Operations Management

Definition

Operations management is defined

as the design, operation, and
improvement of the systems that
create and deliver the firms primary
products and services.

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 Why Study Operations Management?
Systematic Approach
to Org. Processes

Business Education/
Operations
Increase Competitive
Career Opportunities Management Advantage/Survival

Cross-Functional
Applications
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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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 Factors Affecting a Firm's Ability to Ward off Imports and/or Export

Economic/Political Environmental/social External

exchange rates environmental protection transportation costs
trade barriers health costs logistics resources
capital costs labor unions labor supply, capabilities
inflation education system training resources
capital availability consumer tastes communications
social costs/legal retailing capabilities public infrastructure
funds flows employee
savings rate
interest rates
minimum wage

Corporate Technological Operations Suppliers

strategy R&D costs/productivity abilities
risk avoidance engineering quality coordination
role of functions product development delivery cycle location
Fin-Mktg-Mfg-Eng-R&D process development delivery reliability competition
balance sheet new products flexibility for prod change cooperation
financial capacity development process flexibility for vol. change
marketing policies New product introduction
export sales competencies inventory mgt.
Technological sophistication of mgt Prod. Planning Control
Equip. & process tech
#, size, location of facilities
logistics
customer service
information technology
**Wickham Skinner: The Role of the Industrial Managers in the Massive U.S. Negative Trade Balance, April 2000 WS6
 Operations Decision Making
Marketplace

Corporate Strategy

Finance Strategy Operations Strategy Marketing Strategy

Operations Management

People Plants Parts Processes

Materials & Products &
Customers Services
Planning and Control

Input Output

Irwin/McGraw-Hill The Transformation Process (value adding) 4

 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 Systems
System Inputs Conversion Output
(desired)
Hospital Patients Health Care Healthy
MDs, Nurses Individuals
Medical Supplies
Equipment
Restaurant Hungry Customers Prepare Food Satisfied
Food, Chef Serve Food Customers
Servers
Atmosphere
Automobile Sheet Steel Fabrication High Quality
Plant Engine Parts and Assembly Automobiles
Tools, Equipment of Cars
Workers
University High School Grads Transferring Educated
Teachers, Books of Knowledge Individuals
Classroom and Skills

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 Service or Good?

If you drop it on your foot, it wont hurt

you. (Good or service?)

Services never include goods and

goods never include services. (True or
false?)

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 What about McDonalds?
Service or Manufacturing?

The company certainly manufactures tangible

products

Why then would we consider McDonalds a

service business?

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 Front and Back Office

Back Office

Service Provider

Front Office

Customer

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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 <1700
TIME
Industrial Revolution 1700 - 1800
Civil War 1850s
Scientific Management 1890s
Moving Assembly Line 1910s
Hawthorne Studies 1930s
Operations Research 1940s
Global Competition 1970s
Service Revolution 1980s
Mass Customization 1990s 12
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 Development of OM as a Field The Names
and Emphasis Change, but the Elements
Remain Basically the Same!

Scientific Manufacturing TQM &

Management Strategy Six Sigma

Moving Assembly JIT/Lean Business Process

Line Manufacturing Reengineering

Hawthorne Manufacturing Electronic

Studies Resources Planning Enterprise

Operations Service Quality Global Supply

Research and Productivity Chain Mgt.

Historical OMs Emergence

Underpinnings as a Field
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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 Index

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 Operations Management - Overview

Process Analysis Process Control Supply Chain Project

and Design and Improvement Management Management

Operations Quality Supply Chain

Strategy Management Strategy

Process Analysis Statistical Just in Time

Process Control
Job Design Planning for Production
Consulting and
Manufacturing Reengineering Capacity Management

Facility Layout Aggregate

Planning

Services Inventory Control

Waiting Line Analysis and Materials Requirement Planning

Simulation
 Operations Strategy
Strategy Process Example

Customer Needs More Product

Corporate Strategy Increase Org.

Size

Operations Strategy Increase Production Capacity

Decisions on Processes
Build New Factory
and Infrastructure
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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
For
Forexample,
example, ififwe
wereduce
reducecosts
costsbybyreducing
reducingproduct
product
quality
quality inspections,
inspections, we
wemight
might reduce
reduceproduct
product quality.
quality.

Example
ExampleII, II, ififwe
weimprove
improve
customer
customerservice
serviceproblem
problem
solving
solvingbybycross-training
cross-training Cost
personnel
personnelto todealdeal with
with aa
wider-range
wider-rangeof ofproblems,
problems, Flexibility Delivery
they
theymay
maybecome
becomeless less
efficient
efficientat
atdealing
dealingwith with
commonly Quality
commonlyoccurring
occurring
problems.
problems.
Irwin/McGraw-Hill
 Order Qualifiers and Winners

Order Qualifiers: Screening criterion

that permits a firms 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

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 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?

Competition Us
(Them) Differentiation (Core competencies)
 Manufacturings 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, theyre 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 youve debated the assumptions
behind them.

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 Productivity
Outputs
Productivi ty =
Inputs

Partial measures
output/(single input)
Multi-factor measures
output/(multiple inputs)
Total measure
output/(total inputs)

Irwin/McGraw-Hill
 Example
10,000 Units Produced

Sold for $10/unit

500 labor hours What is the

labor productivity?
Labor rate: $9/hr

Cost of raw material: $5,000

Cost of purchased material: $25,000

Irwin/McGraw-Hill
 Example--Labor Productivity

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

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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 Scorecard

1. Financial perspective

2. Internal perspective

3. Customer perspective

4. Innovation and learning perspective

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