PDK 409

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 UNIT 1
INTRODUCTION TO OPERATIONS
MANAGEMENT
 Learning Objectives
 Define the term operations management
 Identify the three major functional areas of
organizations and describe how they
interrelate
 Compare and contrast service and
manufacturing operations
 Describe the operations function and the
nature of the operations manager’s job
 Learning Objectives
 Differentiate between design and operation
of production systems
 Describe the key aspects of operations
management decision making
 Briefly describe the historical evolution of
operations management
 Identify current trends that impact operations
management
DEFINITIONS
Operations management is the
administration of business practices to
create the highest level of efficiency
possible within an organization.
It is concerned with converting materials
and labour into goods and services as
efficiently as possible to maximize the
profit of an organization.
The design, execution,
and control of operations
that convert resources into
desired goods and
services, and implement a
company's business
strategy.
Operations management is an
area of management concerned
with designing and controlling the
process of production and
redesigning business operations
in the production of goods or
services.
It involves the responsibility of
ensuring that business
operations are efficient in
terms of using as few
resources as needed and
effective in terms of meeting
customer requirements.
It is concerned with managing an
entire production system which is
the process that converts inputs
(in the forms of raw materials,
labour, and energy) into outputs
(in the form of goods and/or
services), as an asset or delivers
a product or services
 Operations Management
Operations Management is:
The management of systems or processes
that create goods and/or provide services

Operations Management affects:

 Companies’ ability to compete
 Nation’s ability to compete internationally
 The Organization

The Three Basic Functions of organizations

Organization

Finance Operations Marketing

 FINANCE
The finance function of a business
is responsible for securing and
distributing funds for operations.
This function also is typically in
charge of purchasing goods,
supplies, and services that are
necessary to carry out marketing
and operational activities.
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 Budgeting and forecasting expenses, revenue,
profits, costs, losses, and debt are crucial tasks
that the finance function of any business must be
able to perform successfully.
 Managing cash flow and the financial assets of a
company is no easy task. To stay competitive a
business must be able to manage their money
effectively. This could mean developing investment
strategies that produce a significant short-term yield
without taking on excess risk.

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 MARKETING
 The marketing function of a business is ultimately
responsible for ensuring the business has customers.
 The marketing activities and efforts of a company must
focus on ensuring that the products and or services of the
business are able to meet the needs and wants of the
customer.
 The marketing department must ensure that the target
market is aware that the companies goods and services,
and further, are aware that the products are able to meet
their needs and wants.
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 The marketing side of a business must focus on
developing strategies and plans that effectively
create this awareness.
 For instance how a company advertises their
products and services is developed and executed
by the marketing department.
 The marketing function of a business attempts to
create a consumer experience that is optimized for
selling the products and services of a business.
 Marketing department will prepare a marketing plan
which forecasts sales and more importantly acts as
the blueprint of how a company will entice
customers to purchase a firm's products and
services.
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 OPERATIONS
Operations is the function of a business that
is responsible for creating the goods and
services of a business.
Operations are responsible for producing
what the company sells within the
boundaries of the budgets and forecasts
supplied by the finance department as well
as the supply and demand forecasts of
determined by the marketing department.

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Operations must produce products and
services in line with what the marketing
department has dictated is necessary to
meet the needs and wants of the consumer.

Operations is also the biggest player in

running and managing the supply chain.
Supply chain management is a crucial aspect
of any business and the proper operations
management approach can make or break a
business.

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 Value-Added Process

The operations function involves the conversion of

inputs into outputs
Value added
Inputs
Transformation/ Outputs
Land
Conversion Goods
Labor
process Services
Capital
Feedback

Control
Feedback Feedback
 Value-Added & Product
Packages
 Value-added is the difference
between the cost of inputs and the
value or price of outputs.
 Product packages are a
combination of goods and services.
 Product packages can make a
company more competitive.
 Goods-service Continuum

Goods Service

Surgery, teaching

Song writing, software development

Computer repair, restaurant meal

Automobile Repair, fast food

Home remodeling, retail sales

Automobile assembly, steel making

 Food Processor

Inputs Processing Outputs

Raw Vegetables Cleaning Canned
Metal Sheets Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment
 Hospital Process

Inputs Processing Outputs

Doctors, nurses Examination Healthy

Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy
 Manufacturing or Service?

Tangible Act
 Production of Goods vs. Delivery of
Services
 Production of goods – tangible output
 Delivery of services – an act
 Service job categories
 Government
 Wholesale/retail
 Financial services
 Healthcare
 Personal services
 Business services
 Education
 Key Differences

1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of
productivity
 Key Differences

6. Production and delivery

7. Quality assurance
8. Amount of inventory
9. Evaluation of work
10. Ability to patent design
 Goods vs Service
Characteristic Goods Service
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Output Tangible Intangible

Measurement of productivity Easy Difficult

Opportunity to correct problems High Low
Inventory Much Little
Evaluation Easier Difficult
Patentable Usually Not usual
 Scope of Operations Management
Operations Management includes:
 Forecasting
 Capacity planning
 Scheduling
 Managing inventories
 Assuring quality
 Motivating employees
 Deciding where to locate facilities
 Supply chain management
 And more . . .
 Types of Operations

Operations Examples
Goods Producing Farming, mining, construction,
manufacturing, power generation
Storage/Transportation Warehousing, trucking, mail
service, moving, taxis, buses,
hotels, airlines
Exchange Retailing, wholesaling, banking,
renting, leasing, library, loans
Entertainment Films, radio and television,
concerts, recording
Communication Newspapers, radio and television
newscasts, telephone, satellites
 Decline in Manufacturing Jobs
 Productivity
 Increasing productivity allows companies to
maintain or increase their output using fewer
workers
 Outsourcing
 Some manufacturing work has been outsourced
to more productive companies
 Why Manufacturing Matters
 Millions of workers in manufacturing jobs
 Accounts for over 70% of value of big
economies exports
 Average full-time compensation about 20%
higher than average of all workers
 Manufacturing workers more likely to have
benefits
 Productivity growth in manufacturing in the
last 5 years is more than double in big
economy
 Why Manufacturing Matters
 More than half of the total R&D
performed is in the manufacturing
industries
 Manufacturing workers earn an average
of about $25,000 more a year than
service workers
 When a manufacturing job is lost, an
average of 2.5 service jobs are lost
 Challenges of Managing
Services
 Service jobs are often less structured than
manufacturing jobs
 Customer contact is higher
 Worker skill levels are lower
 Services hire many low-skill, entry-level workers
 Employee turnover is higher
 Input variability is higher
 Service performance can be affected by worker’s
personal factors
 Real-time communication and resource location
 Customer demand and high expectation
 Key Decisions of Operations
Managers
 What
What resources/what amounts
 When
Needed/scheduled/ordered
 Where
Work to be done
 How
Designed
 Who
To do the work
 Decision Making

System Design
– capacity
– location
– arrangement of departments
– product and service planning
– acquisition and placement of
equipment
 Decision Making

System operation
– personnel
– inventory
– scheduling
– project
management
– quality assurance
 Decision Making

Models
Quantitative
approaches
Analysis of trade-offs
Systems approach
 Models

A model is an abstraction of reality.

– Physical
– Schematic
– Mathematical Tradeoffs

What are the pros and cons of models?

 Models Are Beneficial

 Easy to use, less expensive

 Require users to organize
 Increase understanding of the problem
 Enable “what if” questions
 Consistent tool for evaluation and
standardized format
 Power of mathematics
 Limitations of Models
 Quantitative information may be
emphasized over qualitative
 Models may be incorrectly applied and
results misinterpreted
 Nonqualified users may not comprehend
the rules on how to use the model
 Use of models does not guarantee good
decisions.
 Quantitative Approaches

• Linear programming
• Queuing Techniques
• Inventory models
• Project models
• Statistical models
 Analysis of Trade-Offs

 Decision on the amount of

inventory to stock
 Increased cost of holding
inventory
Vs.
 Level of customer service
 Systems Approach

“The whole is greater than

the sum of the parts.”

Suboptimization
 Pareto 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?

 Ethical Issues
 Financial statements
 Worker safety
 Product safety
 Quality
 Environment
 Community
 Hiring/firing workers
 Closing facilities
 Worker’s rights
 Business Operations Overlap

Operations

Marketing Finance
 Operations Interfaces
Industrial
Engineering
Maintenance
Distribution

Purchasing Public
Operations Relations

Legal
Personnel

Accounting MIS
 Historical Evolution of Operations
Management
 Industrial revolution (1770’s)
 Scientific management (1911)
 Mass production
 Interchangeable parts
 Division of labor
 Human relations movement (1920-60)
 Decision models (1915, 1960-70’s)
 Influence of Japanese manufacturers
 Trends in Business

 Major trends
 The Internet, e-commerce, e-business
 Management technology
 Globalization
 Management of supply chains
 Outsourcing
 Agility
 Ethical behavior
 Management Technology
 Technology: The application of
scientific discoveries to the
development and improvement of
goods and services
 Product and service technology
 Process technology
 Information technology
 Simple Product Supply Chain

Suppliers’ Direct Final

Producer Distributor
Suppliers Suppliers Consumer

Supply Chain: A sequence of activities

And organizations involved in producing
And delivering a good or service
 A Supply Chain for Bread

Stage of Production Value Value of

Added 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
 Other Important Trends
 Ethical behavior
 Operations strategy
 Working with fewer resources
 Revenue management
 Process analysis and improvement
 Increased regulation and product liability
 Lean production