Introduction to Operations Management

Operations is the production activities that go on in the organization, regardless of whether the end product is a good or a service What is Operations?

Operations management is defined as the design, operation, and improvement of the systems that create the firm’s primary products and services Operations management is the management of systems or processes that creates value in the form of goods and services by transforming inputs into desired outputs What Is Operations Management (OM)?

Operations as a transformation process Operations as a basic function Operations as the technical core The Operations Function

Inputs: Materials Machines Labor Management Capital Transformation/ Conversion Process Outputs: Goods Services Control Feedback Value added Operations as a Transformation Process

What is Value Added? Value added is the difference between the cost of intputs and the value or price of outputs. The essence of operations function is to add value during the transformation process

Firms use the money generated by value added for: Firms use the money generated by value added for:  R&D  Investment in new facilities and equipment  Paying workers  Paying for materials  Paying for general expenses  Profits

Transformation Process of a Canned Food Processor Canned Food Processor InputsProcessingOutputs Cleaning Canned vegetables Making cans Cutting Cooking Packing Labeling Raw vegetables Metal sheets Water Energy Labor Building Equipment

Transformation Process of a Hospital Inputs ProcessingOutputs Doctors, nurses Examination Healthy patients Hospital Surgery Medical Supplies Monitoring Equipment Medication Laboratories Therapy

Examples of Various Operations OperationsExamples Goods ProducingFarming, mining, construction, manufacturing, power generation Storage/ Transportation Warehousing, trucking, mail service, moving, taxis, buses, hotels, airlines ExchangeRetailing, wholesaling, banking, renting, leasing, library, loans EntertainmentFilms, radio and television, concerts, recording CommunicationNewspapers, radio and television newscasts, telephone, satellites

Types of Transformation Processes  Physical - manufacturing  Locational - transportation  Exchange - retailing  Storage - warehousing  Physiological - health care  Informational - telecommunications  Psychological - entertainment

 Marketing  Generates demand gets customers  Operations  creates product or service  Finance/Accounting  Obtains funds  Tracks organizational performance Operations as a Basic Function

Business Functions Overlap Operations FinanceMarketing

Business Functions - Bank (1 of 3) Operations Finance/ Accounting Marketing Check Clearing Teller Scheduling Transactions Processing Security Commercial Bank © T/Maker Co.

Business Functions – Airline (2 of 3) Operations Finance/ Accounting Marketing Ground Support Flight Operations Facility Maintenance Catering Airline

Business Functions – Manufacturer (3 of 3) Operations Finance/ Accounting Marketing Production Control Manufacturing Quality Control Purchasing Manufacturing

Operations Finance/Accounting Human Resources Marketing Suppliers Production and Inventory data Capital budgeting requests Capacity expansion and Technology plans Budgets Cost analysis Capital investments Stockholder requirements Orders for materials Production and delivery Schedules Quality Requirements Design/ Performance specs Material availability Quality data Delivery schedules Designs Product/Service Availability Lead-time estimates Status of order Delivery schedules Sales forecasts Customer orders Customer feedback Promotions Personnel needs Skill sets Performance evaluations Job design/work measurement Hiring/firing Training Legal requirements Union contract negotiations Operations as the Technical Core

Importance of OM (Why Study OM?) (1 of 2)  Operations is one of the three major functions ( marketing, finance and operations ) of an organization  OM affects 1) the companies’ ability to compete and 2) the nation’s ability to compete internationally  Nearly half of the employed people over the world have jobs in operations  OM is a costly part of an organization

Importance of OM (Why Study OM?) – (2 of 2)  Offers a major opportunity for an organization to improve its productivity and profitability  The OM function is responsible for a major portion of the assets of most organizations  The concepts, tools and techniques of OM are widely used in managing other functions.  Presents career opportunities

Options for Increasing Contribution

Production of Goods vs. Delivery of Services Delivery of Services

Tangible Act Manufacturing or Service

Goods vs. Services (1 of 2) CharacteristicsGoodsService Customer contactLowHigh Uniformity of inputs and outputsHighLow Labor contentLowHigh AutomationEasyGenerally difficult OutputTangibleIntangible, often unique Measurement of productivityEasyDifficult Opportunity to correct problemsHighLow InventoryMuchLittle Quality evaluationEasierDifficult Production activitiesObviousNot so obvious

Goods vs. Services (2 of 2) CharacteristicsGoodsService Production and consumptionSeparateGenerally take place at the same time LocationCentralizedGenerally dispersed Locational factors to be consideredCost-orientedRevenue-oriented ResellingPossibleNot possible PatentabilityUsuallyNot usually ActivitiesSmooth and efficient Slower and awkward Inventoriability andTransportabilityInventoriable & Transportable Non inventoriable and so nontransportable

Service Job Categories (1 of 2)  Governmental services  Municipal services  Trade services (wholesale/retail)  Finance, insurance, real estate  Medical (healthcare)  Personal services

Service Job Categories (2 of 2)  Business services  Education  Food, lodging and entertainment  Utilities and transportation  Legal, consulting  Repair

Goods Contain Services / Services Contain Goods Automobile assembly, steel making Computer Home remodeling, retail sales Fast-food Meal Restaurant Meal Auto Repair Hospital Care Advertising Agency Investment Management Consulting Service Surgery, Teaching,Counseling Percent of Product that is a Good Percent of Product that is a Service

Steel production Automobile fabrication House building Road constructio Auto Repair Appliance repair Dressmaking Farming Maid Service Manual car wash Teaching Lawn mowing High goods content Low service content Goods-services Continuum Low goods content High service content

1-29

1-30 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

1-31 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

Services in Manufacturing In manufacturing, services can be divided into two groups:  Core Services  Value-added Services

Core services are basic things that customers want from products they purchase Core Services

Core Services Performance Objectives Operations Management Flexibility Quality Speed Price (or cost Reduction)

Value-added services differentiate the organization from competitors and build relationships that bind customers to the firm in a positive way Value-Added Services

Value-Added Service Categories Operations Managemen t Information Problem Solving Sales Support Field Support

The Scope of OM: What Operations Managers Do? Plan - Organize - Staff - Lead - Control

Critical OM Decisions

 Service, product design  Process, capacity design  Planning of the technology  Location  Layout design  Human resources, job design  Production planning and scheduling  Supply chain management  Inventory management  Maintenance  Quality management

Operations Management and Decision Making  Models  Quantitative approaches  Analysis of tradeoffs  Systems approach  Establishing priorities

Models A model is an abstraction of reality. – Physical – Schematic – Mathematical Types of models:

Why Models are Beneficial?  Easy to use, less expensive  Require users to organize information  Systematic approach to problem solving  Increase understanding of the problem  Enable “what if” questions  Specific objectives  Consistent tool  Power of mathematics  Standardized format

Limitations of Models:  Quantitative information may be emphasized at the expense of qualitative information  May be incorrectly applied and results may be misinterpreted

Quantitative Approaches (Analytical Tools used in OM)  Linear programming  Queuing techniques  Inventory models  Project models  Statistical models  Simulation  Decision analysis

Tradeoffs 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 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?

The Historical Evolution of Operations Management

Significant Events in Operations Management

Historical Events in OM  The Industrial Revolution (1770s)  Scientific Management (1911)  Human Relations Movement ( )  Decision Models – Management Science (1915, s)  Quality Revolution (1970s-1990s )  Globalization (1970s- )  Information Age/Internet Revolution (1990s- )

Historical Events in OM (1 of 4): Historical Events in OM (1 of 4): Industrial Revolution and Scientific Management Industrial Revolution Steam engine1769James Watt Division of labor1776Adam Smith Interchangeable parts1790Eli Whitney Scientific Management Principles1911Frederick W. Taylor Time and motion studies1911Frank & Lillian Gilbreth Activity scheduling chart1912Henry Gant Moving assembly line1913Henry Ford

Historical Events in OM (2 of 4) : Historical Events in OM (2 of 4) : Human Relations and Management Science Human Relations Hawthorne studies1930Elton Mayo Motivation theories1940sAbraham Maslow 1950sFrederick Hertzberg 1960sDouglas McGregor Management Science Linear programming1947George Dantzig Digital computer1951Remington Rand Simulation, PERT/CPM, 1950sOperations research Waiting line theory groups MRP1960sJoseph Orlicky, IBM

Historical Events in OM (3 of 4): Historical Events in OM (3 of 4): Quality Revolution and Globalization Quality Revolution JIT1970sTaiichi Ohno, Toyota TQM1980sW. Edwards Deming, Joseph Juran, et. al. Strategy and operationsSkinner, Hayes Reengineering1990sHammer, Champy World Trade Organization1990sNumerous countries and companies Globalization European Union and1970sIBM and others other trade agreements EDI, EFT, CIM1980s

Historical Events in OM (4 of 4) : Historical Events in OM (4 of 4) : Information Age/Internet Revolution Information Age/ Internet Revolution Internet, WWW, ERP1990sARPANET, Tim Supply chainBerners-Lee, SAP, i2 management,Technologies, ORACLE, E-commercePeopleSoft, Amazon, Yahoo, eBay, and others

Exciting New Challenges in Operations Management

New Concepts and Trends in OM  Mass Customization  Supply Chain Management  Outsourcing  Lean manufacturing  Agility  Electronic Commerce

New Concepts and Trends(1 of 6): Mass Customization The rapid, low cost production of goods and services that fulfill constantly changing and increasingly unique customer desires.

New Concepts and Trends (2 of 6): Supply Chain Management  The management of the sequence of organizations- their facilities, functions and activities- that are involved in producing and delivering a product or service  SCM requires the application of a systems approach to managing the flow of information, materials and services from raw material suppliers through factories and warehoses to the end user (customer)

Suppliers’ Suppliers Direct Suppliers Producer Distributor Final Consumer Simple Product Supply Chain

Stage of Production Value Added Value of Product Farmer produces and harvests wheat$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 A Supply Chain for Bread

New Concepts and Trends (3 of 6) : Outsourcing Buying goods or services rather than producing goods or performing services within the organization

New Concepts and Trends (4 of 6): Lean Manufacturing  Systems that use minimal amounts of resources - less space, less inventory, fewer workers, fewer levels of management- to produce a high volume of high-quality goods with some variety  An adaptation of mass production that prizes quality and flexibility  Incorporates advantages of mass production (high volume, low unit cost) and craft production (variety and flexibility)

New Concepts and Trends (5 of 6): Agility The ability of an organization to respond quickly to demands or opportunities. Involves maintaining a flexible system that can quickly respond to changes in either the volume of demand or changes in product/service offerings

New Concepts and Trends (6 of 6): Electronic Commerce The use of computer networks, primarily the internet, to buy and sell products, services, and information.

Other Trends (1 of 2)  Enhancing Value-Added Services  Management of Technology  Emphasis on Operations Strategy  Increasing Emphasis on Cost Control and Productivity Improvement  Quality and Process Improvements  Increasing emphasis on business and social responsibility

Other Trends (2 of 2)  Developing flexible supply chains to enable mass customization of products and services  Achieving the Service Factory

Globalization

Globalization can take the form of:  Selling in foreign markets  Producing in foreign lands  Purchasing from foreign suppliers  Partnering with foreign firms

Reasons to Globalize Operations (1 of 2)  To take advantage of favorable costs  To gain access to and attract international markets  To build reliable sources of supply  To improve the supply chain  To be more responsive to changes in demand

Reasons to Globalize Operations (2 of 2)  To provide better goods and services  To learn to improve operations  To attract and retain global talent  To keep abreast of the latest trends and technologies

Examples of Global Strategies  Boeing – both sales and production are worldwide.  Benetton – moves inventory to stores around the world faster than its competitor by building flexibility into design, production, and distribution  Sony – purchases components from suppliers in Thailand, Malaysia, and around the world  GM is building four similar plants in Argentina, Poland, China, and Thailand

Some Multinational Corporations (1 of 3) CountryForeign Sales Companyof Originas % of Total Nestlé Switzerland98.2 Nokia Finland97.6 Philips Netherlands94.0 Bayer Germany89.8 ABB Germany87.2 SAP Germany80.0 Exxon Mobil United States79.6 Royal Dutch/Shell Netherlands73.3 IBM United States62.7 McDonald’s United States61.5

Some Multinational Corporations (2 of 3) Workforce CompanyHome Country % Sales Outside Home Country % Assets Outside Home Country % Foreign Colgate- Palmolive USA7263NA Dow Chemical USA6050NA GilletteUSA6253NA HondaJapan6336NA IBMUSA Citicorp USA 3446 NA

Some Multinational Corporations (3 of 3) Workforce CompanyHome Country % Sales Outside Home Country % Assets Outside Home Country % Foreign ICIBritain7850NA NestléSwitzerland PhilipsNetherlands SiemensGermany51NA38 Electronics Unilever Britain & Netherlands

Boeing Suppliers (777) FirmCountryParts AleniaItalyWing flaps AeroSpace Technologies AustraliaRudder CASASpainAilerons doors, wing section FujiJapanLanding gear GEC AvionicsUnited KingdomFlight computers Korean AirKoreaFlap supports Menasco Aerospace CanadaLanding gears Short BrothersIrelandLanding gear doors Singapore Aerospace SingaporeLanding gear doors