McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

11

Introduction to Operations

Management

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Learning ObjectivesLearning Objectives

Define the term operations management Identify the three major functional areas of

organizations and describe how they interrelate

Compare and contrast service and manufacturing operations

Describe the operations function and the nature of the operations manager’s job

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Learning ObjectivesLearning Objectives

Differentiate between design and operation of production systems

Describe the key aspects of operations management decision making

Briefly describe the historicalevolution of operations management

Identify current trends that impact operations management

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Operations ManagementOperations Management

Operations Management is:

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

Operations Management affects: Companies’ ability to compete Nation’s ability to compete internationally

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The OrganizationThe Organization

The Three Basic Functions

Organization

Finance Operations Marketing

Figure 1.1

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Value-Added ProcessValue-Added Process

The operations function involves the conversion of inputs into outputs

Inputs Land Labor Capital

Transformation/Conversion

process

Outputs Goods Services

Control

Feedback

FeedbackFeedback

Value added

Figure 1.2

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Value-Added & Product Value-Added & Product PackagesPackages

Value-added is the difference between the cost of inputs and the value or price of outputs.

Product packages are a combination of goods and services.

Product packages can make a company more competitive.

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Automobile assembly, steel making

Home remodeling, retail sales

Automobile Repair, fast food

Goods-service ContinuumGoods-service ContinuumFigure 1.3

Computer repair, restaurant meal

Song writing, software development

Goods Service

Surgery, teaching

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Food ProcessorFood Processor

Inputs Processing Outputs

Raw Vegetables Cleaning Canned vegetables Metal Sheets Making cans

Water CuttingEnergy CookingLabor PackingBuilding LabelingEquipment

Table 1.2

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Hospital ProcessHospital Process

Inputs Processing Outputs

Doctors, nurses Examination Healthy patientsHospital Surgery

Medical Supplies MonitoringEquipment MedicationLaboratories Therapy

Table 1.2

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Manufacturing or Service?Manufacturing or Service?

Tangible Act

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Production of Goods vs. Delivery of Production of Goods vs. Delivery of ServicesServices

Production of goods – tangible output Delivery of services – an act Service job categories

Government Wholesale/retail Financial services Healthcare Personal services Business services Education

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Key DifferencesKey Differences

1. Customer contact

2. Uniformity of input

3. Labor content of jobs

4. Uniformity of output

5. Measurement of productivity

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Key DifferencesKey Differences

6. Production and delivery

7. Quality assurance

8. Amount of inventory

9. Evaluation of work

10. Ability to patent design

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Goods vs ServiceGoods vs Service

Characteristic Goods Service

Customer contact Low High

Uniformity of input High Low

Labor content Low High

Uniformity of output High Low

Output Tangible Intangible

Measurement of productivity Easy Difficult

Opportunity to correct problems High Low

Inventory Much Little

Evaluation Easier Difficult

Patentable Usually Not usual

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Operations Management includes: Forecasting Capacity planning Scheduling Managing inventories Assuring quality Motivating employees Deciding where to locate facilities Supply chain management And more . . .

Scope of Operations ManagementScope of Operations Management

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Types of OperationsTypes of OperationsTable 1.4

Operations ExamplesGoods Producing Farming, mining, construction,

manufacturing, power generationStorage/Transportation Warehousing, trucking, mail

service, moving, taxis, buses,hotels, airlines

Exchange Retailing, wholesaling, banking,renting, leasing, library, loans

Entertainment Films, radio and television,concerts, recording

Communication Newspapers, radio and televisionnewscasts, telephone, satellites

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Year Mfg. Service45 79 2150 72 2855 72 2860 68 3265 64 3670 64 3675 58 4280 44 4685 43 5790 35 6595 25 7500 30 70

02 25 75

U.S. Manufacturing vs. Service Employment

0102030405060708090

45 50 55 60 65 70 75 80 85 90 95 00 02 05

Year

Per

cent

Mfg.

Service

Figure 1.4

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Decline in Manufacturing JobsDecline in Manufacturing Jobs

Productivity Increasing productivity allows companies to

maintain or increase their output using fewer workers

Outsourcing Some manufacturing work has been outsourced

to more productive companies

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Why Manufacturing MattersWhy Manufacturing Matters

Over 18 million workers in manufacturing jobs

Accounts for over 70% of value of U.S. exports

Average full-time compensation about 20% higher than average of all workers

Manufacturing workers more likely to have benefits

Productivity growth in manufacturing in the last 5 years is more than double U.S. economy

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Why Manufacturing MattersWhy Manufacturing Matters

More than half of the total R&D performed is in the manufacturing industries

Manufacturing workers in California earn an average of about $25,000 more a year than service workers

When a California manufacturing job is lost, an average of 2.5 service jobs are lost

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Challenges of Managing Challenges of Managing ServicesServices

Service jobs are often less structured than manufacturing jobs

Customer contact is higher Worker skill levels are lower Services hire many low-skill, entry-level workers Employee turnover is higher Input variability is higher Service performance can be affected by worker’s

personal factors

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Operations Management Operations Management Decision MakingDecision Making

Models Quantitative approaches Analysis of trade-offs Systems approach Establishing priorities Ethics

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Key Decisions of Operations Key Decisions of Operations ManagersManagers

WhatWhat resources/what amounts

WhenNeeded/scheduled/ordered

WhereWork to be done

HowDesigned

WhoTo do the work

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Decision MakingDecision Making

System Design– capacity– location– arrangement of departments– product and service planning– acquisition and placement of

equipment

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Decision MakingDecision Making

System operation– personnel– inventory– scheduling– project

management– quality assurance

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Decision MakingDecision Making

Models Quantitative approaches Analysis of trade-offs Systems approach

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ModelsModels

A model is an abstraction of reality.

– Physical– Schematic– Mathematical

What are the pros and cons of models?

Tradeoffs

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Models Are BeneficialModels Are Beneficial

Easy to use, less expensive Require users to organize Increase understanding of the problem Enable “what if” questions Consistent tool for evaluation and

standardized format Power of mathematics

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Limitations of ModelsLimitations of Models

Quantitative information may be emphasized over qualitative

Models may be incorrectly applied and results misinterpreted

Nonqualified users may not comprehend the rules on how to use the model

Use of models does not guarantee good decisions

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Quantitative ApproachesQuantitative Approaches

• Linear programming

• Queuing Techniques

• Inventory models

• Project models

• Statistical models

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Analysis of Trade-OffsAnalysis of Trade-Offs

Decision on the amount of inventory to stock Increased cost of holding inventory

Vs. Level of customer service

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Systems ApproachSystems Approach

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

SuboptimizationSuboptimization

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Pareto PhenomenonPareto 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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Ethical IssuesEthical Issues

Financial statements Worker safety Product safety Quality Environment Community Hiring/firing workers Closing facilities Worker’s rights

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Business Operations OverlapBusiness Operations Overlap

Operations

Finance

Figure 1.5

Marketing

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Operations InterfacesOperations Interfaces

Public Relations

Accounting

IndustrialEngineering

Operations

Maintenance

Personnel

Purchasing

Distribution

MIS

Legal

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Historical Evolution of Operations Historical Evolution of Operations ManagementManagement

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

Mass production Interchangeable parts Division of labor

Human relations movement (1920-60) Decision models (1915, 1960-70’s) Influence of Japanese manufacturers

Table 1.7

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Trends in BusinessTrends in Business

Major trends The Internet, e-commerce, e-business Management technology Globalization Management of supply chains Outsourcing Agility Ethical behavior

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Management TechnologyManagement Technology

Technology: The application of scientific discoveries to the development and improvement of goods and services

Product and service technology Process technology Information technology

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Suppliers’ Suppliers

DirectSuppliers Producer Distributor Final

Consumer

Simple Product Supply ChainSimple Product Supply ChainFigure 1.7

Supply Chain: A sequence of activitiesAnd organizations involved in producingAnd 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 BreadA Supply Chain for Bread

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Other Important TrendsOther Important Trends

Ethical behavior Operations strategy Working with fewer resources Revenue management Process analysis and improvement Increased regulation and product liability Lean production