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

11

Introduction toOperationsManagement



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LearningLearning ObjectivesObjectives

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 managers 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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IntroductionIntroduction

To many people, the term production conjures up images of fact ories, machines, and assembly lines. Interestinglyenough, the field of production management in the past f ocused almost exclusively on manuf acturing management,with a heavy emphasis on the methods and techniques

used in operating a f act ory.

In recent years, the scope of production management hasbroaden considerably. Production concept s and techniquesare applied t o wide range of activities and situations out sidemanuf acturing; that is, in services, such as health care,

f ood service, recreation, banking, hotel management, ret ailsales, etc.



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Types of OperationsTypes of Operations

Table 1.4

Operations Examples

Goods Producing Farming, mining, construction ,

manuf acturing, power generation

St orage/Transport ation Warehousing, trucking, mail

service, moving, t axis, buses,

hotels, airlines

Exchange Ret ailing, wholesaling, banking,

renting, leasing, library, loans

Entert ainment Films, radio and television,concert s, recording

Communication Newspapers, radio and television

newscast s, telephone, satellites



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OperationsOperations ManagementManagement DefinedDefined

Operations Management is:

The management of systems or processes that creategoods and/or provide services.

Operations Management affect s:

Companies ability t o compete

Nation s ability t o compete internationally



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OperationsOperations ManagementManagement DefinedDefined

Operations management designs the system and controls it ;this includes arranging f acilities, scheduling t asks,developing procedures f or invent ory acquisition andturnover, as well as providing corrective actions t o insurethat changes are made whenever it is necessary t o do so.

Examples

Airline company f orecasting, capacity planning,scheduling, managing invent ory, assuring quality, employee

motivation, location of f acilities, etc.

Bicycle factory assembly operation, f abrication work,scheduling production, selecting and maint aining operation,etc.



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Why Study Operations Management?

There are a number of very good reason f or studyingoperations management :

Operations management activities are at the core of all

business organizations

35% or more of all jobs are in operationsmanagement-related areas

Activities in all of the other areas of businessorganizations are all interrelated with operationsmanagement activities



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The OrganizationThe Organization

The Three Basic Functions

Organization

Finance Operations Marketing

Figure 1.1



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Operations FunctionOperations Function



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INPUT Material

MachinesLaborManagementCapital

TR ANSFORMATIONPROCESS

OUTPUT GoodsServices

Feedback

Value Value--Added Process Added Process

Value added



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Value Value--Added Added && ProductProduct PackagesPackages

Value-added is the difference between the cost of input s andthe value or price of out put s.

Product packages are a combination of goods and services.

Product packages can make a company more competitive.



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Automobile assembly, steel making

Home remodeling, retail sales

Automobile Repair, fast food

GoodsGoods--Service ContinuumService Continuum

Figure 1.3

Computer repair, restaurant meal

Song writing, software development

Goods Service

Surgery, teaching



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Food Processor

Inputs Processing Outputs

Raw Veget ables Cleaning Canned veget ablesMet al Sheet s Making cans

Water Cutting

Energy Cooking

Labor Packing

Building Labeling

Equipment

Table 1.2



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Hospital Process

Inputs Processing Outputs

Doctors, nurses Examination Healthy

patientsHospital Surgery

Medical Supplies MonitoringEquipment Medication

Laboratories Therapy

Table 1.2



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Production of Goods vs. Delivery ofProduction of Goods vs. Delivery ofServicesServices

Production of goods t angible out put

Delivery of services an act

Service job categories

Government

Wholesale/ret ail

Financial services

Healthcare

Personal services

Business services

Education



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KeyKey DifferencesDifferences

1. Cust omer cont act

2. Unif ormity of input

3. Labor content of jobs

4. Unif ormity of out put

5. Measurement of productivity

6. Production and delivery

7. Quality assurance

8. Amount of invent ory9. Evaluation of work

10. Ability t o patent design



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GoodsGoods vsvs ServiceService

Characteristic Goods Service

Cust omer cont act Low High

Unif ormity of input High Low

Labor content Low HighUnif ormity of out put High Low

Out put Tangible Int angible

Measurement of productivity Easy Difficult

Opportunity t o correct problems High Low

Invent ory Much Little

Evaluation Easier Difficult

Patent able Usually Not usual



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Operations Management includes:

Forecasting

Capacity planning

Scheduling

Managing invent ories

Assuring quality

Motivating employees Deciding where t o locate f acilities

Supply chain management

And many more . . .

Scope of Operations ManagementScope of Operations Management



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Year Mfg. Service

45 79 21

50 72 28

55 72 28

60 68 32

65 64 36

70 64 36

75 58 42

80 44 46

85 43 5790 35 65

95 25 75

00 30 70

02 25 75

U.S. Manufacturing vs. Service Employment

0

10

20

30

40

50

60

7080

90

45 50 55 60 65 70 75 80 85 90 95 00 02 05

Year

P e r c e n t

Mfg.

Service

Figure 1.4DeclineDecline inin ManufacturingManufacturing JobsJobs



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DeclineDecline inin ManufacturingManufacturing JobsJobs

Productivity

Increasing productivity allows companies t o maint ain orincrease their out put using fewer workers

Out sourcing

Some manuf acturing work has been out sourced t o moreproductive companies



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WhyWhy ManufacturingManufacturing Matters?Matters?

Over 18 million workers in manuf acturing jobs

Account s f or over 70% of value of U.S. export s

Average full-time compensation about 20% higher thanaverage of all workers

Manuf acturing workers more likely t o have benefit s

Productivity growth in manuf acturing in the last 5 years ismore than double U.S. economy



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ChallengesChallenges ofof ManagingManaging ServicesServices

Service jobs are often less structured than manuf acturing jobs

Cust omer cont act is higher

Worker skill levels are lower

Services hire many low-skill, entry-level workers

Employee turnover is higher

Input variability is higher

Service perf ormance can be affected by worker s personalf act ors



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Operations Management DecisionOperations Management DecisionMakingMaking

Models

Quantit ative approaches

Analysis of trade-off s

Systems approach

Est ablishing priorities

Ethics



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Decision MakingDecision Making

System Design capacity

location

arrangement of department s

product and service planning

acquisition and placement of equipment



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Decision MakingDecision Making

System operation

personnel

invent ory

scheduling

pro ject management

quality assurance



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DecisionDecision MakingMaking

Models

Quantit ative approaches

Analysis of trade-off s

Systems approach



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ModelsModels Are Are BeneficialBeneficial

Easy t o use, less expensive

Require users t o organize

Increase underst anding of the problem

Enable what if questions

Consistent t ool f or evaluation and st andardized f ormat

Power of mathematics



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Limitations of ModelsLimitations of Models

Quantit ative inf ormation may be emphasized overqualit ative

Models may be incorrectly applied and result smisinterpreted

Nonqualified users may not comprehend the rules onhow t o use the model

Use of models does not guarantee good decisions



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Quantitative ApproachesQuantitative Approaches

Linear programming

Queuing Techniques

Invent ory models

Pro ject models

St atistical models



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Analysis of Trade Analysis of Trade--OffsOffs

Decision on the amount of invent ory t o st ock

Increased cost of holding invent ory

Vs.

Level of cust omer service



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Systems ApproachSystems Approach

The wh ole i s greater th an th e sum of th e part s.

SuboptimizationSuboptimization



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Pareto PhenomenonPareto Phenomenon

A few f act ors account f or a high percent age of theoccurrence of some event (s).

80 /20 Rule - 80% of problems are caused by 20% of theactivities.

How do we identify the vital few?



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EthicalEthical IssuesIssues

Financial st atement s Worker safety

Product safety

Quality

Environment

Community

Hiring /firing workers

Closing f acilities

Worker s right s



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Business Operations OverlapBusiness Operations Overlap

Operations

Finance

Figure 1.5

Marketing



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Operations InterfacesOperations Interfaces

Public Relations

Accounting

IndustrialEngineering

Operations

Maintenance

Personnel

Purchasing

Distribution

MIS

Legal



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TrendsTrends inin BusinessBusiness

Ma jor trends

The Internet, e-commerce, e-business

Management technology

Globalization Management of supply chains

Out sourcing

Agility

Ethical behavior



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ManagementManagement TechnologyTechnology

Technology: The application of scientific discoveries t o thedevelopment and improvement of goods and services

Product and service technology

Process technology

Inf ormation technology



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Suppliers Suppliers

Direct Suppliers Producer Distribut or

FinalConsumer

Simple Product Supply ChainSimple Product Supply ChainFigure 1.7

Supply Chain: A sequence of activities and organizationsinvolved in producing and delivering a good or service



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St age of Production Value Added Value of Product

Farmer produces and harvest s wheat $0.15 $0.15

Wheat transported t o mill $0.08 $0.23Mill produces flour $0.15 $0.38

Flour transported t o baker $0.08 $0.46

Baker produces bread $0.54 $1.00

Bread transported t o grocery st ore $0.08 $1.08

Grocery st ore displays and sells bread $0.21 $1.29

Tot al Value- Added $1.29

A Supply Chain for Bread A Supply Chain for Bread



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Other Important TrendsOther 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 ManagementEvolution of Operations Management

Craft Production

process of handcrafting product s or services f or individualcust omers

Division of Labor

dividing a job int o a series of small t asks each perf ormedby a different worker

Interchangeable Parts

st andardization of part s initially as replacement part s;enabled mass production



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Historical Events in OperationsHistorical Events in OperationsManagementManagement

Era Events/Concepts Dates Originator

Industrial

Revolution

Steam engine 1769 James Watt

Division of labor 1776 Adam Smith

Interchangeable part s 1790 Eli Whitney

ScientificManagement

Principles of scientific

management 1911

Frederick W. Taylor

Time and motion studies 1911Frank and Lillian

Gilbreth

Activity scheduling chart 1912 Henry Gantt

Moving assembly line 1913 Henry Ford



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HumanRelations

Hawthorne studies 1930 Elt on Mayo

Motivation theories

1940s Abraham Maslow

1950s Frederick Herzberg

1960s Douglas McGregor

OperationsResearch

Linear programming 1947 George Dantzig

Digit al computer 1951 Remingt on Rand

Simulation, waiting

line theory, decision

theory, PERT /CPM

1950s Operations research groups

MRP, EDI, EFT, CIM1960s, 1970s

Joseph Orlicky, IBM

and others



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Quality

Revolution

JIT ( just-in-time) 1970s Taiichi Ohno (Toyot a)

TQM (t ot al quality

management )1980s

W. Edwards Deming,

Joseph Juran

Strategy andoperations

1990s Wickham Skinner, Robert Hayes

Business process

reengineering1990s

Michael Hammer,

James Champy



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Era Events/Concepts Dates OriginatorGlobalization WTO, European Union,

and other trade agreement s

1990s

2000s

Numerous countries

and companies

Internet

Revolution

Internet, WWW, ERP,

supply chain management

1990s ARP ANET, Tim

Berners-Lee S AP,i2 Technologies,

OR ACLE,

PeopleSoft E-commerce 2000s Amazon, Yahoo,

eBay, and others

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