SAP 1

Introduction to Operations Management,

Operations Strategy and Competitiveness

Prepared
by

B. Yuliarto Nugroho, Ph.D

 Learning Objectives
 Define Operations Management (OM)
 Explain the role of OM in business
 Describe the differences between service and
manufacturing operations
 Identify major historical developments in OM
 Describe the flow of information between OM
and other business functions
 Learning Objectives - continued

 Define the role of Business Strategy

 Explain how a Business strategy is developed
 Explain the role of Operations Strategy in the
organization
 Explain the relationship between business
strategy and operations strategy
 Describe how an operations strategy is
developed
 Learning Objectives - continued

 Identify competitive priorities for of the

operations function
 Explain the strategic role of technology
 Define productivity and identify
productivity measures
 Compute productivity measures
What is Operations Management?

The business function responsible for

planning, coordinating, and
controlling the resources needed to
produce a company’s products and
services
What is Operations Management?

 It is a management function

 Organization’s core function

 Every organization has OM function

 Service or Manufacturing

 For profit or Not for profit

Typical Organization Chart
What is Operations Management
Role?

 OM Transforms inputs to outputs

 Inputs are resources such as
 People, Material, and Money

 Outputs are goods and services

OM’s Transformation Process
OM’s 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
Differences between Manufacturers
and Service Organizations

 Services:  Manufacturers:
 Intangible product  Tangible product
 Product cannot be  Product can be
inventoried inventoried
 High customer contact  Low customer contact
 Short response time  Longer response time
 Labor intensive  Capital intensive
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
Service - Manufacturing
 Manufacturing often provides services
 Services often provides tangible goods
 Some organizations are a blend of
service/manufacturing/quasi-
manufacturing Quasi-Manufacturing
(QM) organizations
 QM characteristics include
 Low customer contact & Capital Intensive
 Gambar 1.4. Contoh: Barang dan Jasa
(Reid & Sander, 2007: 6)
Mobil
Komputer
Pemasangan karpet
Makanan siap saji
Restoran/bengkel
Perawatan rumah sakit
Agen periklanan/
Manajemen investasi
Jasa konsultan/
pendidikan
konseling
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

prosentase produk Prosentase jasa

Trends in OM
 Service sector growing
to 50-80% of non-farm
jobs
 Global competitiveness
 Demands for higher
quality
 Huge technology
changes
 Time based competition
 Work force diversity
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
OM Decisions
 Tactical decisions focus on
 Specific day-to-day issues
 Resource needs, schedules, & quantities to
produce
 Tactical decisions are very frequent
 Strategic decisions less frequent
 Tactical decisions must align with strategic
decisions
OM Decisions
Why OM?
 For long-run success companies must place
much important 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
1990’s capitalized on improved operations
 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
 Historical Development of OM
 Just-in-Time Systems (JIT) 1980s

 Total quality management (TQM) 1980s

 Reengineering 1990s

 Global competition 1980s

 Flexibility 1990s
 Historical Development of OM

 Time-Based Competition 1990s

 Supply chain Management 1990s

 Electronic Commerce 2000s

 Outsourcing and
flattening of the world 2000s
Today’s 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
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
Business Information Flow
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
The Role of Operations
Strategy
 Provide a plan that makes best use of
resources which;
 Specifies the policies and plans for using
organizational resources
 Supports Business Strategy
Business/Functional Strategy
Importance of Operations
Strategy
 Companies often do not understand the
differences between operational
efficiency and strategy
 Operational efficiency is performing tasks
well, even better than competitors
 Strategy is a plan for competing in the
marketplace
 Operations strategy is to ensure all
tasks performed are the right tasks
Developing a Business
Strategy
 A business strategy is developed after
taking into many factors and following
some strategic decisions such as;
 What business in the company in (mission)
 Analyzing and understanding the market
(environmental scanning)
 Identifying the companies strengths (core
competencies)
Three Inputs to a Business Strategy
Examples from Strategies
 Mission: Dell Computer- “to be the most
successful computer company in the world”
 Environmental Scanning: political trends,
social trends, economic trends, market place
trends, global trends
 Core Competencies: strength of workers,
modern facilities, market understanding, best
technologies, financial know-how, logistics
Developing an Operations
Strategy
 Operations Strategy is a plan for the
design and management of operations
functions
 Operation Strategy developed after the
business strategy
 Operations Strategy focuses on specific
capabilities which give it a competitive
edge – competitive priorities
Operations Strategy – Designing
the Operations Function
Competitive Priorities- The Edge
 Four Important Operations Questions:
Will you compete on –
Cost?
Quality?
Time?
Flexibility?
 All of the above? Some? Tradeoffs?
Competing on Cost?
 Offering product at a low price relative to competition
 Typically high volume products
 Often limit product range & offer little
customization
 May invest in automation to reduce unit costs
 Can use lower skill labor
 Probably use product focused layouts
 Low cost does not mean low quality
Competing on Quality?
 Quality is often subjective
 Quality is defined differently depending on who is
defining it
 Two major quality dimensions include
 High performance design:
 Superior features, high durability, & excellent customer service

 Product & service consistency:

 Meets design specifications
 Close tolerances
 Error free delivery
 Quality needs to address
 Product design quality – product/service meets requirements
 Process quality – error free products
Competing on Time?
 Time/speed one of most important
competition priorities
 First that can deliver often wins the race
 Time related issues involve
 Rapid delivery:
 Focused on shorter time between order placement and delivery
 On-time delivery:
 Deliver product exactly when needed every time
Competing on Flexibility?
 Company environment changes rapidly
 Company must accommodate change by being
flexible
 Product flexibility:
 Easily switch production from one item to another
 Easily customize product/service to meet specific requirements
of a customer

 Volume flexibility:
 Ability to ramp production up and down to match market
demands
The Need for Trade-offs
 Decisions must emphasis priorities that support business
strategy
 Decisions often required trade offs
 Decisions must focus on order qualifiers and order winners
 Which priorities are “Order Qualifiers”?
e.g. Must have excellent quality since everyone expects it

 Which priorities are “Order Winners”?

e.g. Dell competes on all four priorities
Southwest Airlines competes on cost
McDonald’s competes on consistency
FedEx competes on speed
Custom tailors compete on flexibility
Translating to Production Requirements

 Specific Operation requirements include

two general categories
 Structure – decisions related to the

production process, such as characteristics

of facilities used, selection of appropriate
technology, and the flow of goods and
services
 Infrastructure – decisions related to

planning and control systems of operations

Translating to Production Requirements

 Dell Computer example – structure & infrastructure

 They focus on customer service, cost, and speed
 ERP system developed to allow customers to order
directly from Dell
 Product design and assembly line allow a “make to
order” strategy – lowers costs, increases turns
 Suppliers ship components to a warehouse within
15 minutes of the assembly plant - VMI
 Dell set up a shipping arrangement with UPS
Strategic Role of Technology
 Technology should support competitive
priorities
 Three Applications: product technology, process
technology, and information technology
 Products - Teflon, CD’s, fiber optic cable
 Processes – flexible automation, CAD
 Information Technology – POS, EDI, ERP, B2B
Technology for Competitive
Advantage
 Technology has positive and negative
potentials
 Positive
 Improve processes
 Maintain up-to-date standards
 Obtain competitive advantage
 Negative
 Costly
 Risks such as overstating benefits
Technology for Competitive
Advantage
 Technology should
 Support competitive priorities
 Can require change to strategic plans
 Can require change to operations strategy

 Technology is an important strategic

decision
 Measuring Productivity
 Productivity is a measure of how efficiently inputs are
converted to outputs
Productivity = output/input

 Total Productivity Measure

Total Productivity = $sales/inputs $

 Partial Productivity Measure

Partial Productivity = cars/employee

 Multifactor Productivity Measure

Multi-factor Productivity = sales/total $costs
 Productivity Example - An automobile manufacturer has presented the
following data for the past three years in its annual report. As a potential
investor, you are interested in calculating yearly productivity and year to
year productivity gains as one of several factors in your investment
analysis.

2003 2002 2001

2003 2002 2001
Unit car 2,700,000 2,400,000 2,100,000 Partial Prod. Measure
sales
Unit Car Sales/Employee 24.1 21.2 18.3
Employees 112,000 113,000 115,000
Year-to-year Improvement 13.7% 15.8%

Multifactor Prod. Measures

$ Sales $49,000 $41,000 $38,000
(billions$)
Total Cost Productivity 1.26 1.24 1.19

Cost of $39,000 $33,000 $32,000

Year-to-year Improvement 1.6% 4.2%
Sales
(billions)
Which is the best measurement?
Interpreting Productivity Measures
 Productivity measures must be compared to
something, i.e. another year, a different company
 Raw productivity calculations do not tell the complete
story unless there are no major structure differences.
 In the prior automobile business example, it is
obvious that some major changes were taking place
to yield 15.8% and 13.7% year-to-year
cars/employee productivity improvements. What
changes could improve car sales per employee?
Automation? Out sourcing? Major re-design?
Interpreting Productivity Measures
 Other productivity measure questions;
 Is this partial productivity measurement enough to
make an investment decision?
 Is the Total Cost Productivity measure a better
reflection of year to year productivity at 4.2% and
1.6%. Why?
 Should you also look at productivity measures for
the two major competitors for comparison?
 Productivity measure provides information on
how the firm is doing relative to what is
critical to the firm
Productivity, Competitiveness,
and the Service Sector
 Productivity is a scorecard on
effective resource use
 A nation’s Productivity
effects its standard of living
 US productivity growth
averaged 2.8% from
 1948-1973
 Productivity growth slowed
for the next 25 years to
1.1%
 Productivity growth in
service industries has been
less than in manufacturing
Productivity Measures

OM Explorer
Tutor 1. — Productivity Measures

The state ferry service charges $18 per ticket plus a $3 surcharge to fund planned
equipment upgrades. It expects to sell 4,700 tickets during the eight-week
summer season. During that period, the ferry service will experience $110,000 in
labor costs. Materials required for each passage sold (tickets, a tourist-
information sheet, and the like) cost $1.30. Overhead during the period comes
to $79,000.

a. What is the multifactor productivity ratio?

b. If ferry-support staff work an average of 310 person-hours per week for the 8
weeks of the summer season, what is the labor productivity ratio? Calculate
labor productivity on an hourly basis.
Productivity Measures
Tutor 1. — Productivity Measures
a. Multifactor productivity is the ratio of the value of output to the value of input.
Step 1. Enter the number of tickets sold during a season, the price per ticket, and the
surcharge per ticket. To compute value of output, multiply tickets sold by the sum of price and
surcharge.
Tickets sold: 4,700 Value of output: $98,700
Price: $18
Surcharge: $3
Step 2. Enter labor costs, materials costs per passenger, and overhead cost. For value of
input, add together labor costs, materials costs times number of passengers, and overhead
costs.
Labor costs: $110,000 Materials costs: $1.30 Overhead: $79,000
Value of input: $195,110
Step 3. To calculate multifactor productivity, divide value of output by value of input.
Multifactor productivity: 0.51
Productivity Measures

Tutor 1. — Productivity Measures

b. Labor productivity is the ratio of the value of output to labor hours The value of output is
computed in part a, step 1.
Step 1. Enter person-hours per week and the number of weeks in the season; multiply the two
together to calculate labor hours of input.
Hours per week: 310 Weeks: 8
Labor hours of input: 2,480
Step 2. To calculate labor productivity, divide value of output by labor hours of input.
Labor productivity: $39.80
 Productivity Measures

OM Explorer
Tutor 2. — Productivity Measures

Natalie Attired makes fashionable garments. During a particular week employees

worked 360 hours to produce a batch of 132 garments, of which 52 were
“seconds” (meaning that they were flawed). Seconds are sold for $90 each at
Attired’s Factory Outlet Store. The remaining 80 garments are sold to retail
distribution, at $200 each.
What is the labor productivity ratio?