Introduction to Operations Management CHAPTER 1

What is Operations Management?

3 Basic Functions of Business Organizations Ensure and allocate financial resources Produce goods or services Assess consumer needs, and sell / promote goods or services

Operations Management Operations Management : Design, operation, and improvement of the systems that create and deliver the firm’s primary products and services. OM is the management of processes that produce and distribute products and/or services to customers. processes OM’s objective is to make sure that the processes work effectivel y and efficiently.

Operations: A Transformation Process Transformation process: System by which resources are used to convert inputs into desired output. I nputs Output Operations and processes Resources

Physical -- manufacturing Location -- transportation Exchange -- retailing Storage -- warehousing Physiological -- health care Informational -- telecommunications Different Types of Transformations

Input-Transformation-Output Relationships Exhibit 1.2 Goods Services

service A service is an intangible process with direct customer involvement in the transformation process. The location of the service facility is important. good A good is the physical output of some process with little customer involvement in the transformation process. Many overlaps between Service Processes and Good Processes: Manufacturers provide services as part of their products. Services manufacture the physical products they deliver to their customers or consume goods in creating the service (e.g., McDonald’s). Differences between Services and Goods?

Operations Management (Cont.) Operations Management: Design, operation, and improvement of the systems that create and deliver the firm’s primary products and services. OM is the management of processes that produce and distribute products and/or services to customers. processes OM’s objective is to make sure that the processes work effectivel y and efficiently.

Efficiency and Effectiveness Efficiency: Efficiency: Doing something at the lowest possible cost. Effectiveness: Effectiveness: Doing the right things to create the most value for the firm. Efficiency Effectiveness Value: Value: Ratio of quality to price paid. Competitive “happiness” is being able to increase quality and reduce price while maintaining or improving profit margins. This is a way that operations can directly increase customer retention and gain market share. Quality Price

Typical Operations Decisions and Their Hierarchy Strategic level Broad scope, long term Operational level Narrow scope, short term Tactical level Moderate scope, medium term

An 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 Strategy: Obtain a college education Tactics: Select a college and a major Operations: Register, buy books, take courses, study, graduate, get job

OM in the Organization Chart Exhibit 1.3

Operations as Services An emerging model in industry Core services + value-added services Every organization is in the service business, T or F?

Core Services Basic things that customers (internal or external) want from products they purchase: To be made correctly Customized to customer needs Delivered on time Priced competitively Somewhat easier to emulate or copy Performance Objectives Operations Management Flexibility Quality Price (or cost Reduction) Speed

Value-Added Services Services that differentiate the organization from competitors and build relationships that bind customers to the firm in a positive way Information Problem solving Sales support Field support Significantly more difficult to copy and implement Operations Management Information Problem Solving Sales Support Field Support Value-Added Service Categories

Reasons to Study Operations Management A business education is incomplete without an understanding of modern approaches to managing operations. OM provides a systematic way of looking at organizational process. OM presents interesting career opportunities:  Supply chain management  Quality assurance  Purchasing  And more The concepts and tools of OM are widely used in managing other functions of a business.

Productivity Measurement CHAPTER 2

Key Performance Indicators (KPI) Key performance indicators (KPI): Key performance indicators (KPI): A set of measures that help managers evaluate a company’s economic performance and spot the need for changes in operations. Financial measures: day’s cash on hand, operating income by units or division, etc. Nonfinancial metrics: average time to respond to service calls, lead time to fill customer orders, percentage of sales from new products, etc. A basic KPI -- Productivity

Productivity Productivity Productivity is a common measure on how well resources are being used. In the broadest sense, it can be defined as the following ratio:  One of the primary responsibilities of an operations manager is to achieve best use of an organization's resources.  Input:  Input: labor, capital, materials, energy, and others.  Output:  Output: goods and services. Productivity = Outputs Inputs

Examples of Productivity Measures Multifactor Output Output measure Labor + Capital + Energy Labor + Capital + Materials Partial Output Output Output Output measure Labor Capital Materials Energy Exhibit 2.6 Total Output Goods and services produced Measure Inputs All inputs used

Example 1 Input and output production data ($) Output: 1. Finished units$10, Work in process$2, Dividends$1,000 Total output$13,500Input: 1. Human$3, Material$ Capital$10, Energy$ Other expenses$1,500 Total input$15,193 Productivity measure examples Total measure: Total output 13,500 Total input 15,193 Multifactor measure: Total output 13,500 Human + Material 3,153 Finished units 10,000 Human + Material 3,153 Partial measure: Total output 13,500 Energy 540 Finished units 10,000 Energy 540 == 0.89 = = = 4.28 = 3.17 = = = 25 = 18.52

Productivity Measures (other than $) BusinessProductivity Measure RestaurantCustomers (meals) per labor hour Retail storeSales per square foot Chicken farmLb. of meat per lb. of feed Utility plantKilowatts per ton of coal Paper mill Tons of paper per cord of wood Only partial measures of productivity can be used.

Example 2 You have just determined that your service employees have used a total of 2400 hours of labor this week to process 560 insurance forms. Last week the same crew used only 2000 hours of labor to process 480 forms. a) Which productivity measure should be used? Answer: Could be classified as a Partial Measure. b) Is productivity increasing or decreasing? Answer: Last week’s productivity = 480/2000 = 0.24 forms/hr This week’s productivity = 560/2400 = 0.23 forms/hr So, productivity is decreasing slightly.

Example 3 (Page 32, problem 4) Two types of cars (Deluxe and Limited) were produced by a car manufacturer in Quantities sold, price per unit, and labor hours follow. Quantity$/Unit Deluxe car4,000 units sold$8,000/car Limited car6,000 units sold$9,500/car Labor, Deluxe20,000 hrs$12/hr Labor, Limited30,000 hrs$14/hr What is the labor productivity for each car? Explain the problem (s) associated with the labor productivity.

Solution to Example 3  A conventional measure of productivity.  May not provide all of the necessary information that is needed. For example, increases in productivity could result from decreases in quality, and/or increases in material cost. units/hour Labor Productivity – units/hour ModelOutput in Units Input in Labor Hours Productivity (Output/Input) Deluxe Car4,00020, Limited Car6,00030, dollars Labor Productivity – dollars ModelOutput in Dollars Input in Dollars Productivity (Output/Input) Deluxe Car4,000($8,000)= $32,000,000 20,000($12.00)= $240, Limited Car6,000($9,500)= $57,000,000 30,000($14.00)= $420,

Recap Operations management Transformation process Services vs. goods Efficiency Effectiveness Value Operations decisions hierarchy Core services Value-added services KPI Productivity Partial / Multifactor / Total measure Dollars / non-dollars