PDK 409
1-2
UNIT 1
INTRODUCTION TO OPERATIONS
MANAGEMENT
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
Learning Objectives
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
DEFINITIONS
Operations management is the
administration of business practices to
create the highest level of efficiency
possible within an organization.
It is concerned with converting materials
and labour into goods and services as
efficiently as possible to maximize the
profit of an organization.
The design, execution,
and control of operations
that convert resources into
desired goods and
services, and implement a
company's business
strategy.
Operations management is an
area of management concerned
with designing and controlling the
process of production and
redesigning business operations
in the production of goods or
services.
It involves the responsibility of
ensuring that business
operations are efficient in
terms of using as few
resources as needed and
effective in terms of meeting
customer requirements.
It is concerned with managing an
entire production system which is
the process that converts inputs
(in the forms of raw materials,
labour, and energy) into outputs
(in the form of goods and/or
services), as an asset or delivers
a product or services
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
The Organization
The Three Basic Functions of organizations
Organization
Finance Operations Marketing
FINANCE
The finance function of a business
is responsible for securing and
distributing funds for operations.
This function also is typically in
charge of purchasing goods,
supplies, and services that are
necessary to carry out marketing
and operational activities.
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Budgeting and forecasting expenses, revenue,
profits, costs, losses, and debt are crucial tasks
that the finance function of any business must be
able to perform successfully.
Managing cash flow and the financial assets of a
company is no easy task. To stay competitive a
business must be able to manage their money
effectively. This could mean developing investment
strategies that produce a significant short-term yield
without taking on excess risk.
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MARKETING
The marketing function of a business is ultimately
responsible for ensuring the business has customers.
The marketing activities and efforts of a company must
focus on ensuring that the products and or services of the
business are able to meet the needs and wants of the
customer.
The marketing department must ensure that the target
market is aware that the companies goods and services,
and further, are aware that the products are able to meet
their needs and wants.
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The marketing side of a business must focus on
developing strategies and plans that effectively
create this awareness.
For instance how a company advertises their
products and services is developed and executed
by the marketing department.
The marketing function of a business attempts to
create a consumer experience that is optimized for
selling the products and services of a business.
Marketing department will prepare a marketing plan
which forecasts sales and more importantly acts as
the blueprint of how a company will entice
customers to purchase a firm's products and
services.
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OPERATIONS
Operations is the function of a business that
is responsible for creating the goods and
services of a business.
Operations are responsible for producing
what the company sells within the
boundaries of the budgets and forecasts
supplied by the finance department as well
as the supply and demand forecasts of
determined by the marketing department.
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Operations must produce products and
services in line with what the marketing
department has dictated is necessary to
meet the needs and wants of the consumer.
Operations is also the biggest player in
running and managing the supply chain.
Supply chain management is a crucial aspect
of any business and the proper operations
management approach can make or break a
business.
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Value-Added Process
The operations function involves the conversion of
inputs into outputs
Value added
Inputs
Transformation/ Outputs
Land
Conversion Goods
Labor
process Services
Capital
Feedback
Control
Feedback Feedback
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.
Goods-service Continuum
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
Metal Sheets Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment
Hospital Process
Inputs Processing Outputs
Doctors, nurses Examination Healthy
Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy
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
Key Differences
1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of
productivity
Key Differences
6. Production and delivery
7. Quality assurance
8. Amount of inventory
9. Evaluation of work
10. Ability to patent design
Goods vs Service
Characteristic 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
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 . . .
Types of Operations
Operations Examples
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
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
Why Manufacturing Matters
Millions of workers in manufacturing jobs
Accounts for over 70% of value of big
economies 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 in big
economy
Why Manufacturing Matters
More than half of the total R&D
performed is in the manufacturing
industries
Manufacturing workers earn an average
of about $25,000 more a year than
service workers
When a 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
Real-time communication and resource location
Customer demand and high expectation
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
Decision Making
System Design
– capacity
– location
– arrangement of departments
– product and service planning
– acquisition and placement of
equipment
Decision Making
System operation
– personnel
– inventory
– scheduling
– project
management
– quality assurance
Decision Making
Models
Quantitative
approaches
Analysis of trade-offs
Systems approach
Models
A model is an abstraction of reality.
– Physical
– Schematic
– Mathematical Tradeoffs
What are the pros and cons of models?
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
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.
Quantitative Approaches
• Linear programming
• Queuing Techniques
• Inventory models
• Project models
• Statistical models
Analysis of Trade-Offs
Decision on the amount of
inventory to stock
Increased cost of holding
inventory
Vs.
Level of customer service
Systems Approach
“The whole is greater than
the sum of the parts.”
Suboptimization
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?
Ethical Issues
Financial statements
Worker safety
Product safety
Quality
Environment
Community
Hiring/firing workers
Closing facilities
Worker’s rights
Business Operations Overlap
Operations
Marketing Finance
Operations Interfaces
Industrial
Engineering
Maintenance
Distribution
Purchasing Public
Operations Relations
Legal
Personnel
Accounting MIS
Historical Evolution of Operations
Management
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
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
Simple Product Supply Chain
Suppliers’ Direct Final
Producer Distributor
Suppliers Suppliers Consumer
Supply Chain: A sequence of activities
And organizations involved in producing
And delivering a good or service
A Supply Chain for Bread
Stage of Production Value Value of
Added Product
Farmer produces and harvests wheat $0.15 $0.15
Wheat transported to mill $0.08 $0.23
Mill produces flour $0.15 $0.38
Flour transported to baker $0.08 $0.46
Baker produces bread $0.54 $1.00
Bread transported to grocery store $0.08 $1.08
Grocery store displays and sells bread $0.21 $1.29
Total Value-Added $1.29
Other Important Trends
Ethical behavior
Operations strategy
Working with fewer resources
Revenue management
Process analysis and improvement
Increased regulation and product liability
Lean production
