Defining Operations Professor Stephen Lawrence

Diego Rivera, Detroit Industry, 1933; Front Wall Mural, Detroit Institute of Art

Diego Rivera, Detroit Industry, 1933; South Wall Mural, Detroit Institute of Art

Goals for Course?

What is Operations?

How is Wealth Created?

OPERATIONS… Operations is all about adding value, and creating wealth

Operations – 80-90% Hidden

Definitions Transformation definition Organizational definition Economic definition Transaction cost definition Added-value definition

What is Operations? Transformation Definition The design, control, and management of processes that transform inputs into finished goods and services for sale to customers

Transformation Processes Transformation Processes Goods Services Labor Knowledge Capital Materials What is Operations? Transformation Definition INPUTS OUTPUTS

Who are “operations” managers?

Managers transform inputs into outputs Example: Accounting Manager Inputs: data, information, labor Transformation: application of accounting principles and knowledge Outputs: accounting reports, knowledge of performance,... All managers have an “operation” to run Therefore: All managers are Operations Managers!

Manufacturing and Services Continuum of Characteristics Mining (coal) Automobiles Fast Food Banking Consulting Service Orientation Manufacturing Orientation

Strategy Business C Strategy Business A Corporate Strategy Business B MarketingFinanceAccounting What is Operations? Organizational Definition OPERATIONS

What is Operations? Economic Definition Operations is responsible for improving the “production function” of the firm.

Example: Bicycle Manufacturing Labor Used per unit produced Capital Used (equipment) per unit produced Huffy Serotta Schwinn ’80s Lots of automation Lots of labor / unit Automated equipment Little labor per unit Little automation Lots of skilled labor Moderate Automation Moderate Labor Trek

Example: Bicycle Manufacturing Labor Used per unit produced Capital Used (equipment) per unit produced Desirable Undesirable! Desirable Efficient Frontier

Labor Used per unit produced Capital Used (equipment) per unit produced What is Operations? Economic Definition

Why Do Firms Exist? “The assumptions of micro-economics, when applied to the question of why there are firms, suggest that firms should not exist at all.” Barney and Ouchi (eds), Organizational Economics, 1986.

What is Operations? Transaction-Cost Definition General approach to economic organization: Markets and firms are alternative instruments for completing a related set of transactions The relative efficiency of each determines which mode is used The costs of writing and executing complex contracts vary with the properties of the market and the characteristics of the human decision makers involved The same human and environmental factors apply to both transactions between firms and within a firm [Firms exist because it is difficult to use the price system to coordinate all economic activity.] The question always is, will it pay to bring an extra exchange transaction under the organizing authority? At the margin, the costs of organizing within the firm will be equal either to the costs of organizing in another firm or to the costs involved in leaving the transaction to be “organized” by the price mechanism. Coase, “The nature of the firm,” Economica 4, Williamson, Markets and Hierarchies, 1975

Value is the customer’s subjective evaluation, adjusted for cost, of how well a good or service meets or exceeds expectations. Note that: Value is defined in terms of a singular customer It is a subjective evaluation The evaluation is compared with an expectation Expectations can be influenced and do change What is Operations? Added-Value Definition

Added Value Model adapted from Porter, Competitive Advantage, Free Press, 1985 Information Systems People and Organization Finance Accounting Marketing Operations Profit! Profit!CostLoss! Added Value for Customer

Added Value Model adapted from Porter, Competitive Advantage, Free Press, 1985 SuppliersCustomers Competitors The Firm Business Environment Value Chain

Adding Value with Marketing and Operations MarketingOperations Inputs: Materials Labor Ideas Technology Outputs: Goods + Services = “Products” How? Marketing and Operations “touch the product”

Operations is the fundamental means by which firms… What is Operations? Added-Value Definition Add Value!

What is Operations? How do Firms Add Value? Suppose you are in the market for a new automobile? What attributes are you most interested in? What would cause you to purchase one car versus another?

What is Operations? How do Firms Add Value? Greater Productivity Lower costs and expenses Lower prices for the customer Higher Quality Better performance Greater durability, reliability, aesthetics,... Better Timeliness Faster response and turnaround On-time delivery, meet promises Greater Flexibility Greater variety Customization for customer needs / desires Useful Innovation Features, technology Better performance New capabilities Often unrecognized

The Value Equation

Defining Operations Professor Stephen Lawrence