35A00210 Lecture 1

Operations Management Introduction to OM

Lecture 1
Introduction to Operations
Management What is OM
What is OM
Transformation processes
Manufacturing vs services
Operations strategy

Operations management at IKEA

Supermarket

Plastic Design a store layout

Milk product container Design elegant which gives smooth Ensure that the jobs of
packaging manufacturer products which can be and effective flow all staff encourage
flat-packed efficiently their contribution to
Milk product
business success
processing

Chemical
manufacturer Site stores of an
Cardboard Continually examine
appropriate size in
container and improve
the most effective
Transport manufacturer operations practice
locations
company

Oil
Dairy Paper refinery
farmer mill Maintain cleanliness Monitor and enhance
and safety of storage Arrange for fast quality of service to
area replenishment of customers
Lumber
company products
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 What is OM about? Who said operations are boring?

The ultimate goal:

fulfilling people’s needs

Needs are filled by producing

products and services

Operations is responsible
for production

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Various definitions of what OM is? One pretty universal OM-definition

a) Transforming inputs to outputs

b) Designing, managing and improving the Designing company’s processes,

production system that develops managing it’s resources and developing
company’s products and services capabilities, which help to transform raw
materials to products and services
c) Managing company’s business processes customers value

d) Planning, designing, operating,

controlling and improving OM has strong ”managerial” and
”getting things done” focus

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 Even traditionally defined OM is a
Why study OM-issues?
wide area
Value added very likely operations based
- has be to understood no matter where one works
- e.g. accounting, finance, marketing, information technology…
- numerous career opportunities / have to?
Significant role in company’s every day life
- most of the costs are operations based
Success is achieved by doing things right
- many problems can be led to OM-mistakes
- “Bad execution kills CEO’s” (Fortune-magazine)
- ”Brilliant strategy, but can you execute?” (McKinsey & Co.)
- operational excellence as a strategy
- importance understood again in recent years

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Who should be interested in Operations are the heart of

operations? corporations - case Disney World -
Inputs constantly transformed to outputs
e.g. accounting manager
Forecasting demand and
- input: data, information, employees managing capacity
- transformation: processes, knowledge, following the rules Equipment acquisition, locating
- output: reports, knowledge of success and maintenance
You cannot hide from people, material and Quality assurance
Procurement of stores
machines
Workforce training and
- grocery store visit is a simple inventory problem
scheduling
- painting a house requires job design
Management of queues and
- etc. cleanliness
Use of technology
OM is a useful way of thinking Cost cutting
- not only a profession -
etc..
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 How do operations differ from each
Operations differ by the Four “V”s
other?
Production volume
- impacts almost everything Low Volume (of production) High
Complexity of product variety
- smaller variety eases operations
Fluctuation in demand High Variety (of production) Low

- level demand much easy to manage

Relation between product and service
- influences the requirements for operations High Variation (in demand) Low

Role of the customer

- influences directly the process design
High Visibility (customer contact) Low

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The Four “V”s - Implications Lecture 1

Introduction to OM
IMPLICATIONS IMPLICATIONS
Low repetition High repeatability
Staff members perform Specialisation
more of job Low Volume High Systemisation
Less systemisation Capital intensive
High unit costs Low unit costs

Flexible Well defined

Complex
Match customer needs
High unit cost
High Variety Low Routine
Standardised
Low unit costs
Transformation processes
Changing capacity
Anticipation Stable
Flexibility High Variation Low
Routine/Predictable
In touch with demand in demand High utilisation
High unit cost Low unit cost

Short waiting tolerance Lag between production

Satisfaction governed by Visibility and consumption
perception High Low
(contact) High staff utilisation
Customer contact skills Low unit cost
High unit cost
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 What are operations about? Different transformations
Production is only one type of transformation
Process
process
Management - physical - manufacturing, chemical
- locational - transportation
Transformation process
- exchange - sales
Inputs
Activities and inventories Outputs - informative - telecommunication
Material Products - storage - inventory
Customers Services
- physiological - health
- mental - education
- attitudinal - entertainment

Workforce and money

Resources
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Lecture 1 Service Definitions

Introduction to OM
“Services are deeds, processes, and performances.”
Zeithaml & Bitner

“A service is a time-perishable, intangible experience

Manufacturing vs services performed for a customer acting in the role of a co-
producer.”
James Fitzsimmons

“Service enterprises are organizations that facilitate

the production and distribution of goods, support
other firms in meeting their goals, and add value to
our personal lives.”
James Fitzsimmons

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 Percent Employment in Services Output from most operations are a
- Top Ten Postindustrial Nations mixture of goods and services

Country 1965 1975 1985 1995 2005 PURE GOODS

United States 59.5 66.4 70.0 74.1 78.6 Tangible
Crude oil production
Can be stored
United Kingdom 51.3 58.3 64.1 71.4 77.0 Aluminun smelting Production precedes
The Netherlands 52.5 60.9 68.3 73.4 76.5 consumption
Special machine manuf.
Low customer
Sweden 46.5 57.7 66.1 71.5 76.3 contact
Tailoring Can be transported
Canada 57.8 65.8 70.6 74.8 76.0 Quality is evident
Restaurant Intangible
Australia 54.6 61.5 68.4 73.1 75.8
Cannot be stored
Computer systems service
France 43.9 51.9 61.4 70.0 74.8 Production and
consumption are
Japan 44.8 52.0 57.0 61.4 68.6 Management consultancy
simultaneous
High customer contact
Germany 41.8 n/a 51.6 60.8 68.5 Psychotherapy clinic Cannot be transported
Italy 36.5 44.0 55.3 62.2 65.5 Insurance
Quality difficult to judge
PURE SERVICES

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Typical characteristics of services Service Process

Intangibility INPUTS SERVICE OUTPUTS

- measuring quality and efficiency
Compared to manufacturing,
hard and very subjective
these characteristics introduce: PROCESS
- opportunity to mass customize
quite easy …
Inseparability
- rather labor oriented and
more uncertainty into the Customers Service
operating system
customer part of the process
… experience
Heterogeneity
- both input and output differs fewer options for managing Staff Activities,
(customers have an impact) uncertainty Resources,
Perishability …
- opportunity loss of idle capacity,
an operational focus on Materials Processes Satisfaction/
no inventory
- demand and supply has to be managing the customer dissatisfaction
balanced with employees, pricing, experience throughout the
customer participation, service delivery process
reservation systems etc. Information

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 Services interesting from OM Customer rarely sees the
perspective production side of the service
Methods quite similar in production and services
Many additional but at the same time interesting Customer
challenges compared to production of products
- production & marketing cooperation in designing & running ops
- balancing technology, information and human resources from
customer satisfaction point of view Front office
Visible activities to the customer

Service provider
- impact of simultaneous production & consumption to quality
- improving employee’s technical and customer interaction skills
- customer contact’s and customization’s impact on hiring and
motivating employees as well as designing their work
- greater dependency on business networks and IT
Back office
- several geographical locations Invisible activities to the customer
- slow productivity gains compared to manufacturing (only about 1 %
per year)

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The production side of the service - Lecture 1

car repair Introduction to OM

1. Calling the auto shop and making appointment

”Front Office”

2. Leaving the car and meeting supervisor

....
7. Receiving a notice from finished work Operations strategy
8. Checking the work and paying

3. Timing the repair

”Back Office”

4. Finding out the problem

5. Managing the inventory for repair parts
6. Doing the repair work and testing (+test drive)

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 ‘Operations’ is not the same as Operations strategy is different
‘operational’ from operations management
‘Operations’ are the resources that create Operations management Operations strategy
products and services Short-term
for example, capacity
Long-term
for example, capacity
decisions decisions
‘Operational’ is the opposite of strategic, Time scale

Demand

Demand
meaning day-to-day and detailed 1-12 months 1-10 years

Micro Macro
One can examine both the operational and the Level of
level of the process level of the total operation

strategic aspects of operations analysis

- the operational role =do things right

Detailed Aggregated
- the strategic role = do the right things Level of For example For example
aggregation “Can we give tax services to “What is our overall business
the small business market in advice capability compared with
Antwerp?” other capabilities?”

Concrete Philosophical
Level of For example For example
abstraction “How do we improve our “Should we develop strategic
purchasing procedures?” alliances with suppliers?”
(Slack et al, 2006)
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Business strategy Disney World, Orlando

Vision and mission

Developing long-term plans and systems which lead to success Location strategy
(goal and a plan how to achieve them) - large site, warm climate, far from Disneyland, legal independence, good for tourists,
possible other attractions close by
Corporate strategy Capacity strategy
- larger site than required, steady capacity expansion, lagging demand
Strategy development process Layout strategy
- ”convenience to spend money”, different groups separated from each other, interpark
Business strategy transportation, restaurants and gaming closely nit, parks and lakes as entertainment
Internal Competitor External Environment and sound buffers
analyses analyses analyses analyses Technology strategy
- strong internal technology capabilities, management of queues
Functional Personnel strategy
strategies
(e.g. oper. strategy) - most talented, continuous training, willingness to serve
How company competes; Information strategy
Products, customers, competitive advantage - continuous radio communication, electronic signs
total family experience,
- electronic booking system
Tactics product uniqueness,
Customer valued capability, which gives the company Quality strategy variety and quality
advantage over its competitors (often operation based) - safe and clean

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 Competitive priorities Competitive priorities

• Delivery speed
• On-time delivery
Cost Time • Development
speed

• Top quality • Customization

Quality • Consistent Flexibility • Variety
• Volume flexibility
quality

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Order winners and qualifiers Successful companies focus

No company can succeed at being everything for
everybody
Positive order winners - operatively impossible
Competitive benefit

- economically impossible
- from skill point-of-view impossible
less important
- customers do not believe
Neutral
Company has to find it’s own value proposition and be
qualifiers able to deliver it
- product, price, access, service, experience
- dominate in one element
- differentiate on a second
Negative - be industry par on the remaining three

Low High
Achieved performance
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Case in point:
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 How to develop operations
Trends & challenges for OM
strategy?
Global
competition
Business strategy
products, markets,
competitive advantage Social
Environmental
responsibility
responsibility

Customer Operations
Managers
Marketing strategy Operations strategy
products, markets, cost/speed/quality/flexibility
pricing/promotion/distribution, process and technology
services capacity, location, workforce
Technology Productivity
Cannot be developed apart! improvement
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Operations strategies have an

ethical dimension
Product/service design
- customer safety, recyclability of materials, energy consumption.
Network design
- employment implications and environmental impact of location.
Layout of facilities
- staff safety, disabled customer access
Process technology
- staff safety, waste and product disposal, noise pollution, fumes and emissions
Job design
- workplace stress, unsocial working hours
Capacity planning and control
- employment policies
Inventory planning and control
- price manipulation

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