*Based on the 10th edition of the Stevenson text Chapter 1 Introduction to Operations Management* *Based on the 10th edition of the Stevenson text The copyright of our 10th edition textbook is 2009. How long do you think it will take for our 10th edition textbook to be out of date?

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 Note that operations management is the most fundamental function in a business operation. For example, the first cavemen and cavewomen may have manufactured spears for hunting for their tribe. Did they require accountants, financial managers, personal managers, marketing managers, information analysts, or corporate attorneys? Did they require someone to oversee the manufacturing of the spears?

OPERATIONS MANAGEMENT* The functional area of management that is responsible for systems that create goods or provide services. This encompasses the acquisition of resources (labor, material, operating budget, and facilities) and the conversion of their inputs to outputs using one or more transformation processes. This includes planning, coordinating, and controlling the elements (including the resources) that comprise the process. This slide, and the one that follows, supplements your textbook with a more detailed definition of operations management. In the next slide, the responsibilities of operations managers should help in better understanding the definition as we complete the course. *Sometimes referred to as Production, Production and Operations Management, and Resources Management.

Operations Management Responsibilities of Operations Management • Planning • Organizing Products and services – Capacity Location Make or buy Layout Projects Scheduling – Degree of centralization Subcontracting • Staffing Hiring/laying off – Use of Overtime Note that this is a partial list. • Directing Incentive plans – Issuance of work orders Job assignments • Controlling – Inventory Quality

The Three Basic Functions The Organization Figure 1.1 The Three Basic Functions Organization Finance Operations Marketing Accounting, Information Systems, and other typical departments found in most business or government organizations are for supporting the above “BASIC” functions.

The operations function involves the conversion of inputs into outputs Value-Added Process Figure 1.2 The operations function involves the conversion of inputs into outputs Inputs Land Labor Capital Transformation/ Conversion process Outputs Goods Services Control Feedback Value added Think about this. Take an automobile. Its basic components are steel, iron, plastics, glass, platinum (for the catalytic converter), etc. These basic components are perhaps a few thousand dollars. However, when the basic components are assembled into a Toyota Camry, for example, they could jump in value to $25,000. It should be quite obvious to you as to why.

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. Can you think of all the services involved in the value-added for a Camry?

Goods-service Continuum Figure 1.3 Goods Service Surgery, teaching Song writing, software development Computer repair, restaurant meal Automobile Repair, fast food Home remodeling, retail sales Automobile assembly, steel making

Food Processor Inputs Processing Outputs Raw Vegetables Cleaning Canned vegetables Metal Sheets Making cans Water Cutting Energy Cooking Labor Packing Building Labeling Equipment This represents value added for a manufactured good.

Hospital Process Inputs Processing Outputs Doctors, nurses Examination Table 1.2 Inputs Processing Outputs Doctors, nurses Examination Healthy patients Hospital Surgery Medical Supplies Monitoring Equipment Medication Laboratories Therapy This represents value added for a service. Also, what is another output that, sad as it may be, could be an output?

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 What about freeways, airports, or even a parking lot?

Goods vs Service Characteristic Goods Service Customer contact Low High Uniformity of input Labor content Uniformity of output Output Tangible Intangible Measurement of productivity Easy Difficult Opportunity to correct problems Inventory Much Little Evaluation Easier Patentable Usually Not usual What kind of job do you want? Involvement in goods or services?

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 . . .(like project management) If you are majoring in marketing, financing, accounting, etc., don’t you think a job in your major area would involve one or more of the above? Whether you like it or not, everyone in business is involved in operations, and is an operations manager!

Types of Operations Operations Examples Table 1.4 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 Where would you put the Internet in the above slide?

Figure 1.4 Looks like most of you will be working in the service sector.

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 Can you think of examples of services that you can outsource. Are there some safe job areas in manufacturing and services that cannot be outsourced, especially to overseas operations?

Why Manufacturing Matters Over 18 million workers in manufacturing jobs Accounts for over 70% of value of U.S. exports Average full-time compensation about 20% higher than average of all workers Manufacturing workers more likely to have benefits Productivity growth in manufacturing in the last 5 years is more than double U.S. economy See pages 51-52 in the textbook for how productivity is measured

Why Manufacturing Matters More than half of the total R&D performed is in the manufacturing industries Manufacturing workers in California earn an average of about $25,000 more a year than service workers When a California manufacturing job is lost, an average of 2.5 service jobs are lost

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 We might want to better examine the third and fourth bullets. Why?

Operations Management Decision Making Models Quantitative approaches Analysis of trade-offs Systems approach Establishing priorities Ethics Software has enhanced managers’ performance of the first three bullets. Also, recall that a system consists of inputs, process, and outputs, with a feedback loop. Note that our earlier slide on “Value-Added Process” outlines a system.

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 Again, regardless of what functional area of business you work in (e.g., finance, accounting, marketing, etc.), you will be making decisions as outlined above. As such, you will be an operations manager (more in substance than in form).

Decision Making System Design – capacity location arrangement of departments product and service planning acquisition and placement of equipment Think about why a systems approach is necessary for a manufacturing organization when dealing with the performance of their manufacturing and marketing managers.

Decision Making System operation – personnel inventory scheduling project management quality assurance This may help with understanding the note attached to the previous slide.

Decision Making Models Quantitative approaches Analysis of trade-offs Systems approach This refers back to slide #1-21

Models Tradeoffs A model is an abstraction of reality. – Physical Schematic Mathematical Tradeoffs What are the pros and cons of models?

Examples of physical models (like a small scale reproduction of a car, ship, a downtown, or fighter aircraft). Much can be understood about the cost and performance of the real system (or item) from the model, which can help in building the real system.

Example of a schematic model.

E = mc2 Example of a Mathematical Model.

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 In reference to the fourth bullet, how can engineers ask “what if ” questions in the design of an airport?

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 In reference to the last bullet, are we better off using models regardless of the lack of a guarantee?

Quantitative Approaches Linear programming Queuing Techniques Inventory models Project models Statistical models Examples of these methods will be discussed later in the course.

Analysis of Trade-Offs Decision on the amount of inventory to stock Increased cost of holding inventory vs. Level of customer service So would you rather order something and wait for it, or always get what you want at once and pay a premium? Think of this problem for new car dealers.

“The whole is greater than the sum of the parts.” Systems Approach “The whole is greater than the sum of the parts.” Suboptimization How could suboptimization apply to the note for slide #1-23?

How do we identify the vital few? 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 does this slide explain, in part, how managers can cope with a complex world. How do we identify the vital few?

Ethical Issues Financial statements Worker safety Product safety Quality Environment Community Hiring/firing workers Closing facilities Worker’s rights Have you had other courses which covered some areas of business ethics? If so, which courses?

Business Operations Overlap Figure 1.5 Operations Marketing Finance

Operations Interfaces Public Relations Accounting Industrial Engineering Operations Maintenance Personnel Purchasing Distribution MIS Legal Hence, organizations must manage the interfaces.

Historical Evolution of Operations Management Table 1.7 Industrial revolution (1770’s) Scientific management (1911) Mass production Interchangeable parts Division of labor Human relations movement (1920-60) Decision models (1915, 1960-70’s) Influence of Japanese manufacturers

Trends in Business Major trends The Internet, e-commerce, e-business Management technology Globalization Management of supply chains Outsourcing Agility Ethical behavior Are these trends threats or opportunities?

Management Technology Technology: The application of scientific discoveries to the development and improvement of goods and services Product and service technology Process technology Information technology In short, technology assumes that knowledge can be converted into a product or service.

Simple Product Supply Chain Figure 1.7 Suppliers’ Suppliers Direct Suppliers Producer Distributor Final Consumer Supply Chain: A sequence of activities And organizations involved in producing And delivering a good or service In short, a supply chain is similar to a JIT system (assuming you heard of JIT), but extends the JIT concept to several different business, where those businesses parallel departments within a single organization. This will be a big topic later in this course, especially for those of you majoring in TOM, accounting, and finance.

A Supply Chain for Bread 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 $0.38 Flour transported to baker $0.46 Baker produces bread $0.54 $1.00 Bread transported to grocery store $1.08 Grocery store displays and sells bread $0.21 $1.29 Total Value-Added This will be illustrated in class.

Other Important Trends Ethical behavior Operations strategy Working with fewer resources Revenue management Process analysis and improvement Increased regulation and product liability Lean production It will be discussed in class as to why the second bullet was perhaps the most significant factor in building the Japanese economy, currently the second largest in the world.