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Chapter 1

INTRODUCTION TO OPERATIONS MANAGEMENT

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Operations Management = OM Management of ANY activities/process that create goods and provide services

» Exemplary Activities: Forecasting, Scheduling, Quality management

Why to study OM» At a typical manufacturing company

Profit 5%

OM Cost 21%

Marketing Cost 26%

Manufacturing Cost 48%

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The management of systems or processes that create goods and/or provide services

Organization

Finance Operations Marketing

The distinct –active- role of operations:Inputs become Outputs after some Transformation

Operations Management = OM

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Operations example in Manufacturing: Food Processing

INPUTS PROCESS OUTPUTS

Raw vegetables Cleaning Clean vegetables

Metal sheets Cutting/Rolling/Welding Cans

Energy, Vegetables Cutting Cut vegetables

Energy, Water, Vegetables

Cooking Boiled vegetables

Energy, Cans, Boiled vegetables

Placing Can food

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Operations example in service: Health care

Inputs Processing Outputs

Doctors, nurses Examination Healthy patientsHospital Surgery

Medical Supplies MonitoringEquipment MedicationLaboratories Therapy

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Types of Operations

Operation Examples

Goods producing Farming, mining, construction

Storage/transportation Warehousing, trucking, mail, taxis, buses, hotels, location

Exchange Trade, retailing, wholesaling, renting, leasing, loans

Entertainment Radio, movies, TV, concerts, recording

Communication Newspapers, journals, magazines, radio, TV, telephones, satellite

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Why OM?

Core of all business organizations Many areas interrelated with OM activities Management of operations is critical to create and

maintain competitive advantages

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Organization of Businesses

Three basic functions– Operations/Production

» Goods oriented (manufacturing and assembly)

» Service oriented (health care, transportation and retailing)

» Value-added (the essence of the operations functions)

– Finance-Accounting» Budgets (plan financial requirements)

» Economic analysis of investment proposals

» Provision of funds (the necessary funding of the operations)

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Organization of Businesses (Cont.)– Marketing

» Selling

» Promoting

» Assessing customer wants and needs

» Communicating those needs to operations

The need for working closelyOperations

FinanceMarketing

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Operations Interfaces

Accounting

IndustrialEngineering

Operations

Maintenance

Public Relations

PersonnelPurchasing

Distribution

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Systems (Holistic) Approach

Emphasizes interrelations among subsystems. A systems approach is essential whenever something is being

designed, redesigned, implemented, or improved. It is important to take into account the impact on all parts of the system.

Example: A new feature is added to a product. Designer must take into account how customers will view the

change, instruction for using new feature, the cost, training of workers, production schedule, quality standard, advertising must be informed about the new feature.

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Systems Approach

“The whole is greater than the sum of the parts.”

SuboptimizationSuboptimization

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Value Added

Value added: The difference between cost of inputs and price (??) of outputs.

Is this definition right? Should value added include profit?

Value added: The difference between the cost of inputs and the (market or fair) value or price of outputs.

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Value-Added

Inputs Land Labor Capital

Transformation/Conversion

process

Outputs Goods Services

Control

Feedback

FeedbackFeedback

Value added

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Degree of Standardization !

Standardized output– Take advantage of standardized methods, less skilled

workers, materials…» Example: Iron, Wheat, most of commodities

Customized output – Each job is different

– Workers must be skilled» Example: Hair cut

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Manufacturing (=Goods) vs. Service operations

Production of goods (goods oriented)– Tangible products

» Automobile

» Refrigerator

Services (TV and auto repair, lawn care)» Government

» Regulatory bodies, FAA, FDA

» Wholesale/retail

» Financial services

» Education

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Goods vs. Service Operations (Cont)

Differences1. 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

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Manufacturing vs. Service !

Characteristic Manufacturing ServiceOutput Tangible IntangibleCustomer contact Low HighUniformity of output High LowLabor content Low HighUniformity of input High LowMeasurement of productivity

Easy Difficult

Opportunity to correct quality problems

Easy Difficult

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Steel productionAutomobile fabrication

Home remodelingRetail sales

Auto RepairAppliance repair

Maid ServiceManual car wash

TeachingLawn mowing

High percentage goodsLow percentage service

Goods-service Continuum

Low percentage goodsHigh percentage service

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U.S. Manufacturing vs. Service Employment

0

20

40

60

80

100

45 50 55 60 65 70 75 80 85 90 95 00

Year

Perc

ent

Year Mfg. Service45 79 2150 72 2855 72 2860 68 3265 64 3670 64 3675 58 4280 44 4685 43 5790 35 6595 32 6800 30 70

Manufacturing vs. Service Industries in US

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Responsibilities of Operations Management

Planning– Capacity, utilization– Location– Choosing products or services– Make or buy– Layout– Projects– Scheduling– Market share– Plan for risk reduction, plan B?– Forecasting

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Operations Managers Controlling

– Inventory– Quality– Costs

Organization– Degree of standardization– Subcontracting– Process selection

Staffing– Hiring/lay off– Use of overtime– Incentive plans– Job assignments

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Operations Management includes:– Forecasting

– Capacity planning

– Scheduling

– Managing inventories

– Assuring quality

– Motivating employees

– Deciding where to locate facilities– And more . . .

Scope of Operations Management

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Help comes from Models

A structure which has been built purposefully to exhibit features and characteristics of some other object.

Do not use “thing” or “something” in a definition.

For– Improved understanding and communication– Experimentation– Standardization for analysis

Abstraction vs. computability

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Modeling !

Use models– Physical models (prototypes)

– Schematic models (Graphs, charts, pictures)

– Mathematical models,» Statistical models

» Inventory models

» Linear programming

» Queuing techniques

» Project management models

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What type of models

Simulation models : to test a proposed idea– Monte Carlo Simulation

Optimization models : to create an optimal idea– Linear programming

Pattern recognition models : to recognize a pattern– Statistics, Forecasting, data mining

Other classes to learn the rest.

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Decision Making

Models Quantitative approaches Analysis of trade-offs Systems approach

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Models Are Beneficial

Easy to use, less expensive Require users to organize

– Increase understanding of the problem

– Consistent tool

– Standardized format

– Specific objectives

Systematic approach to problem solving– Analysis of tradeoffs

– Enable “what if” questions

Power of mathematics

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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?

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Historical Evolution of Operations Management

Industrial revolution (1770’s) Scientific management (1911)

– Mass production

– Interchangeable parts

– Division of labor

Human relations movement (1920-60)– Unemployment insurance

– Pension plans

Decision models (1915, 1960-70’s) Influence of Japanese manufacturers (1970-1990)

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Trends in Business

Major trends– The Internet, e-commerce, e-business

– Management technology

– Globalization

– Management of supply chains

– Agility

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Recent Trends !

Worker involvement Environmental issues, emission reductions are popular after

Central European floods

Service economy in US, foreign production E-business – information technology Supply chain management Total Quality Management Globalization, emerging markets, NAFTA Lean Production – see the next page

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Production systems classified

Craft Production : System in which highly skilled workers use simple, flexible tools to produce small quantities of customized goods.– Carpenter

Lean production : System that uses minimal amounts of resources to produce a high volume of high-quality goods with some variety.– Dell

Mass production: System in which lower-skilled workers use specialized machinery to produce high volumes of standardized goods.– Ford

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Production systems classifiedAgile=Lean manufacturing

It provides flexibility to switch quickly and economically from one product design to another with little disruption. This characteristic, in turn enables faster response to changes in customer demand.

A sophisticated computerized inventory control system allows the plant to keep track of large number of parts.

Keys to being an agile manufacturer are : – Reduction in inventories, – Reduction in turnaround times, – Availability of automated flexible machinery, – Rapid collection and processing of information

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Suppliers’ Suppliers

DirectSuppliers Producer Distributor Final

Consumer

Simple Product Supply Chain

Supply Chain: A sequence of activities and organizations involved in producing and delivering a good or service

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Stage of Production Value Added

Value of 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

A Supply Chain for Bread

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Other Important Trends

Ethical behavior Operations strategy Working with fewer resources Cost control and productivity Quality and process improvement Increased regulation and product liability Lean production

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Summary

Definition of OM OM’s relationship with Marketing, Finance and

Accounting Goods vs. service industries OM issues, trends and models Manufacturing systems