Session 1

Introduction to Operations
Management
 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
• OM is a systematic approach to addressing
issues in the transformation process that
converts useful inputs into useful revenue
generating outputs
 Transformations

• Physical -- manufacturing

• Locational--transportation

• Exchange--retailing

• Storage--warehousing

• Physiological--health care

• Informational--telecommunications
 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
Options for Increasing Contribution
Finance/
Marketing Accounting OM
Option Option Option

Increase Reduce Reduce

Sales Finance Production
Current Revenue 50% Costs 50% Costs 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of Goods Sold – 80,000 – 120,000 – 80,000 – 64,000
Gross Margin 20,000 30,000 20,000 36,000
Finance Costs – 6,000 – 6,000 – 3,000 – 6,000
SUBTOTAL 14,000 24,000 17,000 30,000
Taxes at 25% – 3,500 – 6,000 – 4,250 – 7,500
CONTRIBUTION $ 10,500 $ 18,000 $ 12,750 $ 22,500
Objectives of Operations Management
• Effectiveness objective
– Producing the right kind of goods & services
• Efficiency objective
– Maximizing output of goods & services
• Quality objective
– Ensuring that items conform to quality specifications
• Lead time objective
– Minimizing the time between the initiation and completion of a
production/service process.
• Capacity utilization objective
– Maximizing utilization of manpower, machines etc
• Cost objective
– Minimizing cost of producing goods or services
Activities in Operations Management
 Goods Vs Service
• Production of Goods -- tangible
• Delivery of Services – an act
• Service job categories
– Government
– Wholesale/retail
– Financial service
– Healthcare
– Personnel services
– Business services
– Education
 Characteristics of Goods
• Tangible Products
• Consistent Product
definition
• Production is usually
separate from
consumption
• Can be inventoried
• Low customer interaction
 Characteristics of Services
• Intangible
• Produced and consumed
at same time
• Inconsistent Product
definition
• Often Unique
• Often knowledge based
• High customer interaction
 Goods and Services
Automobile
Computer
Appliances
Fast-food meal
Auto repair
Hospital care
Advertising agency/
investment management

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

 Organizing to Produce
Goods and Services
• Essential business functions:
– Marketing – generates demand
– Production/operations – creates the product
– Finance/accounting – tracks how well the
organization is doing, pays bills, collects the
money
Business Functions – Manufacturer
(1 of 3)
Organizational Charts
Manufacturing

Marketing Operations Finance/

Accounting

Manufacturing Production Quality

Purchasing
Control Control
 Business Functions – Airline
(2 of 3)
Organizational Charts
Airline

Marketing Operations Finance/

Accounting

Flight Ground Facility

Catering
Operations Support Maintenance
 Business Functions – Airline
(3 of 3)
Organizational Charts

Commercial Bank

Marketing Operations Finance/

Accounting

Teller Cheque Transactions

Security
Scheduling Clearing Processing
 Ten Critical 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
 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?
 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?
 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 & Job Design
– How do we provide a reasonable work
environment?
– How much can we expect our employees to
produce?
 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?
 The Critical Decisions
• Intermediate and short–term 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?
Scope of OM Decisions
Brief History of Operations
Management
Significant Events in Operations
Management
 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)
 Historical Development of OM
• Just in Time and Total Quality Control
• Manufacturing Strategy Paradigm
• Service Quality and Productivity
• Total Quality Management and Quality Certification
• Business Process Reengineering
• Six-Sigma Quality
• Supply Chain Management
• Electronic Commerce
 New Concepts and Trends in OM
Past Causes Future
Local or Low-cost, reliable worldwide Global Focus
national communication and
focus transportation networks
Batch (large) Cost of capital puts pressure on Just-in-time
shipments reducing investment in shipments
inventory
Low-bid Quality emphasis requires that Supply-chain
purchasing suppliers be engaged in product partners
improvement
Lengthy Shorter life cycles, rapid Rapid product
product international communication, development,
development computer-aided design, and alliances,
international collaboration collaborative
designs
 New Concepts and Trends in OM
Past Causes Future
Standardized Affluence and worldwide markets; Mass
products increasingly flexible production customization
processes
Job Changing sociocultural milieu. Empowered
specialization Increasingly a knowledge and employees, teams,
information society. and lean
production
Low cost Environmental issues, ISO 14000, Environmentally
focus increasing disposal costs sensitive
production, Green
manufacturing,
recycled materials,
remanufacturing
Thank You