Introduction to Operations Management Chapter 1

Learning Objectives Define the terms operations management and supply chain Identify 3 major functional areas of organizations and describe how they interrelate Identify similarities and differences between production and service operations Explain the key aspects of operations management decision making Describe the operations function and the nature of the operations manager’s job Describe current issues in business that impact operations management

What Is “Operations Management” ABC News: “Inside Amazon: Secrets of an Online Mega-Giant”

Operations Management What is operation? The part of a business organization that is responsible for producing goods or services. What is operation management? The management of systems or processes that create goods and/or provide services.

The 3 Basic Functions of Business Organizations Operations Finance Marketing Organization

Operations Function Inputs Outputs Transformation/ Conversion Process Land Labor Capital Materials Information Outputs Goods Services Transformation/ Conversion Process Control Measurement and Feedback Value-Added Feedback = measurements taken at various points in the transformation process Control = The comparison of feedback against previously established standards to determine if corrective action is needed.

Goods v.s. Services Tangible Act-Oriented Goods Services

The Goods-Service Continuum Goods: physical items that include raw materials, parts, subassemblies, and final products. Services: activities that provide some combination of time, location, form or psychological value. Goods Services Surgery, Teaching Songwriting, Software Development Computer Repair, Restaurant Meal Home Remodeling, Retail Sales Automobile Assembly, Steelmaking

Discussion How goods are different from services? Hints: Degree of customer contact Quality assurance Inventory Wages Ability to patent …

Key Differences Characteristic Goods Service Customer contact Low High Uniformity of input Labor content of jobs Uniformity of output Production and delivery (Output) Tangible Intangible Measurement of productivity Easy Difficult Quality assurance (Opportunity to correct problems) Amount of inventory Much Little Evaluation of work Easier Ability to patent design Usually Not usual

Process Management Process: One or more actions that transform inputs into outputs. Three Categories of Business Processes: Upper-management processes: These govern the operation of the entire organization. Operational processes: These are core processes that make up the value stream. Supporting processes: These support the core processes. Supply v.s. Demand Ideally, the capacity of a process will be such that its output just matches demand.

Customer Dissatisfaction Supply and Demand Operations & Supply Chains Sales & Marketing Wasteful Costly Supply > Demand Opportunity Loss Customer Dissatisfaction Supply < Demand Ideal Supply = Demand

4 Sources of Process Variation Variety of goods or services being offered The greater the variety of goods and services offered, the greater the variation in production or service requirements. Structural variation in demand These are generally predictable (seasonal variation or seasonality, e.g., swimwear, warm clothes, Christmas, tourist seasons, school supplies). They are important for capacity planning Random variation Natural variation that is present in all processes (e.g., random demand etc.). Generally, it cannot be influenced by managers. Assignable variation Variation that has identifiable sources. (e.g., defective inputs, incorrect work methods, equipment etc.) This type of variation can be reduced, or eliminated, by analysis and corrective action.

P&G’s Products Image Credit: pgbeautyscience.com

Scope of Operations Management – The Airline Example Forecasting Capacity planning Locating facilities Facilities and layout Scheduling Managing inventories Assuring quality Motivating and training employees

Role of the Operations Manager Recap: Operations: The part of a business organization that is responsible for producing goods or services Operations management: The management of systems or processes that create goods and/or provide services A primary function of the operations manager is to guide the system by decision making. System Design Decisions System Operation Decisions

System Design Decisions Capacity Facility location Facility layout Product and service planning These are typically strategic decisions that usually require long-term commitment of resources determine parameters of system operation

System Operation Decisions These are generally tactical and operational decisions Management of personnel Inventory management and control Scheduling Project management Quality assurance Operations managers spend more time on system operation decision than any other decision area They still have a vital stake in system design

Decision Making Most operations decisions involve many alternatives that can have quite different impacts on costs or profits Typical operations decisions include: What: What resources are needed, and in what amounts? When: When will each resource be needed? When should the work be scheduled? When should materials and other supplies be ordered? Where: Where will the work be done? Who: Who will do the work? How: How will the product or service be designed? How will the work be done? How will resources be allocated?

General Approach to Decision Making Modeling is a key tool used by all decision makers Model: an abstraction of reality; a simplification. Common features of models: They are simplifications of real-life phenomena They omit unimportant details of the systems they mimic so that attention can be focused on the most important aspects of the real-life system

Types of Models Physical Models Schematic Models Mathematical Models Look like their real-life counterparts Advantage: visual correspondence with reality Schematic Models Look less like their real-life counterparts than physical models (graphs, charts, blueprints, drawings, etc.) Mathematical Models Do not look at all like their real-life counterparts

Discussion What are the advantages and disadvantages of models? Hints: Usability Abstraction Quantities v.s. qualitative Suitablilty

Benefits of Models Models are generally easier to use and less expensive than dealing with the real system Require users to organize and sometimes quantify information Increase understanding of the problem Enable managers to analyze “What if?” questions Serve as a consistent tool for evaluation and provide a standardized format for analyzing a problem

Limitation of Models Important variables may be missed Quantitative information may be emphasized over qualitative Models may be incorrectly applied and results misinterpreted Nonqualified users may not use the model incorrectly

Quantitative Methods A decision making approach that seeks to obtain a mathematically optimal solution Linear programming Queuing techniques Inventory models Project models Forecasting techniques Statistical models

Historical Evolution of OM Industrial Revolution Scientific Management Human Relations Movement Decision Models and Management Science Influence of Japanese Manufacturers

Industrial Revolution Pre-Industrial Revolution Craft production - System in which highly skilled workers use simple, flexible tools to produce small quantities of customized goods Some key elements of the industrial revolution Began in England in the 1770s Division of labor - Adam Smith, 1776 Application of the “rotative” steam engine, 1780s Cotton Gin and Interchangeable parts - Eli Whitney, 1792 Management theory and practice did not advance appreciably during this period

Scientific Management Movement was led by efficiency engineer, Frederick Winslow Taylor Believed in a “science of management” based on observation, measurement, analysis and improvement of work methods, and economic incentives Management is responsible for planning, carefully selecting and training workers, finding the best way to perform each job, achieving cooperate between management and workers, and separating management activities from work activities Emphasis was on maximizing output

Scientific Management - contributors Frank Gilbreth - father of motion studies Henry Gantt - developed the Gantt chart scheduling system and recognized the value of non-monetary rewards for motivating employees Harrington Emerson - applied Taylor’s ideas to organization structure Henry Ford - employed scientific management techniques to his factories Moving assembly line Mass production

Decision Models & Management Science F.W. Harris – mathematical model for inventory management, 1915 Dodge, Romig, and Shewart – statistical procedures for sampling and quality control, 1930s Tippett – statistical sampling theory, 1935 Operations Research (OR) Groups – OR applications in warfare George Dantzig – linear programming, 1947

Human Relations Movement The human relations movement emphasized the importance of the human element in job design Lillian Gilbreth Elton Mayo – Hawthorne studies on worker motivation, 1930 Abraham Maslow – motivation theory, 1940s; hierarchy of needs, 1954 Frederick Hertzberg – Two Factor Theory, 1959 Douglas McGregor – Theory X and Theory Y, 1960s William Ouchi – Theory Z, 1981

Influence of Japanese Manufacturers Refined and developed management practices that increased productivity Credited with fueling the “quality revolution Just-in-Time production Their approach emphasized quality and continual improvement, worker teams and empowerment, and achieving customer satisfaction.

Discussion Based on your experience, how do operations today differentiate from previous stages? What are the key issues? Hints: What factors came into play? What factors is not as important as before? What do you think the new trend will be?

Key Issues For Today’s Business Operations Economic conditions Management of technology (Innovating) The Internet, e-commerce, e-business Competing in a global economy Globalization, outsourcing Quality Problems Risk Management

Environmental Concerns Sustainability Using resources in ways that do not harm ecological systems that support human existence Sustainability measures often go beyond traditional environmental and economic measures to include measures that incorporate social criteria in decision making All areas of business will be affected Product and service design Consumer education programs Disaster preparation and response Outsourcing decisions

US Carbon Footprint The United States has been one of the few bright spots for climate-change policy in recent years. Thanks to the recession, improved efficiency measures and the shale-gas boom, the nation's carbon-dioxide emissions from energy fell 12 percent between 2005 and 2012. Strategies Energy Efficiency Energy Conservation Fuel Switching Carbon Capture and Sequestration Source: US Environmental Protection Agency Source: The Washington Post 1/13/14

Ethical Issues in Operations Ethical issues arise in many aspects of operations management: The environment The community Hiring and firing workers Closing facilities Financial statements Workers rights Worker safety Product safety Quality

Worker Safety WSJ 4/21/14 http://online.wsj.com/news/articles/SB10001424052702303873604579493502231397942 Inside Nike's Struggle to Balance Cost and Worker Safety in Bangladesh Nike, which first used a factory in Bangladesh in 1991, had kept its footprint there small, never working with more than 10 factories. The rest of the industry moved more aggressively into Bangladesh. The decision came not long before another garment-manufacturing hub known as Rana Plaza collapsed, killing 1,100 people in a suburb of Dhaka, in the worst industrial disaster in Bangladesh's history. The tragedy, which happened a year ago this month, has forced Western apparel sellers to re-examine their world-wide search for cheap labor, which has turned Bangladesh into an exporter of $20 billion of clothing a year.

Supply Chain Suppliers’ suppliers Direct Producer Distributor Final Customers

Supply Chain

Supply Chain What is supply chain? The sequence of organizations – their facilities, functions, and activities – that are involved in producing and delivering a product or service.

Discussion Why does supply chain management matter? Hints: From a customer’s perspective From a manager’s perspective From a executive’s perspective

The Need for Supply Chain Management In the past, organizations did little to manage the supply chain beyond their own operations and immediate suppliers which led to numerous problems: Oscillating inventory levels Inventory stockouts Late deliveries Quality problems

Supply Chain Issues The need to improve operations The need to manage inventories Increasing transportation costs Increasing levels of outsourcing Increasing importance of e-business Competitive pressures Increasing globalization The complexity of supply chains

Supply Chain Issues 1. The need to improve operations Sustainability Productivity (more in chapter 2) Efficiency (more in chapter 5) Quality (more in chapters 9 & 10)

Supply Chain Issues 2. The need to manage inventories Just in time (JIT) Vendor Managed Inventory (VMI) Logistics

Supply Chain Issues 3. Increasing transportation costs

Supply Chain Issues 4. Increasing levels of outsourcing Law of Comparative Advantage Benefits of Outsourcing Allow a company to focus on strategic, core competencies Cost savings or cost avoidance Flexibility for using services as needed Changes fixed costs into variable costs Types of Business Activities Outsourced Information Technology (IT) Human Resources (HR) Learning Function (Corporate Training) Customer Service (Call centers) Finance and Accounting

Supply Chain Issues 5. Increasing importance of e-business E-business: The use of internet to network and empower business processes, electronic commerce, organizational communication and collaboration with in a company and with its customers, suppliers, and other stakeholders. (Combe, 2006) To Consumer Business Government From C2C C2B C2G B2C B2B B2G G2C G2B G2G

Supply Chain Issues 6. Competitive pressures 7. Increasing globalization 8. The complexity of supply chains Serdarasan, Seyda. "A review of supply chain complexity drivers." Proceedings of the 41st International Conference on Computers & Industrial Engineering, pp792-797

OM and Supply Chain Career Opportunities Operations manager Supply chain manager Production analyst Schedule coordinator Production manager Industrial engineer Purchasing manager Inventory manager Quality manager

Key Points The operations function is that part of every business organization that produces products and/or delivers services. Operations consists of processes that convert inputs into outputs. Failure to manage those processes effectively will have a negative impact on the organization. A key goal of business organizations is to achieve an economic matching of supply and demand. The operations function is responsible for providing the supply or service capacity for expected demand. All processes exhibit variation that must be managed.

Key Points Although there are some basic differences between services and products that must be taken into account from a managerial standpoint, there are also many similarities between the two. Environmental issues will increasingly impact operations decision making. Ethical behavior is an integral part of good management practice. All business organizations have, and are part of, a supply chain that must be managed.