2. 2
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%
3. 3
The management of systems or processes that create goods and/or
provide services
Organizatio
n
Finance Operations Marketing
The distinct –active- role of operations:
Inputs become Outputs after some
Transformation
Operations Management = OM
4. 4
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
5. 5
Operations example in service:
Health care
Inputs Processing Outputs
Doctors, nurses Examination Healthy
patients
Hospital Surgery
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy
7. 7
Why OM?
Core of all business organizations
Many areas interrelated with OM activities
Management of operations is critical to create and
maintain competitive advantages
8. 8
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)
9. 9
Organization of Businesses (Cont.)
– Marketing
» Selling
» Promoting
» Assessing customer wants and needs
» Communicating those needs to operations
The need for working closely
Operations
Finance
Marketing
11. 11
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.
13. 13
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.
15. 15
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
16. 16
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
17. 17
Goods vs. Service Operations (Cont)
Differences
1. 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
18. 18
Manufacturing vs. Service !
Characteristic Manufacturing Service
Output Tangible Intangible
Customer contact Low High
Uniformity of output High Low
Labor content Low High
Uniformity of input High Low
Measurement of
productivity
Easy Difficult
Opportunity to correct
quality problems
Easy Difficult
19. 19
Steel production
Automobile fabrication
Home remodeling
Retail sales
Auto Repair
Appliance repair
Maid Service
Manual car wash
Teaching
Lawn mowing
High percentage goods
Low percentage service
Goods-service Continuum
Low percentage goods
High percentage service
20. 20
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
Percent
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 32 68
00 30 70
Manufacturing vs. Service Industries in US
21. 21
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
22. 22
Operations Managers
Controlling
– Inventory
– Quality
– Costs
Organization
– Degree of standardization
– Subcontracting
– Process selection
Staffing
– Hiring/lay off
– Use of overtime
– Incentive plans
– Job assignments
23. 23
Operations Management includes:
– Forecasting
– Capacity planning
– Scheduling
– Managing inventories
– Assuring quality
– Motivating employees
– Deciding where to locate facilities
– And more . . .
Scope of Operations Management
24. 24
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
26. 26
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.
28. 28
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
29. 29
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?
30. 30
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)
31. 31
Trends in Business
Major trends
– The Internet, e-commerce, e-business
– Management technology
– Globalization
– Management of supply chains
– Agility
32. 32
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
33. 33
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
34. 34
Production systems classified
Agile=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
36. 36
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
37. 37
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
38. 38
Summary
Definition of OM
OM’s relationship with Marketing, Finance and
Accounting
Goods vs. service industries
OM issues, trends and models
Manufacturing systems
