Introduction to Production and Operations Management

  

Nature and Scope Relationship to other management functions Strategy and Productivity --- role of production/operations and its link to competition and firm s competitive advantage

Operations Management
 The management of systems or processes that create goods and/or provide services.  The operations function in business can also be viewed from a more far-reaching perspective: The collective success or failure of companies operations functions has an impact on the ability of a nation to compete with other nations, and on the nation s economy.

Three basic functions of business organizations

Organization

Finance

Operations

Marketing

 Finance - is responsible for securing financial resources at favorable prices and allocating those resources throughout the organization, as well as budgeting, analyzing investment proposals, and providing funds for operations. Marketing is responsible for assessing consumer wants and needs, and selling and promoting the organization s good or services. Operations is responsible for producing the goods or providing the services offered by the organization

The operations function involves the conversion of inputs into outputs.

Feedback To ensure that the desired outputs are obtained, an organization takes measurements at various points in the transformation process Control compares the outputs with previously established standards to determine the corrective action needed

Goods

Services

Surgery, teaching

Songwriting, software development

Computer repair, restaurant meal

Automobile repair, fast food

Home remodeling, retail sales

Automobile assembly, steelmaking

*The goods-service combination is a continuum. It can range from primarily goods, with little service, to primarily service, with few goods. Because there are relatively few pure goods or pure services, companies usually sell product packages which are combination of goods and services. There are elements of both goods production and service delivery in those product packages. Value-added the term used to describe the difference between the cost of inputs and the value or price of the outputs. In nonprofit organizations, the value of outputs is their value to society; the greater value-added, the greater the effectiveness of these operations. In for-profit organizations, the value of outputs is measured by the prices that customers are willing to pay for those goods and services.

Production of Goods versus Delivery of Services

Production of goods results in a tangible output. Delivery of service, on the other hand, generally implies an act. The majority of service jobs fall into these categories: government, wholesale retail, financial services, health care, personal services, business services, and education. Manufacturing and service organizations differ chiefly because manufacturing is goods-oriented and service is act oriented. The differences involve the following: 1. Degree of 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

Characteristic Customer contact Uniformity of input Labor content Uniformity of output Output Measurement of productivity Opportunity to correct quality problems before delivery to customer

Goods Low High Low High Tangible Easy High

Services High Low High Low Intangible Difficult Low

Inventory Evaluation Patentable

Much Easier Usually

Little More difficult Not usually

The Scope of Operations Management

 Operations management people are involved in product and service design, process selection, selection and management of technology, design of work systems, location planning, facilities planning, and quality improvement of the organization s products or services.  The operation function includes many interrelated activities, such as forecasting, capacity planning, scheduling, managing inventories, assuring quality, motivating employees, deciding where to locate facilities and more.  The operations function consists of all activities directly related to producing goods or providing services.

A primary function of an operations manager is to guide the system by decision making. System design involves the decisions that relate to system capacity, the geographic location of facilities, arrangement of departments and placement of equipment within physical structures, product and service planning, and acquisition of equipment. They are typically strategic decisions. System operation involves management of personnel, inventory planning and control, scheduling, project management, and quality assurance. These are generally tactical and operational decisions.

Other areas that are part of the operations function include purchasing, industrial engineering, distribution, and maintenance.     Purchasing has responsibility for procurement of materials, supplies, and equipment; also involved in receiving and inspecting the purchased goods. Industrial engineering often concerned with scheduling, performance standards, work methods, quality control, and material handling. Distribution involves the shipping of goods to warehouses, retail outlets, or final customers. Maintenance responsible for general upkeep and repair of equipment, buildings and grounds, heating and air-conditioning; removing toxic wastes; parking; and perhaps security

The operations manager is the key figure in the system: He or she has the ultimate responsibility for the creation of goods or provision of services. Operation is the core function of an organization.

Operations Management and Decision Making

The chief role of an operations manager is that of planner and decision maker. Operations management professionals make a number of key decisions that affect the entire organizations. These include the following: What: What resources will be 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? When is corrective action needed? Where: Where will the work be done? How: How will the product or service be designed? How will the work be done? How will resources be allocated? Who: Who will do the work?

General approaches to decision making include the use of models, quantitative methods, analysis of trade-offs, establishing priorities, ethics, and the systems approach.
Models an abstraction of reality; a simplified representation of something. They omit unimportant details so that attention can be concentrated on the most important aspects of a situation Models are sometimes classifies as the following: Physical models look like their real-life counterparts Schematic models more abstract than their physical counterparts; that is, they have less resemblance to the physical reality. The advantage of them is that they are often relatively simple to construct and change. Moreover, they have some degree of visual correspondence. Mathematical models are the most abstract: They do not look like their real-life counterparts. They are usually the easiest to manipulate, and they are important forms of inputs for computers and calculators.

Models are beneficial because they 1. Are generally easy to use and less expensive than dealing directly with the actual situation 2. Require users to organize and sometimes quantify information and, in the process, often indicate areas where additional information is needed 3. Increase understanding of the problem 4. Enable managers to analyze What if? questions 5. Serve as a consistent tool for evaluation and provide a standardized format for analyzing a problem 6. Enable users to bring the power of mathematics to bear a problem Models have three important limitations 1. Quantitative information may be emphasized at the expense of qualitative information 2. Models may be incorrectly applied and the results misinterpreted 3. The use of models does not guarantee good decisions

Quantitative Approaches embody an attempt to obtain mathematically optimal solutions to managerial problems. Managers typically use a combination of qualitative and quantitative approaches, and many important decisions are based on qualitative approaches. Linear programming and related mathematical techniques are widely used for optimum allocation of scarce resources. Queuing techniques are useful for analyzing situations in which waiting lines form. Inventory models are widely used to control inventories. Project models such as PERT and CPM are useful for planning, coordinating, and controlling large-scale projects. Forecasting techniques are widely used in planning and scheduling. Statistical models are currently used in many areas of decision making

Performance Metrics All managers use metrics to manage and control operations Analysis of Trade-Offs Operations personnel frequently encounter decisions that can be described as trade-off decisions. Decision makers sometimes deal with these decisions by listing the advantages and disadvantages ---the pros and cons--- of course of action to better understand the consequences of the decisions they must make. A Systems Approach System is a set of interrelated parts that must work together. The systems approach emphasizes interrelationships among subsystems, but its main theme is that the whole is greater than the sum of its individual parts. Establishing Priorities In every situation, managers discover that certain factors are more important than others. Recognizing this enables the managers to direct their efforts to where they will do the most good and avoid wasting time and energy on insignificant factors.  Pareto phenomenon a few factors account for a high percentage of the occurrence of some events.

Ethics Operations managers, like all managers have the responsibility to make ethical decisions. Ethical issues arise in many aspects of operations, management, and including
Financial Statements Worker safety Product safety Quality The environment The community Hiring and firing workers Closing facilities Workers rights

Many organizations have developed Codes of Ethics to guide employees or members conduct.

There is significant interfacing and collaboration among the various functional areas, involving exchange of information and cooperative decision making.
Operations

Finance

Marketing

Finance and operations management personnel cooperate by exchanging information and expertise in such activities as the following: 1. Budgeting 2. Economic analysis of investment proposals 3. Provision of funds

Marketing, operations, and finance must interface on product and process design, forecasting, setting realistic schedules, quality and quantity decisions, and keeping each other informed on the other s strengths and weaknesses.

Operations also interacts with other functional areas of the organization, including legal, management information systems (MIS), accounting, personnel/human resources, and public relations.
Legal

Accounting

Public relations

Operations

MIS

Personnel

THE HISTORICAL EVOLUTION OF OPERATIONS MANAGEMENT

Approximate date 1776 1790 1911 1911 1912 1913 1915 1930 1935 Division of labor Interchangeable parts Principles of scientific management Motion study, the use of industrial psychology Chart for scheduling activities Moving assembly line Mathematical model for inventory management Hawthorne studies on worker motivation Statistical procedures for sampling and quality control Contribution/Concept Originator Adam Smith Eli Whitney Frederick W. Taylor Frank and Lillian Gilbreth Henry Gannt Henry Ford F. W. Harris Elton Mayo H. F. Dodge, H. G. Romig, W. Shewhart, L. H. C. Tippett Operations research groups George Dantzig Sperry Univac, IBM Numerous Numerous Jay Forrester W. Skinner Japanese manufacturers, especially Toyota, and Taiichi Ohno Numerous Numerous

1940 1947 1951 1950s 1960s 1960s 1975

Operations research application in warfare Linear Programming Commercial digital computers Automation Extensive development of quantitative tools Industrial dynamics Emphasis on manufacturing strategy Emphasis on quality, flexibility, time-based competition, lean production Internet, supply chain management Applications service providers and outsourcing

1990s 2000s

Terms: Craft Production system in which highly skilled workers use simple, flexible tools to produce small quantities of customized goods Mass Production systems in which low-skilled workers use specialized machinery to produce high volumes of standardized goods Interchangeable parts parts of a product made to such precision that they do not have to be custom fitted Division of labor the breaking up of a production process into small tasks, so that each worker performs small portions of the overall jobs

TRENDS IN BUSINESS
Major trends The Internet, e-commerce, and e-business o E-business use of internet to transact business o E-commerce consumer-to-business transactions o Technology the application of scientific discoveries to the development and improvement of goods and services Management of technology Globalization Management of supply chains o Supply chain a sequence of activities and organizations involved in producing and delivering a good or service Outsourcing obtaining a product or service from outside the organization Agility the ability of an organization to respond quickly to demands or opportunities Ethical behavior

Other important trends Operations strategy Working with fewer resources Revenue management Process analysis and improvement, and quality improvement o Six sigma a process for reducing costs, improving quality, and increasing customer satisfaction Increased regulation and product liability issues Lean production o Lean production system that uses minimal amounts of resources to produce a high volume of high quality goods with some variety

Competitiveness
How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services Marketing influences competitiveness in several ways, including Identifying consumer wants and needs Pricing Advertising and promotion Operations has a major influence on competitiveness Product and service design Cost Location Quality Quick response Flexibility Inventory management Supply chain management Service Managers and workers

Why some organizations fail Among the chief reasons are the following: 1. Putting too much emphasis on short-term financial performance at the expense of research and development. 2. Failing to take advantage of strengths and opportunities, and/or failing to recognize competitive threats. 3. Neglecting operations strategy. 4. Placing too much emphasis on product and service design and not enough on process design and improvement. 5. Neglecting investments in capital and human resources. 6. Failing to establish good internal communications and cooperation among different functional areas. 7. Failing to consider customer wants and needs.

Strategy
Plan for achieving organizational goals Mission and Goals o Mission the reason for the existence of an organization o Mission Statement states the purpose of an organization o Goals provide detail and scope of the mission Strategies and Tactics o Tactics the methods and actions taken to accomplish strategies Examples of different strategies an organization might choose from:
Low cost outsource operations to third-world countries that have low labor costs Scale-based strategies use capital intensive methods to achieve high output volume and low unit costs Specialization focus on narrow product lines or limited service to achieve higher quality Flexible operations focus on quick response and/or customization High quality focus on achieving higher quality than competitors Service focus on various aspects of service

The most effective organizations use an approach that develops distinctive competencies based on customer needs as well as on what the competition is doing. o Distinctive competencies the special attributes or abilities that give an organization a competitive edge

Strategy Formulation To formulate an effective strategy, senior managers must take into account the distinctive competencies of the organizations, and they must scan the environment. This is sometimes referred to as the SWOT approach. In formulating a successful strategy, organizations must take into account both: o Order qualifiers characteristics that customers perceive as minimum standards of acceptability to be considered as a potential for purchase o Order winners - characteristics of an organization s goods or services that cause it to be perceived as better than the competition

Environmental scanning the considering of events and trends that present threats or opportunities for a company.

Another key factor to consider when developing strategies is technological change, which can present real opportunities and threats to an organization. They can occur in products, in services, and in processes. The obvious benefit is a competitive edge; the risk is that incorrect choices, poor execution, and higher-than-expected operating costs will create competitive disadvantages. Important factors may be internal or external. External: Economic conditions Political conditions Legal environment Technology Competition Markets Internal Human resources Facilities and equipment Financial resources Customers Products and services Technology Suppliers Others

The organization may decide to have single, dominant strategy or to have multiple strategies. Operations Strategy The approach, consistent with the organization strategy, that is used to guide the operations function. Quality-based Strategy strategy that focuses on quality in all phases of an organization Time-based Strategy strategy that focuses on reduction of time needed to accomplish tasks

Productivity
A measure of the effective use of resources, usually expressed as the ratio of output to input. Productivity measures can be based on a single input (partial), on more than one input (multifactor), or on all inputs (total). Partial measures are often of greatest use in operations management. Examples Labor productivity Machine productivity Capital productivity Energy productivity

Factors that affect productivity Generally they are: Methods Capital Quality Technology Management Other factors: Standardization of processes and procedures Quality differences Use of the internet Computer viruses Search for lost or misplaced items Scrap rates New workers Safety Shortage of information technology workers and other technical workers Layoffs Labor turnover Design of the workspace Incentive plans that reward productivity

Improving productivity Develop productivity measures for all operations. Look at the system as a whole in deciding which operations are most critical. Develop methods for achieving productivity improvements. Establish reasonable goals for improvement. Make it clear that management supports and encourages productivity improvement. Measure improvements and publicize them.