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Introduction to Operations Management

McGraw-Hill/Irwin

Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
       

Define the term operations management Identify the three major functional areas of organizations and describe how they interrelate Compare and contrast service and manufacturing operations Describe the operations function and the nature of the operations manager s job Differentiate between design and operation of production systems Describe the key aspects of operations management decision making Briefly describe the historical evolution of operations management Identify current trends that impact operations management
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Introduction
 To many people, the term production conjures up images of factories, machines, and assembly lines. Interestingly enough, the field of production management in the past focused almost exclusively on manufacturing management, with a heavy emphasis on the methods and techniques used in operating a factory.  In recent years, the scope of production management has broaden considerably. Production concepts and techniques are applied to wide range of activities and situations outside manufacturing; that is, in services, such as health care, food service, recreation, banking, hotel management, retail sales, etc.

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What is Operations?
 The operational function consists of all activities directly related to producing goods or providing services. Operation is a function or system that transforms inputs into outputs of greater value.  To ensure that the desired outputs are obtained, measurements are taken at various points in the transformation process (feedback) and then compared with previously established standards to determine whether corrective action is needed (control).  The essence of the operations function is to add value during the transformation process.

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Types of Operations
Table 1.4
Operations Goods Producing Storage/Transportation Examples Farming, mining, construction , manufacturing, power generation Warehousing, trucking, mail service, moving, taxis, buses, hotels, airlines Retailing, wholesaling, banking, renting, leasing, library, loans Films, radio and television, concerts, recording Newspapers, radio and television newscasts, telephone, satellites

Exchange Entertainment Communication

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Operations Management Defined

 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

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Operations Management Defined

 Operations management designs the system and controls it; this includes arranging facilities, scheduling tasks, developing procedures for inventory acquisition and turnover, as well as providing corrective actions to insure that changes are made whenever it is necessary to do so. Examples  Airline company forecasting, capacity planning, scheduling, managing inventory, assuring quality, employee motivation, location of facilities, etc.  Bicycle factory assembly operation, fabrication work, scheduling production, selecting and maintaining operation, etc.
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Why Study Operations Management?

 There are a number of very good reason for studying operations management:  Operations management activities are at the core of all business organizations  35% or more of all jobs management-related areas

are

in

operations

 Activities in all of the other areas of business organizations are all interrelated with operations management activities

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The Organization
Figure 1.1

The Three Basic Functions

Organization

Finance

Operations

Marketing

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Operations Function

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ValueValue-Added Process
Value added
INPUT Material Machines Labor Management Capital

TRANSFORMATION PROCESS

OUTPUT Goods Services

Feedback

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ValueValue-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.

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GoodsGoods-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

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Food Processor
Table 1.2

Inputs
Raw Vegetables Metal Sheets Water Energy Labor Building Equipment

Processing
Cleaning Making cans Cutting Cooking Packing Labeling

Outputs
Canned vegetables

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Hospital Process
Table 1.2

Inputs
Doctors, nurses Hospital Medical Supplies Equipment Laboratories

Processing
Examination Surgery Monitoring Medication Therapy

Outputs
Healthy patients

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Manufacturing or Service?

Tangible

Act

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Production of Goods vs. Delivery of Services

 Production of goods  Delivery of services

tangible output an act

 Service job categories  Government  Wholesale/retail  Financial services  Healthcare  Personal services  Business services  Education
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Key Differences
1. Customer contact 2. Uniformity of input 3. Labor content of jobs 4. Uniformity of output 5. Measurement of productivity 6. Production and delivery 7. Quality assurance 8. Amount of inventory 9. Evaluation of work 10. Ability to patent design

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Goods vs Service
Characteristic Customer contact Uniformity of input Labor content Uniformity of output Output Measurement of productivity Opportunity to correct problems Inventory Evaluation Patentable Goods Low High Low High Tangible Easy High Much Easier Usually Service High Low High Low Intangible Difficult Low Little Difficult Not usual
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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 many more . . .
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Decline in Manufacturing Jobs

Figure 1.4

U.S. Manufacturing vs. Service Employment

Year Mfg. Service 45 79 21 90 Mfg. 50 72 28 80 Service 55 72 28 70 60 68 32 60 65 64 36 50 70 64 36 40 75 58 42 30 80 44 46 20 85 43 57 10 90 35 65 0 95 25 75 45 50 55 60 65 70 75 80 85 90 95 00 02 05 00 30 70 Year 25 75

02

Percent

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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

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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

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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

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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

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Operations Management Decision Making

     

Models Quantitative approaches Analysis of trade-offs Systems approach Establishing priorities Ethics

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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

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Decision Making
System Design capacity location arrangement of departments product and service planning acquisition and placement of equipment

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Decision Making
System operation personnel inventory scheduling project management quality assurance

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Decision Making
   

Models Quantitative approaches Analysis of trade-offs Systems approach

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Models
A model is an abstraction of reality. Physical Schematic Mathematical

Tradeoffs

What are the pros and cons of models?

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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

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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

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Quantitative Approaches
Linear programming Queuing Techniques Inventory models Project models Statistical models

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Analysis of Trade-Offs Trade Decision on the amount of inventory to stock  Increased cost of holding inventory

Vs.
 Level of customer service

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Systems Approach
The whole is greater than the sum of the parts.

Suboptimization

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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?

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Ethical Issues
        

Financial statements Worker safety Product safety Quality Environment Community Hiring/firing workers Closing facilities Worker s rights

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Business Operations Overlap

Figure 1.5

Operations

Marketing

Finance

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Operations Interfaces
Industrial Engineering Distribution Maintenance

Purchasing

Operations

Public Relations

Legal Personnel Accounting MIS

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Trends in Business
 Major trends  The Internet, e-commerce, e-business  Management technology  Globalization  Management of supply chains  Outsourcing  Agility  Ethical behavior

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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

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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

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A Supply Chain for Bread

Value Added $0.15 $0.08 $0.15 $0.08 $0.54 $0.08 $0.21 $1.29 Value of Product $0.15 $0.23 $0.38 $0.46 $1.00 $1.08 $1.29

Stage of Production Farmer produces and harvests wheat Wheat transported to mill Mill produces flour Flour transported to baker Baker produces bread Bread transported to grocery store Grocery store displays and sells bread Total Value-Added

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Other Important Trends

      

Ethical behavior Operations strategy Working with fewer resources Revenue management Process analysis and improvement Increased regulation and product liability Lean production

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Evolution of Operations Management

 Craft Production  process of handcrafting products or services for individual customers  Division of Labor  dividing a job into a series of small tasks each performed by a different worker  Interchangeable Parts  standardization of parts initially as replacement parts; enabled mass production

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Evolution of Operations Management

 Scientific Management  systematic analysis of work methods  Mass Production  high-volume production of a standardized product for a mass market  Lean Production  adaptation of mass production that prizes quality and flexibility

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Historical Events in Operations Management

Era Industrial Revolution Events/Concepts Steam engine Division of labor Interchangeable parts Principles of scientific management Scientific Management Time and motion studies Activity scheduling chart Moving assembly line Dates 1769 1776 1790 1911 Originator James Watt Adam Smith Eli Whitney Frederick W. Taylor Frank and Lillian Gilbreth Henry Gantt Henry Ford

1911 1912 1913

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Historical Events in Operations Management

Era Events/Concepts Hawthorne studies Human Relations Motivation theories Linear programming Digital computer Operations Research Simulation, waiting line theory, decision theory, PERT/CPM MRP, EDI, EFT, CIM Dates 1930 1940s 1950s 1960s 1947 1951 1950s Originator Elton Mayo Abraham Maslow Frederick Herzberg Douglas McGregor George Dantzig Remington Rand Operations research groups Joseph Orlicky, IBM and others
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1960s, 1970s

Historical Events in Operations Management

Era Events/Concepts JIT (just-in-time) TQM (total quality management) Quality Strategy and Revolution operations Business process reengineering Dates 1970s 1980s 1990s 1990s Originator Taiichi Ohno (Toyota) W. Edwards Deming, Joseph Juran Wickham Skinner, Robert Hayes Michael Hammer, James Champy

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Historical Events in Operations Management

Era Events/Concepts Globalization WTO, European Union, and other trade agreements Internet, WWW, ERP, Internet Revolution supply chain management Dates 1990s 2000s 1990s Originator Numerous countries and companies ARPANET, Tim Berners-Lee SAP, i2 Technologies, ORACLE, PeopleSoft Amazon, Yahoo, eBay, and others

E-commerce

2000s

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