parts1790Eli Whitney

Scientific ManagementPrinciples1911Frederick W. TaylorTime and motion studies1911Frank & Lillian GilbrethActivity scheduling chart1912Henry GantMoving assembly line1913Henry Ford

Historical Events in OM (2 of 4) : Human Relations and Management ScienceHuman RelationsHawthorne studies1930Elton MayoMotivation theories1940sAbraham Maslow1950sFrederick Hertzberg1960sDouglas McGregor

Management ScienceLinear programming1947George DantzigDigital computer1951Remington RandSimulation, PERT/CPM, 1950sOperations researchWaiting line theory groupsMRP1960sJoseph Orlicky, IBM

Historical Events in OM (3 of 4):Quality Revolution and GlobalizationQuality RevolutionJIT1970sTaiichi Ohno, ToyotaTQM1980sW. Edwards Deming,Joseph Juran, et. al.Strategy and operationsSkinner, HayesReengineering1990sHammer, ChampyWorld Trade Organization1990sNumerous countriesand companies

GlobalizationEuropean Union and1970sIBM and othersother trade agreementsEDI, EFT, CIM1980s

Historical Events in OM (4 of 4) : Information Age/Internet RevolutionInformation Age/Internet Revolution

Internet, WWW, ERP1990sARPANET, TimSupply chainBerners-Lee, SAP, i2management,Technologies, ORACLE,E-commercePeopleSoft, Amazon,Yahoo, eBay,and others

Exciting New Challenges in Operations Management

New Concepts and Trends in OMMass Customization Supply Chain ManagementOutsourcingLean manufacturingAgilityElectronic Commerce

New Concepts and Trends(1 of 6): Mass CustomizationThe rapid, low cost production of goods and services that fulfill constantly changing and increasingly unique customer desires.

New Concepts and Trends (2 of 6): Supply Chain Management The management of the sequence of organizations- their facilities, functions and activities- that are involved in producing and delivering a product or serviceSCM 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)

Simple Product Supply Chain

A Supply Chain for Bread

Stage of ProductionValue AddedValue of ProductFarmer produces and harvests wheat$0.15$0.15Wheat transported to mill$0.08$0.23Mill produces flour$0.15$0.38Flour transported to baker$0.08$0.46Baker produces bread$0.54$1.00Bread transported to grocery store$0.08$1.08Grocery store displays and sells bread$0.21$1.29Total Value-Added$1.29

New Concepts and Trends (3 of 6) : OutsourcingBuying goods or services rather than producing goods or performing services within the organization

New Concepts and Trends (4 of 6): Lean 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 varietyAn 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 (5 of 6): Agility 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 (6 of 6): Electronic Commerce The use of computer networks, primarily the internet, to buy and sell products, services, and information.

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)

Developing flexible supply chains to enable mass customization of products and servicesAchieving the Service Factory

Globalization

Globalization can take the form of: Selling in foreign markets Producing in foreign lands Purchasing from foreign suppliers Partnering with foreign firms

Reasons to Globalize Operations (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 Operations (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 StrategiesBoeing 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 distributionSony purchases components from suppliers in Thailand, Malaysia, and around the worldGM is building four similar plants in Argentina, Poland, China, and Thailand

Some Multinational Corporations (1 of 3)

Some Multinational Corporations (2 of 3)

Some Multinational Corporations (3 of 3)

Boeing Suppliers (777)

At this point:1. Introduce yourself - your students are likely to want to know something about your qualifications and interests - overall, where you are coming from.2. Have students introduce themselves. Ask why they are taking this class. If you are fortunate enough to have a Polaroid camera, take pictures of each student for later posting on a class board so both they and you get to know each other.3. Discuss both choice of textbook and development of syllabus.4. If you are expecting students to work in teams, at east introduce the choice of team members. If at all possible, have students participate in a team building or team study exercise. It works wonders. Most student have been told to work in teams in prior classes, but have never examined exactly what a team is and how it works. One hour spent in a team building/examination exercise saves many hours and avoids many problems later on.

Two additional points: 1. Any activity is an operation 2. No company produces only goods - service is a greater or lesser part of any product. (Discuss this in more detail later)

You should stress that the time-based historical perspective is only one way to look at the development of Operations Management, outcome focus is another.