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Operations Management Definition

Operations management is defined as the design, operation, and improvement of the systems that create and deliver the firm’s primary products and services.

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Why Study Operations Management?

OperationsManagement

Business Education/Career Opportunities

Systematic Approachto Org. Processes

Increase Competitive Advantage/Survival

Cross-FunctionalApplications

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Current Trends 96 of the top 100 industries in the U.S. have large $

worth of exports. Exporting industries are characterized by early ongoing investments in advanced product and process technologies.

Productivity is increasing and has become a basis for competition. Success domestically and globally is dependent on the ability to compete on many fronts, including operations (e.g., internet - easy to find potential customers, but hard to deliver)

Outsourcing of manufacturing and services (e.g., India and China) is accelerating.

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**Wickham Skinner: The Role of the Industrial Managers in the Massive U.S. Negative Trade Balance, April 2000

Factors Affecting a Firm's Ability to Ward off Imports and/or Export

Externaltransportation costslogistics resourceslabor supply, capabilitiestraining resourcescommunicationspublic infrastructure

Environmental/socialenvironmental protectionhealth costslabor unionseducation systemconsumer tastesretailing capabilitiesemployee

Economic/Politicalexchange ratestrade barrierscapital costsinflationcapital availabilitysocial costs/legalfunds flowssavings rateinterest ratesminimum wage

Suppliersabilitiescoordinationlocationcompetitioncooperation

TechnologicalR&Dengineeringproduct developmentprocess developmentnew productsdevelopment process

Corporatestrategyrisk avoidancerole of functionsFin-Mktg-Mfg-Eng-R&Dbalance sheetfinancial capacitymarketing policiesexport sales competenciesTechnological sophistication of mgt

Operationscosts/productivityqualitydelivery cycledelivery reliabilityflexibility for prod changeflexibility for vol. changeNew product introductioninventory mgt.Prod. Planning ControlEquip. & process tech#, size, location of facilitieslogisticscustomer serviceinformation technology

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Operations Decision Making

People Plants Parts Processes

Planning and Control

Materials &Customers

Products &Services

Input Output

Operations Management

Marketing StrategyFinance Strategy

Marketplace

Corporate Strategy

Operations Strategy

The Transformation Process (value adding) 4

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Key OM Concepts Efficiency - Doing something at the lowest

possible cost

Effectiveness - Doing the right things to create the most value for the organization

Value - Quality divided by price

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Transformations

Physical--manufacturing Locational--transportation Exchange--retailing Storage--warehousing Physiological--health care Informational--telecommunications

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Examples of Production SystemsSystem Inputs Conversion Output

(desired)Hospital Patients

MDs, NursesMedical SuppliesEquipment

Health Care HealthyIndividuals

Restaurant Hungry CustomersFood, ChefServersAtmosphere

Prepare FoodServe Food

SatisfiedCustomers

AutomobilePlant

Sheet SteelEngine PartsTools, EquipmentWorkers

Fabricationand Assemblyof Cars

High QualityAutomobiles

University High School GradsTeachers, BooksClassroom

Transferringof Knowledgeand Skills

EducatedIndividuals

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Service or Good?

“If you drop it on your foot, it won’t hurt you.” (Good or service?)

“Services never include goods and goods never include services.” (True or false?)

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What about McDonald’s?

Service or Manufacturing?

The company certainly manufactures tangible products

Why then would we consider McDonald’s a service business?

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Front and Back Office

Front Office

Customer

Service Provider

Back Office

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Core “Factory Services”

Core Services are basic things that customers want from products that they purchase.

Quality Flexibility Speed Price (or production cost)

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Value-Added Services

Value-added services differentiate the organization from competitors and build relationships that bind customers to the firm in a positive way.

Information Problem Solving and Field Support Sales Support

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History of Operations Cottage System TIME<1700

1700 - 18001850s

1890s1910s

1930s1940s

1970s1980s1990s

Industrial Revolution Civil War Scientific Management

Hawthorne Studies

Mass Customization Service Revolution Global Competition

Operations Research

Moving Assembly Line

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Development of OM as a Field – The Names and Emphasis Change, but the Elements Remain Basically the Same!

ScientificManagement

Moving AssemblyLine

HawthorneStudies

OperationsResearch

HistoricalUnderpinnings

Manufacturing Strategy

TQM & Six Sigma

JIT/Lean Manufacturing

Business ProcessReengineering

ManufacturingResources Planning

ElectronicEnterprise

Service Qualityand Productivity

Global SupplyChain Mgt.

OM’s Emergenceas a Field 13

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Some Current Issues Implementing/sustaining Quality Management initiatives Consolidating operations resulting from mergers Speeding up the time to get new products to market Developing flexible production systems to enable mass

customization of products and services Developing and integrating new technologies Managing global supplier, production and distribution

networks Outsourcing

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Purchasing Managers Index

Began 1931 Measures:

New Manufacturing Orders Production Volume Deliveries Inventory Levels Employment

Index Measures Economic Activity >50.0% Expanding <42.7% Contracting

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Purchasing Managers Index

A “Leading Indicator” since:- Manufacturing must order materials in advance of production- The indicator is based on plans of supply management (purchasing) executives

Source: Institute for Supply Management (ISM) – ism.org (previously National Association of Purchasing Management)

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Purchasing Managers IndexDec-05 55.6 42.7 50Jan-06 54.8 42.7 50Feb-06 56.7 42.7 50Mar-06 55.2 42.7 50Apr-06 57.3 42.7 50

May-06 54.4 42.7 50Jun-06 53.8 42.7 50Jul-06 54.7 42.7 50

Aug-06 54.5 42.7 50Sep-06 52.9 42.7 50Oct-06 51.2 42.7 50Nov-06 49.5 42.7 50

QualityManagement

StatisticalProcess Control

Just in Time

Materials Requirement Planning

Inventory Control

AggregatePlanning

Operations Management - Overview

ProjectManagement

Supply Chain Management

Process Analysisand Design

Process Controland Improvement

Waiting Line Analysis and Simulation

Services

Manufacturing

OperationsStrategy

Facility Layout

Consulting andReengineering

Process Analysis

Job Design

Capacity Management

Planning for Production

Supply ChainStrategy

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Operations Strategy

Customer Needs

Corporate Strategy

Operations Strategy

Decisions on Processes and Infrastructure

ExampleStrategy Process

More Product

Increase Org. Size

Increase Production Capacity

Build New Factory

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Competitive Dimensions Cost Quality and Reliability Delivery

Flexibility Speed Reliability

Coping with Changes in Demand New Product Introduction

Speed Flexibility

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Dealing with Trade-offs

Cost

Quality

DeliveryFlexibility

Example II, if we improve customer service problem solving by cross-training personnel to deal with a wider-range of problems, they may become less efficient at dealing with commonly occurring problems.

For example, if we reduce costs by reducing product quality inspections, we might reduce product quality.

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Order Qualifiers and Winners

Order Qualifiers: Screening criterion that permits a firm’s products or services to be considered as possible candidates for purchase Order Winners: Criterion that differentiates the products or services of one firm from another

Strategy Begins with Priorities Consider the personal computer assembler

1. How would we segment the market according to product group?

2. How would we identify product requirements, demand patterns, and profit margins for each group?

3. How do we identify order winners and order qualifiers for each group?

4. How do we convert order winners into specific performance requirements?

Us(Core competencies)

Competition(Them) Differentiation

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Manufacturing’s Role in Corporate Strategy

Stage I--Internally Neutral - minimize potential manufacturing negative

Stage II--Externally Neutral - achieve parity with competitors

Stage III--Internally Supportive - support business strategy

Stage IV--Externally Supportive - manufacturing based competitive strategy

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Four Stages of Service Firm Competitiveness

Stage I. Available for Service

Stage II. Journeyman

Stage III. Distinctive Competence Achieved

Stage IV. World Class Service Delivery

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U. S. Competitiveness Drivers Product Development

speed development & enhance manufacturability

Waste Reduction (JIT Philosophy) WIP, space, tool costs, and human effort

Improved Customer-Supplier Relationships borrowed from Japanese Keiretsu

Improved Leadership strong, independent boards of directors

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Execution!!• Unless you translate big thoughts into concrete steps for action, they’re pointless.

(Larry Bossidy)• Strategy is execution. (Louis Gerstner)• In the business world, having a good objective means nothing if you implement it

badly. (Fareed Zakaria)• You cannot have an execution culture without robust dialogue - one that brings

reality to the surface through openness, candor, and informality. Robust dialogue starts when people go in with open minds. You cannot set realistic goals until you’ve debated the assumptions behind them.

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Productivity

Partial measures output/(single input)

Multi-factor measures output/(multiple inputs)

Total measure output/(total inputs)

InputsOutputs =ty Productivi

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Example10,000 Units Produced

Sold for $10/unit

500 labor hours

Labor rate: $9/hr

Cost of raw material: $5,000

Cost of purchased material: $25,000

What is the labor productivity?

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10,000 units/500hrs = 20 units/hour ...

... or we can arrive at a unitless figure

(10,000 unit*$10/unit)/(500hrs*$9/hr) = 22.22

Example--Labor Productivity

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Example:Productivity Measurement

You have just determined that your service employees have used a total of 2400 hours of labor this week to process 560 insurance forms. Last week the same crew used only 2000 hours of labor to process 480 forms.

Is productivity increasing or decreasing?

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Balanced Scorecard1. Financial perspective

2. Internal perspective

3. Customer perspective

4. Innovation and learning perspective