Chapter One

Nature of Operation Management

 Lecture outline
• What operations management is?
• What do operations managers do?
• Difference between service and manufacturing orgs
• Evolution of operations management
• How Operations Strategy is developed?
• Productivity and competitiveness
• Globalization and competitiveness
• Operations management and e–business
 Introduction
 Compete in d/t env’t today: quality, time-based
competition, efficiency, international perspectives, and
customer relationships
 Global competition, e-business, the Internet, and
advances in technology require flexibility and
responsiveness.
 This new focus made operations management in the
limelight of business as it is through operations that an
orgn achieve its competitiveness.
 What is operations?
– a function or system that transforms inputs into outputs of
greater value.
– defined as transformation process.
What is Operations Management?
• What is operations management?
• design, operation, and improvement of productive systems
that is responsible for producing goods and/or services.
• Operations is more than planning and controlling; it’s doing.
• Operations managers are found in banks, hospitals, factories,
and gov’t offices.
– They work with customers and suppliers, the latest technology, and
global partners.
• Operations management is responsible for orchestrating all
the resources needed to produce the final product
 Scope
• It is core business function whether an
organization
 large or small,
Provides a physical good or a service
Domestic or International
Profit or not-for-profit
 Three Major Functions
• Every business is managed through three
major functions: finance, marketing, and
operations management.

• Operations is at the heart and all the other functions

are support functions
Transformation Process
• What is a transformation process?
– a series of activities along a value chain extending from
supplier to customer.
– activities that do not add value are superfluous and
should be eliminated
– OM tries to ensure that the transformation process is
performed efficiently and that the out put is of greater
value than the sum of inputs.
– Thus, the role of operations is value creation throughout
the supply chain.
• Supply chain - a sequence of activities and organizations
involved in producing and delivering a good or service
 Operations as a Transformation
Process

INPUT
•Material
•Machines TRANSFORMATION OUTPUT
•Goods
•Labor PROCESS
•Services
•Management
•Capital

Feedback
 Cont’d…
• Physical: as in manufacturing operations
• Locational: as in transportation operations
• Exchange: as in retail operations
• Physiological: as in health care
• Psychological: as in entertainment
• Informational: as in communication
 Cont’d…
• For operations management to be successful,
it must add value during the transformation
process.
• Value added - the net increase between the
final value of a product (price) and the value
of all the inputs( cost).
• The greater the value added, the more
productive a business.
 Cont’d…
• An obvious way to add value is to reduce the cost of
activities in the transformation process.
• Operations also must be efficient.
• Efficiency - being able to perform activities well,
and at the lowest possible cost.
• Therefore, in this competitive environment, the role
of operations management has become the focal
point of efforts to increase competitiveness by
improving value added and efficiency.
 Why to study about OM?
• OM is one of the three major functions of any
organization and it is integrally related to all
other business functions.
• We want to know how goods and services are
produced.
• To understand what operations managers do
• It is such a costly part of an organization, hence
it provides the organization to improve its
profitability and enhance its service to the
society.( Case from heizer p6).
 Impact of OM
Extracted from Heizer

Note: OM provides a major opportunity

for an organization to improve its profitability and enhance its service to society
 Operations Manager’s responsibility
What Do Operations • Location
Managers Do?
• Layout design
 All mgrs perform basic
functions of • Human resource and
management process. job design
10 Decision areas: • Supply chain
• Service and product management
design • Inventory, MRP, JIT
• Quality management • Intermediate and short
• Process and capacity term scheduling
design • Maintenance
Operations Manager’s responsibility
cont’d....
 Cont’d…
• Thus operations managers thus are responsible for:
– Implement the operations strategy
– Increase productivity
– Gain competitive advantage
 Operations and other functions
• Operations
• Marketing
• Finance and
accounting
• Human
resources
• Outside
suppliers
 Differences between Manufacturing and Service Organizations

• Organizations can be divided into two broad categories:

manufacturing organizations and service organizations,
each posing unique challenges for the operations
function.
• Goods - Physical items produced by business
organizations.
• Services - Activities that provide some combination of time,
location, form, and psychological value.
• Two major dimensions:
Degree of tangibility
Degree of customer contact
Cont’d…
 Cont’d…
• However, the differences between
manufacturing and service organizations are not
as clear-cut as they might appear, and there is
much overlap between them.
• As a result, companies usually sell product
packages, which are a combination of goods and
services which in turn makes operations
Interesting and Challenging
Good – Service Continnum
 Importance to Economy
• The service sector and the manufacturing
sector are both important to the economy
• According to a January 2011 report by the Ministry of Finance
and Economic Development, the service sector’s contribution
has increased from a total of 14% to the national
GDP(2008/09) fiscal year to 45.1% of GDP during the fiscal
year that ended in 2009 and 46.6% during the fiscal year that
ended in 2010/11.
 Importance to Economy cont’d…
• The reason for the decline in manufacturing jobs is
twofold:
i) As the operations function in manufacturing
companies finds more productive ways of producing
goods, the companies are able to maintain or even
increase their output using fewer workers.
ii) Furthermore, some manufacturing work has been
outsourced to more productive companies, many in
other countries, that are able to produce goods at
lower costs
Source: Taylor Historical dev’t in OM
 KEY ISSUES FOR TODAY’S BUSINESS OPERATIONS

• Economic conditions
• Innovating - Finding new or improved products or services
• Quality problems
• Risk management - product recalls, oil spills, and natural and man-
made disasters, and economic ups and downs
• Competing in a global economy- China Factor
• Environmental Concerns – companies are forced to reduce their
carbon footprint (the amount of carbon dioxide generated by their
operations and their supply chains) and to generally operate
sustainable processes.
 Sustainability- refers to service and production processes that use
resources in ways that do not harm ecological systems that support
both current and future human existence.
Ethical Conduct
• Is where by managers must consider how their
decisions will affect shareholders,
management, employees, customers, the
community at large, and the environment.
• Finding solutions that will be in the best
interests of all of these stakeholders is not
always easy, but it is a goal that all managers
should strive to achieve.
 Ethical issues arise in operations management, including

• Worker safety: providing adequate training, maintaining equipment in good

working condition, maintaining a safe working environment.
• Product safety: providing products that minimize the risk of injury to users or
damage to property or the environment.
• Quality: honoring warranties, avoiding hidden defects.
• The environment: not doing things that will harm the environment.
• The community: being a good neighbor.
• Hiring and firing workers: avoiding false pretenses (e.g., promising a long-term job
when that is not what is intended).
• Closing facilities: taking into account the impact on a community, and honoring
commitments that have been made.
• Workers’ rights: respecting workers’ rights, dealing with workers’ problems quickly
and fairly.
 Operations strategy and competitiveness

• To maintain a competitive position in the

marketplace, a company must have a long-
range plan.
• This plan needs to include the company’s long-
term goals, an understanding of the
marketplace, and a way to differentiate itself
from its competitors.
 Cont’d…
• The long-range plan of a business, designed to
provide and sustain shareholder value, is called
the business strategy.
• Operations strategy is a long-range plan for the
operations function that specifies the design and
use of resources to support the business
strategy.
 Cont’d…
• two companies can operate in the same industry,
but with very different business strategies; one
which has a strategy to compete on cost, while
the other may have a strategy to compete on
service.
• Operations strategy specifies the policies and
plans for using the organization’s resources to
support its long-term competitive strategy.
 Cont’d…

Fig 2 Relationship between the business strategy and the

functional strategy
 Developing a business strategy
• The three factors which are critical to the
development of the company’s long-range plan,
or business strategy are:
 the company’s mission - understanding of what
business the company is in,
 environmental scanning- analyzing and
developing an understanding of the market and
 core competencies- identifying the company’s
strengths
 Cont’d…

Three inputs in developing a business strategy

 Developing an operations strategy

 Once a business strategy has been developed, an

operations strategy must be formulated.
 The operations strategy relates the business
strategy to the operations function.
 It focuses on specific capability of the operation
that give the company a competitive edge.
 These capabilities are called competitive priorities.
By excelling in one of these capabilities, a company
can become a winner in its market.
 Cont’d…

Operations strategy and the design of the operations function

 Competitive Priorities
a) Competitive Priorities
• Operations managers must work closely with
marketing in order to understand the
competitive situation in the company’s
market before they can determine which
competitive priorities are important.
• There are of competitive priorities : four
broad categories
 Cont’d…
1. Cost - Competing based on cost means offering
a product at a low price relative to the prices of
competing products.
 The role of the operations strategy is to
develop a plan for the use of resources to
support this type of competition.
 a low-cost strategy can result in a higher profit
margin, even at a competitive price
 Cont’d…
 To develop this competitive priority, the operations
function must focus primarily on cutting costs in the
system, such as costs of labor, materials, and facilities.
 Companies that compete based on cost:
 study their operations system carefully to eliminate all
waste.
 offer extra training to employees to maximize their
productivity and minimize scrap.
 invest in automation in order to increase productivity.
 offer a narrow range of products and product features,
allow for little customization, and have an operations
process that is designed to be as efficient as possible.
 Cont’d…
2. Quality -Many companies claim that quality is
their top priority, and many customers say that
they look for quality in the products they buy.
• it depends on who is defining it. For example,
quality could be -the product that lasts a long
time, such as with a Volvo, a car known for its
longevity; Or It might mean high performance,
such as a BMW.
• When companies focus on quality as a competitive
priority, they are focusing on the dimensions of
quality that are considered important by their
customers.
 Cont’d…
 Quality as a competitive priority has two
dimensions:
i) high-performance design -means that the operations
function will be designed to focus on aspects of quality
such as superior features, close tolerances, high
durability, and excellent customer service.
ii) goods and services consistency- which measures how
often the goods or services meet the exact design
specifications, i.e. the same product every time at any
location.
 Cont’d…
• A company that competes on this dimension needs to
implement quality in every area of the organization.
• Operations function focus on two issues:
 product design quality- which involves making sure the
product meets the requirements of the customer.
 process quality, which deals with designing a process to
produce error-free products, i.e, the process must produce
the product exactly as it is designed.
 This includes focusing on equipment, workers, materials,
and every other aspect of the operation to make sure it
works the way it is supposed to.
 Cont’d…
Time or speed is one of the most important
competitive priorities today. Companies in all
industries are competing to deliver high-quality
products in as short a time as possible.
 Making time a competitive priority means
competing based on all time-related issues, such
as rapid delivery and on-time delivery.
 Rapid delivery refers to how quickly an order is
received; on-time delivery refers to the number
of times deliveries are made on time.
 Cont’d…
• When time is a competitive priority, the job of
the operations function is:
 to critically analyze the system and combine or
eliminate processes in order to save time.
 use technology to speed up processes,
 rely on a flexible workforce to meet peak
demand periods, and
 eliminate unnecessary steps in the production
process.
 Cont’d…
Flexibility -the ability to readily accommodate rapidly
changing company’s environment, including
customer needs and expectations which can be a
winning strategy.
• There are two dimensions of flexibility:
 Product flexibility- the ability to offer a wide variety of
goods or services and customize them to the unique needs
of clients.
 volume flexibility- the ability to rapidly increase or
decrease the amount produced in order to accommodate
changes in the demand
• flexible companies often offer greater customer service and
can meet unique customer requirements
 Cont’d…
• Operations focus in flexible companies :
 more general-purpose equipment that can be
used to make many different kinds of products.
 workers tend to have higher skill levels and can
often perform many different tasks in order to
meet customer needs.
 Trade-Offs
The Need for Trade-Offs
• Operations function needs to give special focus to some
priorities but not all. Aren’t all the priorities important?
• As more resources are dedicated toward one priority,
fewer resources are left for others.
• The operations function must place emphasis on those
priorities that directly support the business strategy.
• Therefore, it needs to make trade-offs between the
different priorities
 Cont’d…
 quality vs cost –trade off between quality and
price
 flexibility vs speed
 flexiblity vs cost
• One way that large facilities with multiple
products can address the issue of tradeoffs is
using the concept of plant-within-a-plant
(PWP)
 Order Winners and Qualifiers

• Order qualifiers are those competitive priorities

that a company has to meet if it wants to do
business in a particular market.
• Order winners, on the other hand, are the
competitive priorities that help a company win
orders in the market
• order winners and order qualifiers change over
time.
 Translating Competitive Priorities into Production
Requirements
• Once the competitive priorities have been identified, a plan is
developed to support those priorities.
• The operations strategy will specify the design and use of the
organization’s resources; that is, it will set forth specific operations
requirements.

• These can be broken down into two categories.

1. Structure—Operations decisions related to the design of the
production process, such as characteristics of facilities used,
selection of appropriate technology, and the flow of goods and
services through the facility.
 Cont’d…
2. Infrastructure—Operations decisions related to
the planning and control systems of the operation,
such as the organization of the operations
function, the skills and pay of workers, and quality
control approaches.
• The structure and infrastructure of the production
process must be aligned to enable the company to
pursue its long-term plan.
 Competitiveness and Productivity
• Competitiveness
– degree to which a company/ nation can produce goods and
services that meet the test of markets.
– The most common measure of competitiveness is productivity.
– Increase in productivity allow wages to grow without producing
inflation, thus raising standard of living.
– Productivity growth also represents how quickly an economy
can expand its capacity to supply goods and services..
 Cont’d…
• Productivity
– ratio of output to input
• Output
– sales made, products produced, customers served, meals
delivered, or calls answered
• Input
– labor hours, investment in equipment, material usage, or
square footage
Competitiveness and
Productivity (cont.)

Measures of Productivity
 Productivity Increase
• Become efficient
– output increases with little or no increase in input
• Expand
– both output and input grow with output growing more
rapidly
• Achieve breakthroughs
– output increases while input decreases
• Downsize
– output remains the same and input is reduced
• Retrench
– both output and input decrease, with input decreasing at
a faster rate
…END…..