Lecture 2

Operations
Management
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Types of Production
• Craft Production
• Mass Production
• Lean Production

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
The Machine That Changed The World

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Craft Production
• Low volume of production
• High customization
• High unit cost
• Very skilled labor
• Non-specialized, multi-purpose tools

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Mass Production
• High volume of production
• Low variety / standard goods
• Low unit cost
• Low skilled labor
• Specialized equipment / single
purpose tools
• Relies on hard technology for
efficiency
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Any type of production is a
managerial response to the existing
business environment

because managers are rational

decision-makers (or, need to be!)

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Craft Production is suitable when

• Demand volume is low

• High customization is required
• High prices may be charged
• Very skilled labor is available and
economically justified by prices
charged
• Appropriate technology depends on
the product characteristics
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Mass Production is suitable when

• Demand volume is high

• Standardized products acceptable in
marketplace
• High prices cannot be charged =>
Costs must be kept low; hence
– low cost (low skilled) labor
– specialized equipment / single purpose
tools
– relies on hard technology for efficiency
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
• Move from craft to mass production
occurred during/by the Industrial
Revolution in late 19th century
– Mass migrations from rural areas to
cities
– Traditional social bonds broken
– Non-human power sources
– Scientific/technological advances

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
• Adam Smith: Wealth of Nations (1776)
• Karl Marx: Das Kapital (1869)
• Joseph A. Schumpeter: The Theory of
Economic Development (1911)

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
• Early 20th century
• Fordism / Taylorism
– Quintessential mass production logic
• Emergence of human resource
issues
• WW II – Birth of Operations Research
• Management Science – 1950s, 1960s

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
• 1973 Oil Shock
• Emergence of Japanese Production
Techniques – 1980s
• PC / IT Revolution – 1980s
• Quality Management – 1980s, 1990s
• Collapse of Communist Block /
Globalization
• Supply Chain Management / Green Mfg
Practices
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
The prevailing business environment
is fundamentally different than most
of the 20th century.
- impatient customers (speed)
- more choice (variety)
- wider outreach (global reach)
- quality X price (better yet cheaper)

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Lean Production ?

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 Lean Production
• Aims to combine the good parts of each!

• High volume of production

• High variety/customization
• Low unit cost
• Labor with decision making autonomy
• Labor with problem solving skills
• Relies mostly on ‘soft technology’ for
efficiency
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Lean Production
• Focus on

‘changing the operating environment’

in addition to

‘optimizing in the given operating

environment’
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
What is the role of Operations
Management in the new business
environment?

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Decisions in
Operations Management
Processes and
Products Services Technology

Human
Capacity Resources Quality

Operating
Facilities Sourcing
Systems

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Operations
Management
Making sure that supply meets
demand – in the presence of scarce
resources!

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Better Ops Mgt
• More output per given inputs ( => cost
advantages and variety opportunities )
• Faster response to customer
wants/needs
• Lower costs
• Better management of risk or
uncertainty
• Better quality products/services
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Better Ops Mgt
• More output per given inputs ( => cost
advantages and variety opportunities )
• Faster response to customer
wants/needs
• Lower costs
• Better management of risk or
uncertainty
• Better quality products/services
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Challenge

• Scale

• Customer expectations of quality

• Response Speed

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Response speed –
supply rates

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Response speed –
New design rates

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Issues and Trends
 Global markets,  Supply chains
sourcing,  C-commerce
operations
 Virtual companies  Technological
advances
 Greater choice
 Emphasis on  Environment
service and social
 Speed and responsibilities
flexibility

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Competitiveness
The degree to which a nation can
produce goods and services that
meet the test of international
markets while simultaneously
maintaining or expanding the real
incomes of its citizens.

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Vitreon Corporation:
The Hyalite Project

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
• Process choice (over time)

• Productivity

• Product life cycle

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Product-Process
Matrix
 Product-Process
Matrix
• A visual tool to help us match a
product portfolio with the production
process type

• Helps us to identify the FOCUS

 1 2 3
High

4 5 6
Customization

7 8 9
Low
Low High
Volume
• In which box would you place Vitreon
in 2000?
• In which box would you place Vitreon
at the end of 2005?
 Process Types

• Projects
– Nonroutine jobs
• Job Shops
– Small runs
• Batch Processing
• Repetitive/Assembly
– Semicontinuous
• Continuous Processing
 Project process
Processes at
High • Selecting location for
new plant in Europe
• Installing ERP for a
manufacturing firm’s
manufacturing
business processes
organizations
Customization

Low
Low High
Volume
 Project process
Processes at
High • Selecting location for
new plant in Europe
• Installing ERP for a
manufacturing firm’s
manufacturing
business processes

Job process
• Machining precision
organizations
metal tubes
• Internal consulting team
Customization

at manufacturing firm

Low
Low High
Volume
 Project process
Processes at
High • Selecting location for
new plant in Europe
• Installing ERP for a
manufacturing firm’s
manufacturing
business processes

Job process
• Machining precision
organizations
metal tubes
• Internal consulting team
Customization

at manufacturing firm

Batch process
• Forging process to make fittings
for pressure vessels access
• Producing a batch of textbooks
at McGraw-Hill’s plant

Low
Low High
Volume
 Project process
Processes at
High • Selecting location for
new plant in Europe
• Installing ERP for a
manufacturing firm’s
manufacturing
business processes

Job process
• Machining precision
organizations
metal tubes
• Internal consulting team
Customization

at manufacturing firm

Batch process
• Forging process to make fittings
for pressure vessels access
• Producing a batch of textbooks
at McGraw-Hill’s plant

Line process
• Auto assembly
• Uno bread line

Low
Low High
Volume
 Project process
Processes at
High • Selecting location for
new plant in Europe
• Installing ERP for a
manufacturing firm’s
manufacturing
business processes

Job process
• Machining precision
organizations
metal tubes
• Internal consulting team
Customization

at manufacturing firm

Batch process
• Forging process to make fittings
for pressure vessels access
• Producing a batch of textbooks
at McGraw-Hill’s plant

Line process
• Auto assembly
• Uno bread line

Continuous process
• Oil refining process
• Filiz Makarna’s pasta
making process
Low
Low High
Volume
 Volume and
Process
Project process
• Selecting location for new
Decisions
plant in Europe
• Installing ERP for a
manufacturing firm’s
for
business processes

Manufacturi
Process design choices

Job process
• Machining precision metal
tubes
• Internal consulting team at
manufacturing firm
ng
Batch process
• Forging process to make fittings
for pressure vessels access
• Producing a batch of textbooks at
McGraw-Hill’s plant

Line process
• Auto assembly
• Uno bread line

Continuous process
• Oil refining process
• Filiz Makarna’s pasta
making process

Low High
Volume
 Volume and
Process
Project process
• Selecting location for new
Decisions
plant in Europe
• Installing ERP for a
manufacturing firm’s
for
business processes

Manufacturi
Process design choices

Job process
• Machining precision metal
tubes
• Internal consulting team at
manufacturing firm
ng
Batch process
• Forging process to make fittings
High volume, make- for pressure vessels access
• Producing a batch of textbooks at
to-stock process McGraw-Hill’s plant

 More vertical
Line process
integration • Auto assembly
 Less resource • Uno bread line
flexibility
 Less customer Continuous process
involvement • Oil refining process
• Filiz Makarna’s pasta
 More capital making process
intensity/
automation
Low High
Volume
 Volume and
Process
Low volume, make-
to-order process Project process
• Selecting location for new
Decisions



Less vertical
integration
More resource
plant in Europe
• Installing ERP for a
manufacturing firm’s
for
business processes
flexibility
Manufacturi
Process design choices

 More customer Job process

involvement • Machining precision metal

 Less capital
intensity/
tubes
• Internal consulting team at
manufacturing firm
ng
automation
Batch process
• Forging process to make fittings
High volume, make- for pressure vessels access
• Producing a batch of textbooks at
to-stock process McGraw-Hill’s plant

 More vertical
Line process
integration • Auto assembly
 Less resource • Uno bread line
flexibility
 Less customer Continuous process
involvement • Oil refining process
• Filiz Makarna’s pasta
 More capital making process
intensity/
automation
Low High
Volume
• Process choice (over time)

• Productivity

• Product life cycle

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Productivity
Output
Productivity =
Input

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Productivity
Output
Productivity =
Input

Productivity improves when firms:

 Become more efficient
 Downsize
 Expand
 Retrench
 Achieve breakthroughs
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Productivity Types
• Single factor productivity:
• Car per worker
• Car per $ of energy
• Multi-factor productivity:
* Car per $ of energy and labor
• Total factor productivity:
• Car per $ of all inputs

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Why measure productivity?
• Focus attention on factors =>mission
• Dbase for goal setting/assessing
performance
• Diagnostic tool for improvement
• Enhances motivation/job satisfaction
• Feedback / recognition

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Solved Example

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Vitreon Corporation:
The Hyalite Project

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Managerial Take-
aways
• Process choice is aligned with firm’s
business context
• Beware the trade-off between efficiency
and flexibility!
• Benchmarking pitfalls:
– High volume ops : scale economies
– High variety ops :
customization/innovation
• Know your true costs! Be careful with
overhead allocations

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Wriston Manufacturing
Corporation

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Expected burden rate = 4.37 – 0.017*(Plant sales) + 0.13*(# Families)

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.903272
R Square 0.815901
Adjusted R 0.754535
Standard Er 0.604775
Observation 9

ANOVA
df SS MS F Significance F
Regression 2 9.725774 4.862887 13.29557 0.00624
Residual 6 2.194515 0.365752
Total 8 11.92029

Coefficientstandard Erro t Stat P-value Lower 95% Upper 95%Lower 95.0% Upper 95.0%
Intercept 4.377327 0.477808 9.161277 9.52E-05 3.208174 5.54648 3.208174 5.546480026
X Variable 1 -0.0173 0.004622 -3.74291 0.009589 -0.02861 -0.00599 -0.02861 -0.00599025
X Variable 2 0.130803 0.037511 3.487024 0.013031 0.039016 0.22259 0.039016 0.222589574

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Take-aways from Wriston Corp.

• Product line complexity and low volumes drive overhead

• Misunderstanding of this distorts costing/pricing and results in errors in

decision making
• Mission at Detroit was different -> lower volume, higher variety -> higher

overhead
• Setup/switchover times may exceed significantly run times

• New products launched at Detroit : learning and low volumes

• Prototype testing, replacement parts at Detroit

• When volume increases, product is transferred elsewhere (just like the

reverse of what actually happened afterwards)

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Product Lifecyle
 Capacity

• Capacity is the upper limit or

ceiling on the load that an
operating unit can handle.
 Capacity Types
• Design capacity
– maximum obtainable output
• Effective capacity
– Maximum capacity given product mix,
procedures and policies, scheduling
difficulties, human considerations,
operations, external forces and other doses
of reality.
• Actual output
– rate of output actually achieved--cannot
exceed effective capacity.
Efficiency and Utilization
Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity
Product-Process
Matrix
 Product-Process
Matrix
• A visual tool to help us match a
product portfolio with the production
process type

• Helps us to identify the FOCUS

 Process Types

• Projects
– Nonroutine jobs
• Job Shops
– Small runs
• Batch Processing
• Repetitive/Assembly
– Semicontinuous
• Continuous Processing
 1 2 3
High

4 5 6
Customization

7 8 9
Low
Low High
Volume
 Project process
Processes at
High • Selecting location for
new plant in Europe
• Installing ERP for a
manufacturing firm’s
manufacturing
business processes
organizations
Customization

Low
Low High
Volume
 Project process
Processes at
High • Selecting location for
new plant in Europe
• Installing ERP for a
manufacturing firm’s
manufacturing
business processes

Job process
• Machining precision
organizations
metal tubes
• Internal consulting team
Customization

at manufacturing firm

Low
Low High
Volume
 Project process
Processes at
High • Selecting location for
new plant in Europe
• Installing ERP for a
manufacturing firm’s
manufacturing
business processes

Job process
• Machining precision
organizations
metal tubes
• Internal consulting team
Customization

at manufacturing firm

Batch process
• Forging process to make fittings
for pressure vessels access
• Producing a batch of textbooks
at McGraw-Hill’s plant

Low
Low High
Volume
 Project process
Processes at
High • Selecting location for
new plant in Europe
• Installing ERP for a
manufacturing firm’s
manufacturing
business processes

Job process
• Machining precision
organizations
metal tubes
• Internal consulting team
Customization

at manufacturing firm

Batch process
• Forging process to make fittings
for pressure vessels access
• Producing a batch of textbooks
at McGraw-Hill’s plant

Line process
• Auto assembly
• Uno bread line

Low
Low High
Volume
 Project process
Processes at
High • Selecting location for
new plant in Europe
• Installing ERP for a
manufacturing firm’s
manufacturing
business processes

Job process
• Machining precision
organizations
metal tubes
• Internal consulting team
Customization

at manufacturing firm

Batch process
• Forging process to make fittings
for pressure vessels access
• Producing a batch of textbooks
at McGraw-Hill’s plant

Line process
• Auto assembly
• Uno bread line

Continuous process
• Oil refining process
• Filiz Makarna’s pasta
making process
Low
Low High
Volume
 Volume and
Process
Project process
• Selecting location for new
Decisions
plant in Europe
• Installing ERP for a
manufacturing firm’s
for
business processes

Manufacturi
Process design choices

Job process
• Machining precision metal
tubes
• Internal consulting team at
manufacturing firm
ng
Batch process
• Forging process to make fittings
for pressure vessels access
• Producing a batch of textbooks at
McGraw-Hill’s plant

Line process
• Auto assembly
• Uno bread line

Continuous process
• Oil refining process
• Filiz Makarna’s pasta
making process

Low High
Volume
 Volume and
Process
Project process
• Selecting location for new
Decisions
plant in Europe
• Installing ERP for a
manufacturing firm’s
for
business processes

Manufacturi
Process design choices

Job process
• Machining precision metal
tubes
• Internal consulting team at
manufacturing firm
ng
Batch process
• Forging process to make fittings
High volume, make- for pressure vessels access
• Producing a batch of textbooks at
to-stock process McGraw-Hill’s plant

 More vertical
Line process
integration • Auto assembly
 Less resource • Uno bread line
flexibility
 Less customer Continuous process
involvement • Oil refining process
• Filiz Makarna’s pasta
 More capital making process
intensity/
automation
Low High
Volume
 Volume and
Process
Low volume, make-
to-order process Project process
• Selecting location for new
Decisions



Less vertical
integration
More resource
plant in Europe
• Installing ERP for a
manufacturing firm’s
for
business processes
flexibility
Manufacturi
Process design choices

 More customer Job process

involvement • Machining precision metal

 Less capital
intensity/
tubes
• Internal consulting team at
manufacturing firm
ng
automation
Batch process
• Forging process to make fittings
High volume, make- for pressure vessels access
• Producing a batch of textbooks at
to-stock process McGraw-Hill’s plant

 More vertical
Line process
integration • Auto assembly
 Less resource • Uno bread line
flexibility
 Less customer Continuous process
involvement • Oil refining process
• Filiz Makarna’s pasta
 More capital making process
intensity/
automation
Low High
Volume
 Better Ops Mgt
• More output per given inputs ( => cost
advantages and variety opportunities )
• Faster response to customer
wants/needs
• Lower costs
• Better management of risk or
uncertainty
• Better quality products/services
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Challenge

• Scale

• Customer expectations of quality

• Response Speed

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Response speed –
supply rates

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Response speed –
New design rates

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Issues and Trends
 Global markets,  Supply chains
sourcing,  C-commerce
operations
 Virtual companies  Technological
advances
 Greater choice
 Emphasis on  Environment
service and social
 Speed and responsibilities
flexibility

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Competitiveness
The degree to which a nation can
produce goods and services that
meet the test of international
markets while simultaneously
maintaining or expanding the real
incomes of its citizens.

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 In any economy,

Increase of overall ‘wealth’ is

possible through productivity
increase

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Productivity
Output
Productivity =
Input

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Productivity
Output
Productivity =
Input

Productivity improves when firms:

 Become more efficient
 Downsize
 Expand
 Retrench
 Achieve breakthroughs
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
 Productivity Types
• Single factor productivity:
• Car per worker
• Car per $ of energy
• Multi-factor productivity:
* Car per $ of energy and labor
• Total factor productivity:
• Car per $ of all inputs

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Why measure productivity?
• Focus attention on factors =>mission
• Dbase for goal setting/assessing
performance
• Diagnostic tool for improvement
• Enhances motivation/job satisfaction
• Feedback / recognition

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Solved Example

To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.