Chapter 1: Introduction to Operations Management

Introduction
• Business organizations typically have three basic functional areas:
• Finance
• Responsible for securing financial resources at favorable prices and allocating those
resources throughout the organization, as well as budgeting, analyzing investment proposals, and
providing fund for operations.
• Marketing
• Responsible for assessing consumer wants and needs, and selling and promoting the
organization's goods or services.
• Operations
• Responsible for producing the goods or providing the services offered by the
organization.
• Operations Management: The management of systems or processes that create goods
and/or provide services.
• The operations function involves the conversion of inputs into outputs:
• Inputs: Land, Labor, Capital, Information. -->
• Transformation/Conversion Process -->
• Outputs: Goods, Services -->
• Feedback --> Inputs
• Value-Added: The difference between the cost of inputs and the value or price of
outputs.
Production of Goods versus Delivery of Services
• Production of goods results in a tangible output, such as an automobile, eyeglasses -
anything that we can see or touch.
• Delivery of service, on the other hand, generally implies an act.  TV and auto repair,
lawn care, etc. are examples.
• The majority of service jobs fall into these categories:
• Government
• Wholesale/retail
• Financial services
• Health care
• Business services
• Education
• The differences between manufacturing and service organizations involve the following:
• Degree of customer contact.
• Uniformity of input.
• Labor content of jobs.
• Uniformity of output.
• Measurement of productivity.
• Production and delivery.
• Quality assurance.
• Amount of inventory.
• Evaluation of work.
• Ability to patent design.
The Scope of Operations Management
• The operations function includes many interrelated activities, such as forecasting,
capacity planning, scheduling, managing inventories, assuring quality, motivating employees,
deciding where to locate facilities, and more.
• System design involves decisions that relate to system capacity, the geographic location
of facilities, arrangement of departments and structures, product and service planning, and
acquisition of equipment.
• System operation involves management of personnel, inventory, planning and control,
scheduling, project management, and quality assurance.
• There are a number of other areas that are part of the operations function.
• Purchasing has responsibility for procurement of materials, supplies, and equipment.
• Industrial engineering is often concerned with scheduling, performance standards, work
methods, quality control, and material handling.
• Distribution involves the shipping of goods to warehouses, retail outlets, or final
customers.
• Maintenance is responsible for general upkeep and repair of equipment, buildings and
grounds, heating and air-conditioning; removing toxic wastes; parking, and perhaps security.
Operations Management and Decision Making
• Operations management professionals make a number of key decisions that affect the
entire organization.  These include the following:
• What: What resources will be needed, and in what amounts?
• When: When will each resource be needed?
• When should the work be scheduled? ...
• Where: Where will the work be done?
• How: How will the product or service be designed?
• How will the work be done? ...
• Who: Who will do the work?
Models
• Models: An abstraction of reality; a simplified representation of something.
• Models are sometimes classified as physical, schematic, or mathematical:
• Physical models look like their real-life counterparts.
• Schematic models are more abstract than their physical counterparts; that is, they have
less resemblance to the physical reality.
• Mathematical models are the most abstract: They do not look at all like their real-life
counterparts.
• For each model, try to learn (1) its purpose, (2) how it is used to generate results, (3) how
these results are interpreted and used, and (4) what assumptions and limitations apply.
• Models are beneficial because they
• Are generally easy to use and less expensive than dealing directly with the actual
situation.
• Require users to organize and sometimes quantify information and, in the process, often
indicate areas where additional information is needed.
• Increase understanding of the problem.
• Enable managers to analyze "What if?" questions.
• Serve as a consistent tool for evaluation and provide a standardized format for analyzing
a problem.
• Enable users to bring the power of mathematics to bear on a problem.
• Limitations to models:
• Quantitative information may be emphasized at the expense of qualitative information.
• Models may be incorrectly applied and misinterpreted.
• The use of models does not guarantee good decisions.
Quantitative Approaches
• Linear programming and related mathematic techniques are widely used for optimum
allocation of scarce resources.
• Project models such as PERT and CPM are useful for planning, coordinating, and
controlling large scale products.
Performance Metrics
• All managers use metrics to manage and control operations.
Analysis of Trade-Offs
• Operations personnel frequently encounter decisions that can be described as trade-
off decisions.
A Systems Approach
• System: A set of interrelated parts that must work together.
Establishing Priorities
• Pareto Phenomenon: A few factors account for a high percentage of the occurrence of
some event(s).
Ethics
• In making decisions, managers must consider how their decisions will effect
shareholders, management, employees, customers, the community at large, and the environment.
• Ethical issues arise in many aspects of operations management, including: Financial
Statements, Worker Safety, Product Safety, Quality, The Environment, The Community, Hiring
and Firing Workers, Closing Facilities, Workers' Rights.
Why Study Operations Management?
• Finance and operations management personnel cooperate by exchanging information and
expertise in such activities as the following:
• Budgeting.
• Economic analysis of investment proposals.
• Provision of funds.
• Lead Time: The time between ordering a good or service and receiving it.
• Operations interface with a number of supporting functions:
• Legal
• Public Relations
• Personnel/Human Resources
• MIS
• Accounting
• The legal department must be consulted on contracts with employees, customers,
suppliers, and transporters, as well as on liability and environmental issues.
• Accounting supplies information to management on costs of labor, materials, and
overhead, and may provide reports on items such as scrap, downtime, and inventories.
• Management Information Systems (MIS) is concerned with providing management with
the information it needs to effectively manage.
• The personnel or human resources department is concerned with recruitment and training
of personnel, labor relations, contract negotiations, wage and salary administration, assisting in
manpower projections, and ensuring health and safety of employees.
• Public relations has responsibility for building and maintaining a positive public image
of the organization.
Career Opportunities
• People who in the operations field should have a skill set that includes both people skills
and knowledge skills.
The Historical Evolution of Operations Management
The Industrial Revolution
• Craft Production: System in which highly skilled workers use simple, flexible tools to
produce small quantities of customized goods.
Scientific Management
• Frederick Winslow Taylor believe in a "science of management" based on observation,
measurement, analysis and improvement of work methods, and economic incentives.
• Mass Production: System in which low-skilled workers use specialized machinery to
produce high volumes of standardized goods.
• Interchangeable Parts: Parts of a product made to such precision that they do not have
to be custom fitted.
• Division of Labor: The breaking up of a production process into small tasks, so that
each worker performs a small portion of the overall job.
The Human Relations Movement
• Elton Mayo's studies revealed that in addition to the physical and technical aspects of
work, worker motivation is critical for improving productivity.
Decision Models and Management Science
• After World War II, efforts to develop and refine quantitative tools for decision making
continued, resulting in decision models for forecasting, inventory management, project
management, and other areas of operations management.
The Influence of Japanese Manufacturers
• The Japanese approaches emphasized quality and continual improvement, worker teams
and empowerment, and achieving customer satisfaction.
Trends in Business
Major Trends
• Major trends include:
• The Internet, e-commerce, and e-business.
• Management of technology.
• Globalization.
• Management of supply chains.
• Outsourcing.
• Agility.
• Ethical behavior.
• E-business: Use of the Internet to transact business.
• E-commerce: Consumer-to-business transactions.
• Technology: The application of scientific discoveries to the development and
improvement of goods and services.
• Operations management is primarily concerned with three types of technology:
• Product and service technology refers to the discovery and development of new
products and services.
• Process technology refers to methods, procedures, and equipment used to produce goods
and provide services.
• Information technology (IT) refers to the science and use of computers and other
electronic equipment to store, process, and send information.
• Supply Chain: A sequence of activities and organization involved in producing and
delivering a good or service.
• A simple product supply chain:
• Suppliers' suppliers --> Direct suppliers --> Producer --> Distributor --> Final Customers
• Outsourcing: Obtaining a product or service form outside the organization.
• Agility: The ability of an organization to respond quickly to demands or opportunities.
Other Important Trends
• These include greater emphasis on
• Operations strategy.
• Working with fewer resources.
• Revenue Management.
• Process analysis and improvement, and quality improvement.
• Increased regulation and product liability issues.
• Lean production.
• Six Sigma: A process for reducing costs, improving quality, and increasing customer
satisfaction.
• Lean Production: System that uses minimal amounts of resources to produce a high
volume of high-quality goods with some variety.