Operation Management

1. McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
1
Introduction to
Operations
Management

2. 1-2
Learning 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

3. 1-3
Learning 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

4. 1-4
Operations 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

5. 1-5
The Organization
The Three Basic Functions
Organization
Finance Operations Marketing
Figure 1.1

6. 1-6
Value-Added Process
The operations function involves the conversion of
inputs into outputs
Inputs
Land
Labor
Capital
Transformation/
Conversion
process
Outputs
Goods
Services
Control
Feedback
Feedback
Feedback
Value added
Figure 1.2

7. 1-7
Value-Added & Product
Packages
 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.

8. 1-8
Automobile assembly, steel making
Home remodeling, retail sales
Automobile Repair, fast food
Goods-service Continuum
Figure 1.3
Computer repair, restaurant meal
Song writing, software development
Goods Service
Surgery, teaching

9. 1-9
Food Processor
Inputs Processing Outputs
Raw Vegetables Cleaning Canned
vegetables
Metal Sheets Making cans
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment
Table 1.2

10. 1-10
Hospital Process
Inputs Processing Outputs
Doctors, nurses Examination Healthy
patients
Hospital Surgery
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy
Table 1.2

11. 1-11
Manufacturing or Service?
Tangible Act

12. 1-12
Production of Goods vs. Delivery of
Services
 Production of goods – tangible output
 Delivery of services – an act
 Service job categories
 Government
 Wholesale/retail
 Financial services
 Healthcare
 Personal services
 Business services
 Education

13. 1-13
Key Differences
1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of productivity

14. 1-14
Key Differences
6. Production and delivery
7. Quality assurance
8. Amount of inventory
9. Evaluation of work
10. Ability to patent design

15. 1-15
Goods 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

16. 1-16
 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 Management

17. 1-17
Types of Operations
Table 1.4
Operations Examples
Goods Producing Farming, mining, construction,
manufacturing, power generation
Storage/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 television
newscasts, telephone, satellites

18. 1-18
Year Mfg. Service
45 79 21
50 72 28
55 72 28
60 68 32
65 64 36
70 64 36
75 58 42
80 44 46
85 43 57
90 35 65
95 25 75
00 30 70
02 25 75
U.S. Manufacturing vs. Service Employment
0
10
20
30
40
50
60
70
80
90
45 50 55 60 65 70 75 80 85 90 95 00 02 05
Year
Percent
Mfg.
Service
Figure 1.4

19. 1-19
Decline 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

20. 1-20
Why 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

21. 1-21
Why 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

22. 1-22
Challenges of Managing
Services
 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

23. 1-23
Operations Management
Decision Making
 Models
 Quantitative approaches
 Analysis of trade-offs
 Systems approach
 Establishing priorities
 Ethics

24. 1-24
Key Decisions of Operations
Managers
 What
What resources/what amounts
 When
Needed/scheduled/ordered
 Where
Work to be done
 How
Designed
 Who
To do the work

25. 1-25
Decision Making
System Design
– capacity
– location
– arrangement of departments
– product and service planning
– acquisition and placement of
equipment

26. 1-26
Decision Making
System operation
– personnel
– inventory
– scheduling
– project
management
– quality assurance

27. 1-27
Decision Making
 Models
 Quantitative approaches
 Analysis of trade-offs
 Systems approach

28. 1-28
Models
A model is an abstraction of reality.
– Physical
– Schematic
– Mathematical
What are the pros and cons of models?
Tradeoffs

29. 1-29
Models 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

30. 1-30
Limitations 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

31. 1-31
Quantitative Approaches
• Linear programming
• Queuing Techniques
• Inventory models
• Project models
• Statistical models

32. 1-32
Analysis of Trade-Offs
 Decision on the amount of inventory to stock
 Increased cost of holding inventory
Vs.
 Level of customer service

33. 1-33
Systems Approach
“The whole is greater than
the sum of the parts.”
Suboptimization

34. 1-34
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?

35. 1-35
Ethical Issues
 Financial statements
 Worker safety
 Product safety
 Quality
 Environment
 Community
 Hiring/firing workers
 Closing facilities
 Worker’s rights

36. 1-36
Business Operations Overlap
Operations
Finance
Figure 1.5
Marketing

37. 1-37
Operations Interfaces
Public
Relations
Accounting
Industrial
Engineering
Operations
Maintenance
Personnel
Purchasing
Distribution
MIS
Legal

38. 1-38
Historical Evolution of Operations
Management
 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

39. 1-39
Trends in Business
 Major trends
 The Internet, e-commerce, e-business
 Management technology
 Globalization
 Management of supply chains
 Outsourcing
 Agility
 Ethical behavior

40. 1-40
Management Technology
 Technology: The application of scientific
discoveries to the development and
improvement of goods and services
 Product and service technology
 Process technology
 Information technology

41. 1-41
Suppliers’
Suppliers
Direct
Suppliers Producer Distributor Final
Consumer
Simple Product Supply Chain
Figure 1.7
Supply Chain: A sequence of activities
And organizations involved in producing
And delivering a good or service

42. 1-42
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

43. 1-43
Other Important Trends
 Ethical behavior
 Operations strategy
 Working with fewer resources
 Revenue management
 Process analysis and improvement
 Increased regulation and product liability
 Lean production