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CHAPTER 1

Introduction to Operations Management

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Learning objectives• After completing this chapter, you should be able to:

• 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 in business that impact operations management

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(I) Operations Management

• What is operations?– The part of a business organization that is responsible

for producing goods or services

• How can we define Operations Management?– 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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Basic Functions of the Business Organization

Organization

Finance Operations Marketing

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The Transformation Process(Value – Added Process)

Inputs•Land•Labor•Capital•Information

Outputs•Goods•Services

Transformation/Conversion

Process

Control

Feedback

Feedback Feedback

Value-Added

Feedback = measurements taken at various points in the transformation process

Control = The comparison of feedback against previously established standards to determine if corrective action is needed.

The operations function involves the conversion of inputs into outputs

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Automobile Assembly, Steelmaking

Products are typically neither purely service- or purely goods-based.

Goods Services

Home Remodeling, Retail Sales

Computer Repair, Restaurant Meal

Songwriting, Software Development

Surgery, Teaching

Goods-service Continuum

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Example: HospitalExample: Hospital

Inputs Processing Outputs

Doctors, nurses Examination Treated patientsHospital Surgery

Medical supplies MonitoringEquipment MedicationLaboratories Therapy

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Tangible Act-Oriented

Goods Services

Manufacturing and Service Organizations differ clearly because manufacturing is goods-oriented and service is act-oriented.

Manufacturing vs. Service?

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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

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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 ServiceCharacteristic Goods Service

Customer contact Low High

Uniformity of input High Low

Labor content Low High

Uniformity of output High Low

Output Tangible Intangible

Measurement of productivity Easy Difficult

Opportunity to correct problems High Low

Inventory Much Little

Evaluation Easier Difficult

Patentable Usually Not usual

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Managing Services is Challenging1. Jobs in services are often less structured than in

manufacturing

2. Customer contact is generally much higher in services compared to manufacturing

3. In many services, worker skill levels are low compared to those of manufacturing employees

4. Services are adding many new workers in low-skill, entry-level positions

5. Employee turnover is high in services, especially in low-skill jobs

6. Input variability tends to be higher in many service environments than in manufacturing

7. Service performance can be adversely affected by many factors outside of the manager’s control (e.g., employee and customer attitudes)

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U.S. Manufacturing vs. Service Employment

• Insert Figure 1.7

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Figure 1.4b

0

10

20

30

40

50

60

70

80

90

97 98 99 00 01 02 03 04 05 06 07

Services

Manufacturing

Singapore Manufacturing vs. Service Employment

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The operations function includes many interrelated activities such as:

– Forecasting– Capacity planning– Scheduling– Managing inventories– Assuring quality– Motivating employees– Deciding where to locate facilities– And more . . .

(II) Scope of Operations Management

The scope of operations management ranges across the organization.

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Types of OperationsTypes of OperationsTable 1.4

Operations ExamplesGoods Producing Farming, mining, construction,

manufacturing, power generationStorage/Transportation Warehousing, trucking, mail

service, moving, taxis, buses,hotels, airlines

Exchange Retailing, wholesaling, financial advising, renting or leasing

Entertainment Films, radio and television,concerts, recording

Communication Newspapers, radio and TV newscasts, telephone, satellites

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The Operations Function consists of all activities directly related to producing goods or providing services.

A primary function of the operations manager is to guide the system by decision making.

– System Design Decisions– System Operation Decisions

Role of the Operations Manager

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System Design Decisions

• System Design– Capacity– Facility location– Facility layout– Product and service planning– Acquisition and placement of equipment

• These are typically strategic decisions that require• long-term commitment of resources• Determine parameters of system operation

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System Operation Decisions

• System Operation– Management of personnel– Inventory management and control– Scheduling– Project management– Quality assurance

• Operations managers spend more time on system operation decision than any other decision area

• They still have a vital stake in system design

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(III) Key Decisions of Operations Managers

• Most operations decisions involve many alternatives that can have quite different impacts on costs or profits

• Typical operations decisions include:

–What: What resources are needed, and in what amounts?

–When: When will each resource be needed? When should

the work be scheduled? When should materials and other

supplies be ordered?

–Where: Where will the work be done?

– How: How will he product or service be designed? How

will the work be done? How will resources be allocated?

–Who: Who will do the work?

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Operations Management Decision Making

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

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General Approach to Decision Making

• A) Modeling is a key tool used by all decision makers–Model - an abstraction of reality; a simplification of

something.

– Common features of models:

• They are simplifications of real-life phenomena

• They omit unimportant details of the real-life systems they mimic so that attention can be focused on the most important aspects of the real-life system

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Models

• Types of Models:– Physical Models

• Look like their real-life counterparts

– Schematic Models• Look less like their real-life counterparts than

physical models

– Mathematical Models• Do not look at all like their real-life counterparts

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Understanding Models

• Keys to successfully using a model in decision making

– What is its purpose?

– How is it used to generate results?

– How are the results interpreted and used?– What are the model’s assumptions and limitations?

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Benefits of Models

• Models are generally easier to use and less expensive than

dealing with the real system

• Require users to organize and sometimes quantify

information

• Increase understanding of the problem

• Enable managers to analyze “What if?” questions

• Serve as a consistent tool for evaluation and provide a

standardized format for analyzing a problem

• Enable users to bring the power of mathematics to bear on a

problem.

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Limitations of Models

• Quantitative information may be emphasized at the expense of qualitative information

• Models may be incorrectly applied and the results misinterpreted– This is a real risk with the widespread availability of

sophisticated, computerized models are placed in the hands of uninformed users.

• The use of models does not guarantee good decisions.

• Nonqualified users may not comprehend the rules on how to use the model

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B) Quantitative Methods

• A decision making approach that frequently seeks to obtain a mathematically optimal solution– Linear programming– Queuing techniques– Inventory models– Project models– Forecasting techniques– Statistical models

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C) Metrics and Trade - Offs

• Performance Metrics– All managers use metrics to manage and control

operations:– Profits, costs, productivity and forecast accuracy.

• Analysis of Trade – Offs– A trade off is giving up one thing in return for

something else.– Carrying more inventory (an expense) in order to

achieve a greater level of customer service.

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D) Systems Approach

• System - a set of interrelated parts that must work together

– The business organization is a system composed of subsystems

• marketing subsystem

• operations subsystem

• finance subsystem

• The systems approach

– Emphasizes interrelationships among subsystems

– Main theme is that the whole is greater than the sum of its parts

– The output and objectives of the organization take precedence over those of any one subsystem

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E) Establishing Priorities

• In nearly all cases, certain issues or items are more important than others

• Recognizing this allows managers to focus their attention to those efforts that will do the most good– Pareto Phenomenon - a few factors account for a high

percentage of occurrence of some event(s)

• 80–20 Rule: 80% of problems are caused by 20% of the activities.

• The critical few factors should receive the highest priority

• This is a concept that is appropriately applied to all areas and levels of management

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F) Ethical Issues in Operations

• Ethical issues arise in many aspects of operations management:

• Financial statements• Worker safety• Product safety• Quality

• The environment

• The community

• Hiring and firing workers• Closing facilities• Workers rights

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(IV) Historical Evolution of OM

• Industrial Revolution• Scientific Management

– Mass production– Interchangeable parts– Division of labor

• Human Relations Movement• Decision Models and Management Science• Influence of Japanese Manufacturers

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A) Industrial Revolution (1770s)

• Pre-Industrial Revolution

– Craft production - System in which highly skilled workers use simple, flexible tools to produce small quantities of customized goods

• Some key elements of the industrial revolution

– Began in England in the 1770s

– Division of labor - Adam Smith, 1776

– Application of the “rotative” steam engine, 1780s

– Cotton Gin and Interchangeable parts - Eli Whitney, 1792

• Management theory and practice did not advance appreciably during this period

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B) Scientific Management (1911)

• Movement was led by efficiency engineer, Frederick Winslow Taylor– Believed in a “science of management” based on

observation, measurement, analysis and improvement of work methods, and economic incentives

– Management is responsible for planning, carefully selecting and training workers, finding the best way to perform each job, achieving cooperate between management and workers, and separating management activities from work activities

– Emphasis was on maximizing output

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Scientific Management - contributors

• Frank Gilbreth - father of motion studies• Henry Gantt - developed the Gantt chart scheduling

system and recognized the value of non-monetary rewards for motivating employees

• Harrington Emerson - applied Taylor’s ideas to organization structure

• Henry Ford - employed scientific management techniques to his factories

• Moving assembly line• Mass production

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C) Human Relations Movement (1920–60)

• The human relations movement emphasized the importance of the human element in job design– Lillian Gilbreth

– Elton Mayo – Hawthorne studies on worker motivation, 1930– Abraham Maslow – motivation theory, 1940s; hierarchy of

needs, 1954

– Frederick Hertzberg – Two Factor Theory, 1959– Douglas McGregor – Theory X and Theory Y, 1960s

– William Ouchi – Theory Z, 1981

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D) Decision Models & Management Science (1915, 1960 – 70s)

• F.W. Harris – mathematical model for inventory management, 1915

• Dodge, Romig, and Shewart – statistical procedures for sampling and quality control, 1930s

• Tippett – statistical sampling theory, 1935• Operations Research (OR) Groups – OR applications

in warfare

• George Dantzig – linear programming, 1947

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E) Influence of Japanese Manufacturers

• Refined and developed management practices that increased productivity– Credited with fueling the “quality revolution

– Just-in-Time production

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(V) Key Trends and Issues in Business

• Internet, E-Business & E-Commerce• Management of Technology• Globalization• Management of Supply Chains• Outsourcing• Agility• Ethical Behavior

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Suppliers’ Suppliers

DirectSuppliers Producer Distributor Final

Consumer

Simple Product Supply ChainSimple Product Supply ChainFigure 1.7

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

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Elements of Supply Chain Management• Customers – what products/services do customers want

• Forecasting – predicting timing and volume of customer demand

• Design – incorporating customer wants, manufacturability, and time to market

• Capacity planning – matching supply and demand

• Processing – controlling quality, scheduling work

• Inventory – meeting demand requirements while managing costs

• Purchasing – evaluating potential suppliers, supporting the needs of operations on purchased goods and services

• Suppliers – monitoring supplier quality, on-time delivery, and flexibility; maintaining supplier relations

• Location – determining the location of facilities

• Logistics – deciding how to best move information and materials