UNIT ONE

Introduction/Nature of
Operations Management

1-1
 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
 Why do we study OM?
Some of the reasons are:
a)To provide modern approaches of managing
operations e.g. BPR, JIT, TQM, etc…
b)Provides systematic way of thinking at
organizational process
c) Presents attractive career opportunities
d)Its concept is widely used in managing other
functions of business, etc…
 The Organization

The Three Basic Functions

Organization

Finance Operations Marketing

 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

 Example: Food Processor

What are the inputs, processes and

outputs of food processing company in
order to produce a canned vegetable?
 Food Processor

Inputs Processing Outputs

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

What are the inputs, processes and

outputs of hospitalizing?
 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
 Goods vs Service: High or Low
Characteristic Goods Service
Customer contact
Uniformity of input
Labor content
Uniformity of output
Output
Measurement of productivity
Opportunity to correct problems
Inventory
Evaluation
Patentable
 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
 U.S. Manufacturing vs. Service Employment
Year Mfg. Service
45
90 79 21
50 72 28 Mfg.
80
55 72 28 Service
70
60
60 68 32
65 64 36
Percent

50
70
40 64 36
75
30 58 42
80 44 46
20
85 43 57
10
90 35 65
0
95 25 75
45 50 55 60 65 70 75 80 85 90 95 00 02 05
00 30 70
02 25 75 Year
 Challenges of Managing Services
• Service jobs are often less structured than
manufacturing jobs
• Customer contact is higher
• Worker skill levels are lower
• Employee turnover is higher
• Input variability is higher
• Service performance can be affected by worker’s
personal factors
 Operations function and its
environment
The Environment of Operations
• EXTERNAL ENVIRONMENT
– Economic environment: Interest rate, tax regulation, inflation, etc…
– Political environment: Gov’t regulations, pollution,
– Competition
– Technology
• INTERNAL ENVIRONMENT
– Finance: sources of finance, investment proposals, allocation of funds,
etc..
– Accounting: cost, financial statements
– Marketing: sales forecast, sales order, customer needs, feedback, etc..
– Engineering: method analysis, layout, maintenance, etc…
– HR
– R&D, etc
Operations Management Decision Making
tools
• Models
• Quantitative approaches
• Analysis of trade-offs
• Systems approach
• Establishing priorities
• Ethics
 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
 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
 Establishing priorities (Pareto Rule)

• 80/20 Rule - 80% of problems are caused

by 20% of the activities.

How do we identify the vital few?

 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 Value Valu

Production Added e of
Prod
uct
Farmer produces and $0.15 $0.15
harvests wheat
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 $0.08 $1.08
store
Grocery store displays and $0.21 $1.29
sells bread
Total Value-Added $1.29
 UNIT TWO

Operations Strategy and

Competitiveness

1-34
Competitiveness:

How effectively an organization meets the

wants and needs of customers relative to
others that offer similar goods or services
 Businesses Compete Using Marketing

• Identifying consumer wants and needs

• Pricing
• Advertising and promotion
 Businesses Compete Using Operations

• Product and service design

• Cost
• Location
• Quality
• Quick response
• Flexibility
• Inventory management
• Supply chain management
• Service and service quality
• Managers and workers
 Why Some Organizations Fail

• Too much emphasis on short-term financial

performance
• Failing to take advantage of strengths and
opportunities
• Neglecting operations strategy
• Failing to recognize competitive threats
 Why Some Organizations Fail
• Too much emphasis in product and service
design and not enough on improvement
• Neglecting investments in capital and human
resources
• Failing to establish good internal
communications
• Failing to consider customer wants and
needs
 Mission/Strategy/Tactics

Mission Strategy Tactics

How does mission, strategies and tactics relate to

decision making and distinctive competencies?
 Strategy
• Mission
– The reason for existence for an organization

• Goals & Objectives

– Provide detail and scope of mission

• Strategies
– Plans for achieving organizational goals and objectives
• Tactics
– The methods and actions taken to accomplish strategies
 Planning and Decision Making

Mission

Goals

Organizational Strategies

Functional Goals

Finance Marketing Operations

Strategies Strategies Strategies

Tactics Tactics Tactics

Operating Operating Operating

procedures procedures procedures
 Strategy Example

Rita is a high school student. She would like

to have a career in business, have a good
job, and earn enough income to live
comfortably.
What are the mission, Goal, Strategy,
Tactics, and Operations of Rita?
 Strategy Example

Rita is a high school student. She would like to have a

career in business, have a good job, and earn enough
income to live comfortably
• Mission: Live a good life
• Goal: Successful career, good income
• Strategy: Obtain a college education
• Tactics: Select a college and a major
• Operations: Register, buy books, take
courses, study, graduate, get job
 Examples of Strategies
• Low cost/Price: Outsource operations to third world
countries that have low labor cost
• Scale-based strategies: Use capital intensive methods
to achieve high output volume and low units cost
• Specialization: Focus on narrow product lines to achieve
higher quality
• Flexible operations: Focus on quick response and/or
customization
• High quality: Focus on achieving higher quality than
competitors
• Service: Helpful courteous, reliable, etc…
 Examples of Operations Strategies

Price Low Cost U.S. first-class postage

Motel-6, Red Roof Inns

Quality High-performance design Sony TV

or high quality Consistent Lexus, Cadillac
quality Pepsi, Kodak, Motorola

Time Rapid delivery Express Mail, FedEx,

On-time delivery One-hour photo, UPS

Flexibility Variety Burger King

Volume Supermarkets

Service Superior customer Disneyland

service Nordstroms

Location Convenience Banks, ATMs

 Global Strategy
• Strategic decisions must be made with respect
to globalization
• What works in one country may not work in
another
• Strategies must be changed to account for
these differences
• Other issues
– Political, social, cultural, and economic differences
 Strategy Formulation
• Distinctive competencies
• Environmental scanning
• SWOT
• Order qualifiers
• Order winners
 Strategy Formulation

• Order qualifiers
– Characteristics that customers perceive as
minimum standards of acceptability to be
considered as a potential purchase
• Order winners
– Characteristics of an organization’s goods or
services that cause it to be perceived as better
than the competition
 Key External Factors

• Economic conditions
• Political conditions
• Legal environment
• Technology
• Competition
• Markets
 Key Internal Factors

• Human Resources
• Facilities and equipment
• Financial resources
• Customers
• Products and services
• Technology
• Suppliers
 Operations Strategy
• Operations strategy – The approach,
consistent with organization strategy, that
is used to guide the operations function.
 Strategic OM Decisions
Decision Area Affects
Product and service design Costs, quality liability and environmental
Capacity Cost structure, flexibility
Process selection and layout Costs, flexibility, skill level, capacity

Work design Quality of work life, employee safety, productivity

Location Costs, visibility

Quality Ability to meet or exceed customer expectations
Inventory Costs, shortages
Maintenance Costs, equipment reliability, productivity
Scheduling Flexibility, efficiency
Supply chains Costs, quality, agility, shortages, vendor relations

Projects Costs, new products, services, or operating systems

 Productivity
• Productivity
– A measure of the effective use of resources,
usually expressed as the ratio of output to input
• Productivity ratios are used for
– Planning workforce requirements
– Scheduling equipment
– Financial analysis
 Productivity

• Partial measures
– output/(single input)
• Multi-factor measures
– output/(multiple inputs)
• Total measure
– output/(total inputs)
Outputs
Productivity =
Inputs
 Measures of Productivity

Partial Output Output Output Output

measures Labor Machine Capital Energy

Multifactor Output Output

measures Labor + Machine Labor + Capital + Energy

Total Goods or Services Produced

measure All inputs used to produce them
Examples of Partial Productivity Measures

Labor Units of output per labor hour

Units of output per shift
Productivity Value-added per labor hour

Machine Units of output per machine hour

Productivity
Capital Units of output per dollar input
Dollar value of output per dollar input
Productivity
Energy Units of output per kilowatt-hour
Dollar value of output per kilowatt-hour
Productivity
 Example

7040 Units Produced

Cost of labor of $1,000

Cost of materials: $520

Cost of overhead: $2000

What is the multifactor productivity?

 Example 3 Solution

MFP = Output
Labor + Materials + Overhead

MFP = (7040 units)

$1000 + $520 + $2000

MFP = 2.0 units per dollar of input

 Exercise
Compute the multifactor productivity measure for each
of the weeks shown. What do the productivity
figures suggest? Assume 40 hour weeks and an
hourly wage of $12, overhead cost is 1.5 times
weekly labor cost; material cost is $6 per pound.
Week Output (units) Workers Material (lbs)

1 30,000 6 450
2 33,600 7 470
3 32,200 7 460
4 35,400 8 480
 Solution
Week Output Labor cost Overhead Cost Material Cost
(units)

1 30,000 6*40*12 = $2,880 $2,880*1.5 =$4,320 450*6 = $2,700

2 33,600 7*40*12 = $3,360 $3,360*1.5 =$5,040 470*6 = $2,820

3 32,200 7*40*12 = $3,360 $3,360*1.5 =$5,040 460*6 = $2,760

4 35,400 8*40*12 = $3,840 $3,840*1.5 =$5,760 480*6 = $2,880

Multifactor Productivity
•Week 1: 30,000/(2,880+4,320+2,700) = 3.03 units/dollar
•Week 2: 33,600/(3360+5,040+2,820) = 2.99 units/dollar
•Week 1: 32,200/(3,360+5,040+2,760) = 2.89 units/dollar
•Week 1: 35,400/(3,840+5,760+2,880) = 2.84 units/dollar
Factors Affecting Productivity

Capital Quality

Technology Management
 Other Factors Affecting Productivity

• Standardization
• Quality
• Use of Internet
• Computer viruses
• Searching for lost or misplaced items
• Scrap rates
• New workers
 Other Factors Affecting Productivity

• Safety
• Shortage of IT workers
• Layoffs
• Labor turnover
• Design of the workspace
• Incentive plans that reward productivity
 Outsourcing
• Higher productivity in another company is a
key reason organizations outsource work
• Improving productivity may reduce the need
for outsourcing
 Improving Productivity

• Develop productivity measures

• Determine critical (bottleneck) operations
• Develop methods for productivity
improvements
• Establish reasonable goals
• Get management support
• Measure and publicize improvements
• Don’t confuse productivity with efficiency