Production and Operations Management

Module 1 Introduction

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The Hard Rock Cafe

First opened in 1971
Now 110 restaurants in over 40 countries

Rock music memorabilia Creates value in the form of good food and entertainment 3,500+ custom meals per day in Orlando How does an item get on the menu? Role of the Operations Manager
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What Is Operations Management?

Production is the creation of goods and services

Operations management (OM) is the set of activities that creates value in the form of goods and services by transforming inputs into outputs
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What Is Operations Management?

The business function responsible for planning, coordinating, and controlling

the resources needed to produce a

companys products and services

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What Is Operations Management?

It is a management function
Organizations core function

Every organization has OM function

Service or Manufacturing For profit or Not for profit
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Why Study Operations Management?

Systematic Approach to Org. Processes

Business Education

Operations Management

Career Opportunities

Cross-Functional Applications

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Why OM?
For long-run success companies must place much importance on their operations
The 1950-1960 era was the U.S. golden era where primary opportunities were marketing
The 1970-1980 U.S. companies experienced a large decline in productivity growth international firms began to challenge in many markets The 1970-1980 era saw U. S. firms lagging behind in methods and processes The resurgence of American business in the 1990s capitalized on improved operations
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What is a Transformation Process? Defined A transformation process is defined as a user of resources to transform inputs into some desired outputs OM Transforms inputs to outputs
Inputs are resources such as
People, Material, and Money

Outputs are goods and services

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OMs Transformation Process

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OMs Transformation Role

To add value
Increase product value at each stage

Value added is the net increase between

output product value and input material value

Provide an efficient transformation

Efficiency perform activities well at lowest possible cost
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Transformations
Physical--manufacturing Locational--transportation Exchange--retailing

Storage--warehousing
Physiological--health care

Informational--telecommunications
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Organizing to Produce Goods and Services

Essential functions:
Marketing generates demand

Production/operations creates the product

Finance/accounting tracks how well the organization is doing, pays bills, collects the money

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Typical Organization Chart

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Organizational Charts
Commercial Bank
Operations
Teller Scheduling Check Clearing Collection Transaction processing Facilities design/layout Vault operations Maintenance Security

Finance
Investments Security Real estate Accounting

Marketing
Loans Commercial Industrial Financial Personal Mortgage Trust Department

Auditing

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Organizational Charts
Airline Operations
Ground support equipment Maintenance Ground Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications Dispatching Management science

Finance/ accounting
Accounting Payables Receivables General Ledger Finance Cash control International exchange

Marketing
Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising

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Organizational Charts
Manufacturing Operations
Facilities
Construction; maintenance

Finance/ accounting
Disbursements/ credits Receivables Payables General ledger Funds Management Money market International exchange Capital requirements Stock issue Bond issue and recall

Marketing
Sales promotion Advertising Sales Market research

Production and inventory control

Scheduling; materials control

Quality assurance and control Supply-chain management Manufacturing

Tooling; fabrication; assembly

Design
Product development and design Detailed product specifications

Industrial engineering
Efficient use of machines, space, and personnel

Process analysis
Development and installation of production tools and equipment
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Why Study OM?

OM is one of three major functions (marketing, finance, and operations) of any organization We want (and need) to know how goods and services are produced We want to understand what operations managers do OM is such a costly part of an organization
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Options for Increasing Contribution

Marketing Option Finance/ Accounting Option OM Option Reduce Production Costs 20% MU 100,000 64,000 36,000 6,000 30,000 7,500 MU22,500 Increase Reduce Sales Finance Revenue 50% Costs 50% MU150,000 120,000 30,000 6,000 24,000 6,000 MU18,000 MU100,000 80,000 20,000 3,000 17,000 4,250 MU 12,750

Current
Sales MU.100,000 Cost of Goods 80,000 Gross Margin 20,000 Finance Costs 6,000 Subtotal 14,000 Taxes at 25% 3,500 Contribution MU 10,500

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What Operations Managers Do

Basic Management Functions
Planning

Organizing
Staffing

Leading
Controlling
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Responsibilities of Operations Management

Planning
Capacity Location Products & services Make or buy Layout Projects Scheduling

Organizing
Degree of centralization Process selection

Staffing
Hiring/laying off Use of Overtime

Leading/Directing

Incentive plans Controlling/Improving Issuance of work orders Inventory Job assignments Quality Costs Productivity
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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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OM Decisions
All organizations are based on decisions Decisions follow a similar path
First decisions very broad Strategic decisions
Strategic Decisions set the direction for the entire company; they are broad in scope and long-term in nature

Following decisions focus on specifics Tactical decision

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OM Decisions
Tactical decisions focus on
Specific day-to-day issues (sometimes called Operational Decisions)
Resource needs, schedules, & quantities to produce

Tactical decisions are very frequent

Strategic decisions less frequent

Tactical decisions must align with strategic decisions
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OM Decisions

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Critical Decisions

Decision Areas Service and product design Quality management Process and capacity design Location Layout design Human resources, job design Supply-chain management Inventory management Scheduling Maintenance

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The Critical Decisions

Service and product design
What good or service should we offer? How should we design these products and services?

Quality management
How do we define quality? Who is responsible for quality?

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The Critical Decisions

Process and capacity design
What process and what capacity will these products require? What equipment and technology is necessary for these processes?

Location
Where should we put the facility? On what criteria should we base the location decision?
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The Critical Decisions

Layout design
How should we arrange the facility and material flow? How large must the facility be to meet our plan?

Human resources and job design

How do we provide a reasonable work environment? How much can we expect our employees to produce?
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The Critical Decisions

Supply-chain management
Should we make or buy this component? Who are our suppliers and who can integrate into our e-commerce program?

Inventory, material requirements planning, and JIT

How much inventory of each item should we have? When do we re-order?
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The Critical Decisions

Intermediate and shortterm scheduling
Are we better off keeping people on the payroll during slowdowns? Which jobs do we perform next?

Maintenance
Who is responsible for maintenance?
When do we do maintenance?

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Where are the OM Jobs?

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What are the OM Jobs?

Technology/methods: Improving Facilities/space utilization: Optimization Strategic issues: Management function Response time: Minimization People/team development: Optimum utilization Customer service: on-time delivery and service Quality: Best-in-class Cost reduction: Measures Inventory reduction: Policy Productivity improvement: Labour, Multi-factor
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The Heritage of OM
Division of labor (Adam Smith 1776; Charles Babbage 1852) Standardized parts (Whitney 1800) Scientific Management (Taylor 1881) Coordinated assembly line (Ford/ Sorenson/Avery 1913) Gantt charts (Gantt 1916) Motion study (Frank and Lillian Gilbreth 1922) Quality control (Shewhart 1924; Deming 1950)
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The Heritage of OM
Computer (Atanasoff 1938) CPM/PERT (DuPont 1957) Material requirements planning (Orlicky 1960) Computer aided design (CAD 1970) Flexible manufacturing system (FMS 1975)

Baldrige Quality Awards (1980)

Computer integrated manufacturing (1990) Globalization (1992)

Internet (1995)
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Historical Development of OM
Industrial revolution Late 1700s Scientific management Early 1900s Human relations movement 1930s to 1960s Management science Mid-1900s Computer age 1970s Environmental Issues 1970s

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Historical Development of OM
Just-in-Time Systems (JIT) 1980s Total quality management (TQM) 1980s Reengineering Global competition 1990s 1980s

Flexibility

1990s

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Historical Development of OM
Time-Based Competition
Supply chain Management

1990s
1990s

Electronic Commerce
Outsourcing and flattening of the world

2000s

2000s

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Eli Whitney
Born 1765; died 1825
In 1798, received government contract to make 10,000 muskets

Showed that machine tools could make standardized parts to exact specifications
Musket parts could be used in any musket
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Frederick W. Taylor
Born 1856; died 1915

Known as father of scientific management

In 1881, as chief engineer for Midvale Steel, studied how tasks were done
Began first motion and time studies

Created efficiency principles

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Taylors Principles
Management Should Take More Responsibility for:
Matching employees to right job Providing the proper training

Providing proper work methods and tools

Establishing legitimate incentives for work to be accomplished
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Frank & Lillian Gilbreth

Frank (1868-1924); Lillian (1878-1972) Husband-and-wife engineering team

Further developed work measurement methods

Applied efficiency methods to their home and 12 children! Book & Movie: Cheaper by the Dozen, book: Bells on Their Toes
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Henry Ford
Born 1863; died 1947
In 1903, created Ford Motor Company In 1913, first used moving assembly line to make Model T
Unfinished product moved by conveyor past work station

Paid workers very well for 1911 ($5/day!)

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W. Edwards Deming
Born 1900; died 1993

Engineer and physicist

Credited with teaching Japan quality control methods in postWorld War II Used statistics to analyze process

His methods involve workers in decisions

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Contributions From
OM is contributed significantly from other disciplines
Human factors

Industrial engineering
Management science Biological science Physical sciences Information science
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New Challenges in OM
From
Local or national focus Batch shipments Low bid purchasing Lengthy product development Standard products Job specialization

To
Global focus
Just-in-time Supply chain partnering Rapid product development, alliances

Mass customization
Empowered employees, teams
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Corporate Characteristics and Trends in OM

Organization Structure Focus Management Style Market reach Productive Resources Production Mode Production Structure Inventories Production Cycle Time Timeliness of Information Product Life Cycle Desired Quality Level Network Customer Flexible

Global
Information/Knowledge Mass Customization

Network Alliances
Hours of Supply Days

Real time
Months Perfection
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New Trends in POM

Past
Local or national focus Batch (large) shipments

Causes
Low-cost, reliable worldwide communication and transportation networks Short product life cycles and cost of capital put pressure on reducing inventory Quality emphasis requires that suppliers be engaged in product improvement

Future
Global focus

Just-in-time shipments

Low-bid purchasing

Supplychain partners, Enterprise Resource Planning, e-commerce

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New Trends in POM

Past
Lengthy product development Standardized products

Causes
Shorter life cycles, Internet, rapid international communication, computeraided design, and international collaboration Affluence and worldwide markets; increasingly flexible production processes

Future
Rapid product development, alliances, collaborative designs Mass customization with added emphasis on quality Empowered employees, teams, and lean production

Job specialization

Changing socioculture milieu; increasingly a knowledge and information society

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New Trends in OM
Past
Low-cost focus

Causes
Environmental issues, ISO 14000, increasing disposal costs

Future
Environmentally sensitive production, green manufacturing, recycled materials, remanufacturing

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Business Operations Overlap

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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The Goods-Services Continuum

Steel production Home remodeling Auto Repair Maid Service Teaching Automobile fabrication Retail sales Appliance repair Manual car wash Lawn mowing
High percentage goods Low percentage service Low percentage goods High percentage service

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Food Processor
Inputs
Raw Vegetables Metal Sheets Water Energy Labour Building Equipment

Processing Outputs
Cleaning Making cans Cutting Cooking Packing Labeling Canned vegetables

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Hospital Process
Inputs Processing Outputs

Doctors, nurses Examination Healthy Hospital Surgery patients Medical Supplies Monitoring Equipment Medication Laboratories Therapy

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Characteristics of Goods
Tangible product Consistent product definition Production usually separate from consumption Can be inventoried Low customer interaction Long response time Capital Intensive
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Characteristics of Service
Intangible product

Produced and consumed at same time

Often unique High customer interaction Inconsistent product definition Often knowledge-based

Frequently dispersed
Short response time Labour Intensive
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Differences between Manufacturers and Service Organizations

Services:
Intangible product Product cannot be inventoried

Manufacturers:
Tangible product Product can be inventoried

High customer contact

Short response time Labor intensive

Low customer contact

Longer response time Capital intensive

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Similarities-Service/Manufacturers
All use technology
Both have quality, productivity, & response issues

All must forecast demand

Each will have capacity, layout, and location issues

All have customers, suppliers, scheduling and staffing issues

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Service - Manufacturing
Manufacturing often provides services

Services often provides tangible goods

Some organizations are a blend of service/manufacturing/quasimanufacturing, Known as QuasiManufacturing (QM) organizations

QM characteristics include
Low customer contact and Capital Intensive
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Goods Versus Services

Attributes of Goods (Tangible Product) Attributes of Services (Intangible Product)

Can be resold Can be inventoried Some aspects of quality measurable Selling is distinct from production Product is transportable
Site of facility important for cost Often easy to automate Revenue generated primarily from tangible product

Reselling unusual Difficult to inventory Quality difficult to measure

Selling is part of service Provider, not product, is often transportable Site of facility important for customer contact Often difficult to automate Revenue generated primarily from the intangible service
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Goods and Services

Automobile Computer Installed carpeting Fast-food meal Restaurant meal/auto repair Hospital care Advertising agency/ investment management Consulting service/ teaching Counseling
100%
|

75
|

50
|

25
|

0
|

25
|

50
|

75
|

100%
|

Percent of Product that is a Good Percent of Product that is a Service

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Organizations in Each Sector

Service Sector Professional Services, Education, Legal, Medical Trade (retail, wholesale) Utilities, Transportation Example Notre Dame University, San Diego Zoo, Arnold Palmer Hospital Walgreens, Wal-Mart, Nordstroms Pacific Gas & Electric, American Airlines, Santa Fe R.R., Roadway Express % of all Jobs 25.5

20.6 7.1

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Organizations in Each Sector

Service Sector
Business and Repair Services Finance, Insurance, Real Estate Food, Lodging, Entertainment

Example
Snelling and Snelling, Waste Management, Pitney-Bowes Citicorp, American Express, Prudential, Aetna, Trammel Crow McDonalds, Hard Rock Caf, Motel 6, Hilton Hotels, Walt Disney, Paramount Pictures

% of all Jobs
6.9

6.7

5.4

Public Administration

U.S., State of Alabama, Cook County

4.5
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Organizations in Each Sector

Manufacturing Sector
General

Example
General Electric, Ford, U.S. Steel, Intel

% of all Jobs
13.3

Construction Agriculture
Mining

Bechtel, McDermott King Ranch

Homestake Mining

7.1 2.5
0.4

Sector
Service Manufacturing

Percent of all jobs

76.7% 23.3%
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Todays OM Environment
Customers demand better quality, greater speed, and lower costs Companies implementing lean systems concepts a total systems approach to efficient operations Recognized need to better manage information using ERP and CRM systems Increased cross-functional decision making

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Current Issues in POM

Coordinate the relationships between mutually supportive but separate organizations. Optimizing global supplier, production, and distribution networks. Increased co-production of goods and services

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Current Issues in POM (contd)

Managing the customers experience during the service encounter (Voice of the customer) Raising the awareness of operations as a significant competitive weapon

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Trends in OM
Service sector growing to 50-80% of non-farm Global competitiveness Demands for higher quality Huge technology changes

Time based competition

Work force diversity
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Productivity Challenge
Productivity is the ratio of outputs (goods and services) divided by the inputs (resources such as labor and capital)
The objective is to improve this measure of efficiency
Important Note! Production is a measure of output only and not a measure of efficiency
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Objectives of Operations and Production Management

Right Quality
Based on customer needs Determined by the cost of the product and technical characteristics as suited to the specific requirements

Right Quantity
Produce products in right numbers If produced more, then excess inventory and if produced less, then shortage of products

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Objectives of Operations and Production Management

Right Time
Timeliness of delivery Make optimal utilization of input resources to achieve the objectives

Right Manufacturing Cost

Cost is determined before the product is actually manufactured Attempt to produce products at predetermined cost in order to reduce the variation between actual cost and standard pre-determined cost
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Environment of Operations Affecting Productivity For Input

Personal Material

funds

For Output
Social impact

Goods and services

Profits and information

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Environment of Operations Affecting Productivity

For Transformation Process
Union demands Employment practices Customer demand Existing technology Financial markets Interest rates Resource availability Inventory tax Health and safety regulations Income tax State and local laws

Customer protection laws

Environmental regulations Economic conditions

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Productivity
Units produced Productivity = Input used

Measure of process improvement

Represents output relative to input Only through productivity increases can our standard of living improve
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Factors Affecting Productivity

Capital/Labour Ratio It is a measure whether enough investment is made in plant, machinery and tools to make best use of labour hours Scarcity of some resources Energy, water and materials may create problems

Work-force changes
Affect productivity due to labour turnovers Innovations and technology

Major cause of increasing productivity

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Factors Affecting Productivity

Regulatory effects Impose substantial constraints on some enterprises Bargaining power Organized labour demand for wage increase excess of output increase, leading to productivity decline Managerial factors Organizations benefit from the unique planning and managerial skills of its managers Quality of work life

Describes the organization culture, and the extent to which it motivates and satisfies employees

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Productivity Calculations
Labor Productivity
Productivity = Units produced Labour-hours used 1,000 250

= 4 units/labour-hour

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Multi-Factor Productivity
Productivity =

Output Labour + Material + Energy + Capital + Miscellaneous

Also known as total factor productivity Output and inputs are often expressed in Monetary Units (MU).

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Measurement Problems
Quality may change while the quantity of inputs and outputs remains constant
External elements may cause an increase or decrease in productivity

Precise units of measure may be lacking

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Productivity Variables
Labour - contributes about 10% of the annual increase

Capital - contributes about 32% of the annual increase

Management - contributes about 52% of the annual increase

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Key Variables for Improved Labour Productivity

Basic education appropriate for the labour force Diet of the labour force

Social overhead that makes labour available

Maintaining and enhancing skills in the midst of rapidly changing technology and knowledge
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Service Productivity
Typically labour intensive
Frequently focused on unique individual attributes or desires

Often an intellectual task performed by professionals

Often difficult to mechanize

Often difficult to evaluate for quality

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Characteristics of an Ideal Enterprise

Corporate objectives
Employees and customers are given priority over shareholders Honesty in business

Time horizon
Long-term viability is important than short-term profits

Production systems
Use automated systems

Quality is important; Scheduling is important

Employment relations
Long-term employment of loyal workers

Unions must cooperate to benefit the enterprise

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Characteristics of an Ideal Enterprise

Materials
Resources are limited

Efficient use of space; Minimize the store inventories

Financing
Make more use of debt capital and less of equity capital

Training
Employees must be thoroughly trained Employees are rotated to learn a variety of skills

Worker participation
Workers learn a variety of productivity improvement techniques through suggestions, quality circles
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OM in Practice
OM has the most diverse organizational function
Manages the transformation process

OM has many faces and names such as;

V. P. operations, Director of supply chains, Manufacturing manager

Plant manger, Quality specialists, etc.

All business functions need information from OM in order to perform their tasks
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Business Information Flow

Managerial decisions taken at the interface between various functional groups

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OM Across the Organization

Most businesses are supported by the functions of operations, marketing, and finance The major functional areas must interact to achieve the organization goals

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OM Across the Organization - continued

Marketing is not fully capable of meeting customer needs if they do not understand what operations can produce Finance cannot judge the need for capital investments if they do not understand operations concepts and needs Information systems enables the information flow throughout the organization Human resources must understand job requirements and worker skills Accounting needs to consider inventory management, capacity information, and labour standards
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Ethics and Social Responsibility

Challenges facing operations managers:
Developing safe quality products

Maintaining a clean environment

Providing a safe workplace Honouring community commitments

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Module 1 Highlights
OM is the business function that is responsible for managing and coordinating the resources needed to produce a companys products and services while adding value. The role of OM is to transform organizational inputs into companys products or services outputs OM is responsible for a wide range of decisions, ranging from strategic to tactical. Organizations can be divided into manufacturing and service organizations, which differ in the tangibility of the product or service
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Module 1 Highlights continued

A number of historical milestones have shaped OM. Some of the more significant of these are the Industrial Revolution, scientific management, the human relations movement, management science, and the computer age. OM is highly important function in todays dynamic business environment. Among the trends with significant impact are just-in-time, TQM, business process reengineering (BPR), flexibility, timebased competition, SCM, global marketplace, and environmental issues. OM works closely with all other business functions, such as marketing, finance, HR, international business, and strategic management.
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Sample Questions
1. Define Operations Management. Explain the key concepts of Operations Management with schematic diagram. 2. Distinguish between manufacturing and service operation with example. 3. Briefly explain how service producers differ from goods producers in important aspects of their operations. 4. Explain, how the considerations of environmental assessment and organizational position provide a modeling framework for strategic planning of operations. 5. State the important objectives of operation management.
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Sample Questions
6. Operations Strategy a key element in corporate strategy. Briefly explain. 7. Explain the historical evolution of production function till the 21st century. 8. What are the various decisions and their applications made by the operations manager in a POM system. 9. Briefly explain the importance of operations management in corporate management. 10. Explain the concept of productivity. Discuss the factors affecting productivity in any enterprise. Suggest some measures improving labour productivity.
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