1 Introduction to Operations

Management

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commons.wikimedia.org/wiki/File:Operations_Management.gif

Learning Objectives

What is Operations Management?

Describe the transformation process and some categories.

 Why should a business student study Operations Management?

What are some of the Professional Organizations involved in

Operations Management?
Previous: Acknowledgements
Describe each of the three phases of Operations Management history.

Discuss how producing goods is different from performing services.

This chapter is an adaptation of two courses, Saylor’s BUS 300 (Operations

Management) and The Open University’s Understanding Operations Management.

Operations management is a vast topic but can be bundled into a few distinct
categories, each of which will be covered in later units. (It should be noted that entire
courses could be devoted to each of these topics individually). Since most people do
not work in a formal operations department, we will begin with an overview of
operations management itself.

The top manager of an operations

department is usually called the Director of
Operations.

Most operations departments will report to

a Chief Operating Officer (COO), who
reports to the Chief Executive
Officer (CEO).

The COO is often considered the most

important figure in a firm, next to the CEO.

The history of operations management can Figure 1.1: A diagram of corporate

hierarchy.
be traced back to the industrial revolution
when production began to shift from small,
local companies to large-scale production firms. One of the most significant
contributions to operations management came in the early 20th century when Henry
Ford pioneered the assembly line manufacturing process. This process drastically
improved productivity and made automobiles affordable to the masses. Understanding
the motivations behind innovations of the past can help us identify factors that may
motivate individuals in the future of operations management.
What is Operations Management?

Operations management is the management of the processes that transform inputs

into the goods and services that add value forAcknowledgements
Previous: the customer. Consider the ingredients
of your breakfast this morning. Unless you live on a farm and produced them yourself,
they passed through a number of different processing steps between the farmer and
your table and were handled by several different organizations.

Every day, you use a multitude of physical objects and a variety of services. Most of
the physical objects have been manufactured and most of the services have been
provided by people in organizations. Just as fish are said to be unaware of the water
that surrounds them, most of us give little thought to the organizational processes that
produce these goods and services for our use. The study of operations deals with how
the goods and services that you buy and consume every day are produced.

The following video shows some of the basic strategic areas in operations
management. We will cover some of these areas in addition to some tools and
techniques used in operations management.

Transformation Processes

A transformation process is any activity or group of activities that takes one or more
inputs, transforms and adds value to them, and provides outputs for customers or
clients. Where the inputs are raw materials, it is relatively easy to identify the
transformation involved, such as when milk is transformed into cheese or butter.
Where the inputs are information or people, the nature of the transformation may be
less obvious. For example, a hospital transforms ill patients (the input) into healthy
patients (the output).

Examples of Transformation Processes

changes in the physical characteristics of materials or customers

 changes in the location of materials, information or customers
changes in the ownership of materials or information
storage or accommodation of materials, information or customers
changes in the purpose or form of information
Previous:
changes in the physiological Acknowledgements
or psychological state of customers

Often all three types of input – materials, information and customers – must be
transformed by a single organisation. For example, withdrawing money from a bank
account involves information about the customer’s account, materials (such as
cheques and currency), and the customer. Treating a patient in hospital involves not
only the “customer’s” state of health, but also any materials used in treatment and
information about the patient.

As Figure 1.2 demonstrates, transformation processes can be categorized into four

groups: manufacture (the physical creation of products, e.g. automobiles), service (the
treatment of customers or storage of products, e.g. hospitals or warehouses), supply
(a change in ownership of goods, e.g. retail), and transport (the movement of
materials or customers, e.g. taxi service).

Figure 1.2: Categories of transformation processes.

Several different transformations are usually required to produce a good or service.

The overall transformation can be described as the macro operation, and the more
detailed transformations within this macro operation as micro operations. For
example, the macro operation in a brewery is making beer (Figure 1.3). The micro
operations include:

milling the malted barley into grist

mixing the grist with hot water to form wort
cooling the wort and transferring it to the fermentation vessel
adding yeast to the wort and fermenting the liquid into beer
filtering the beer to remove the spent yeast
decanting the beer into casks or bottles.
 Previous: Acknowledgements

Figure 1.3: Macro and micro operations (transformation processes); Credit: The
Open University / open.edu

The Operations Function

Every organization has an operations function, whether or not it is called ‘operations’.

The goal or purpose of most organizations involves the production of goods and/or
services. To do this, they have to procure resources, convert them into outputs and
distribute them to their intended users. The term operations embraces all the
activities required to create and deliver an organization’s goods or services to its
customers or clients.

Within large and complex organizations, operations is usually a major functional area,
with people specifically designated to take responsibility for managing all or part of the
organization’s operations processes. It is an important functional area because it plays
a crucial role in determining how well an organization satisfies its customers. In the
case of private-sector companies, the mission of the operations function is usually
expressed in terms of profits, growth and competitiveness; in public and voluntary
organizations, it is often expressed in terms of providing value for money.

Operations management is concerned with the design, management, and

improvement of the systems that create the organization’s goods or services. The
majority of most organizations’ financial and human resources are invested in the
activities involved in making products or delivering services. Operations management
is therefore critical to organizational success.
Other functions of the Business :

A typical organization has four distinct basic functional areas; operations, marketing
and sales, finance, and human resources. Operations is the area that is responsible
Previous: Acknowledgements
for directly creating the product or service for which the customer will pay. The other
three departments ensure that the operations of the business has everything needed
in order to do the work.

Marketing – ensures that operations is producing the right product or service in a way
that provides customers with all the features or characteristics that they value.

Finance – ensures that the funds for materials, supplies, payroll and equipment are
available when needed.

Human Resources – ensures that the correct employees, with the adequate skills and
experience are recruited, hired and trained. They are responsible for compensation,
collection of income taxes, administration of benefits, succession planning and more.
Without HR, there would be no employees in the operations department.

Figure 1.4: Business functions of departments.

Why should I study Operations Management?

In most organizations, operations tends to be the largest department in terms of the

number of employees. For a new graduate, you may be smart to look for a position
within the operations of a business. In a larger company these jobs are far more
plentiful than those in smaller departments. If you have a passion for working for a
large organization, you might want to focus more on which organization you go to
work for, and less focus on the actual job title. Soon enough, if you’re punctual,
energetic and proactive, you will likelyPrevious:
apply or Acknowledgements
get promoted into the job you desire.

Operations is where the largest share of the firm’s dollars are spent. It is a huge focus
of top management.

All other departments in the organization are interrelated with operations. In finance,
marketing and human resources, you will be interacting with operations on a regular
basis. You should understand the businesses’ core transformation process regardless
of the department in which you work.

Major innovations are made through operations. If you look at successful companies
such as Toyota, Amazon, or Dell, you will find that the keys to their success came from
innovations to the operations processes of their businesses.

Operational innovation means coming up with entirely new ways of filling orders,
developing products, providing customer service, or doing any other activity that an
enterprise performs.
As a new grad in an organization, you will find that every business is looking for new
ideas, tools, and improvement suggestions in order to improve on the effectiveness
and the efficiency of the business.

Effectiveness refers to making the right actions and plans in order to improve the
business and add value for the customer. It is helping to get the business doing
the right things for the customer.
Efficiency is different. To be efficient means doing things well at the lowest cost
possible. To be efficient, we look for ways to reduce unnecessary or redundant
activities that add unnecessary cost and could be avoided.

Often, decisions that must be made will involve a trade-off between effectiveness and
efficiency. Consider the decision to hire an extra full time server in a restaurant. The
service may be faster and customers will feel as though their server was more
attentive to their table. However, this comes at a higher cost, which is a reduction in
efficiency.
We think of value as the relationship between quality and price. If we can provide the
customer with a better quality product at the same price point, then that is adding
value. If we are able to provide the same product but at a lower price, then the
customer wins again.

Resources for Operations Management

Previous:learners and professionals:
Acknowledgements

Supply Chain Management Association (SCMA)

Canadian Institute of Traffic and Transportation (CITT)
Association for Supply Chain Management (APICS)
American Society for Quality (ASQ)
Project Management Institute (PMI)

Activity:

Look at ONE of the Associations above and answer the following

questions:

1. Is this organization Canadian, or multinational?

2. Is there an opportunity for students to join? If yes, is there a fee,
and how much?
3. Are there opportunities for networking and to meet
professionals?
4. Do they offer job search assistance?
5. Would you consider joining either of these organizations? Why
or why not?

Development of Operations Management

Operations in some form have been around as long as human endeavor itself but, in
manufacturing at least, it has changed dramatically over time, and there are three
major phases – craft manufacturing, mass production and the modern period. Let’s
look at each of these briefly in turn.
Previous: Acknowledgements

Craft manufacturing

Craft manufacturing describes the process by which skilled craftspeople produce

goods in low volume, with a high degree of variety, to meet the requirements of their
individual customers. Over the centuries, skills have been transmitted from masters to
apprentices and journeymen, and controlled by guilds. Craftspeople usually worked at
home or in small workshops. Such a system worked well for small-scale local
production, with low levels of competition. Some industries, such as furniture
manufacture and clock-making, still include a significant proportion of craft working.

Mass production

In many industries, craft manufacturing began to be replaced by mass production in

the 19th century. Mass production involves producing goods in high volume with low
variety – the opposite of craft manufacturing. Customers are expected to buy what is
supplied, rather than goods made to their own specifications. Producers concentrated
on keeping costs, and hence prices, down by minimizing the variety of both
components and products and setting up large production runs. They developed
aggressive advertising and employed sales forces to market their products.

An important innovation in operations that made mass production possible was the
system of standardized and interchangeable parts known as the “American system of
manufacture” (Hounshell, 1984), which developed in the United States and spread to
the United Kingdom and other countries. Instead of being produced for a specific
machine or piece of equipment, parts were made to a standard design that could be
used in different models. This greatly reduced the amount of work required in cutting,
filing and fitting individual parts, and meant that people or companies could specialize
in particular parts of the production process.

A second innovation was the development by Frederick Taylor (1911) of the system of
‘scientific management’, which sought to redesign jobs using similar principles to
those used in designing machines. Taylor argued that the role of management was to
analyze jobs in order to find the ‘one best way’ of performing any task or sequence of
tasks, rather than allowing workers to determine how to perform their jobs. By
breaking down activities into tasks that were sequential, logical and easy to
understand, each worker would have narrowly defined and repetitious tasks to
perform, at high speed and therefore Previous:
with lowAcknowledgements
costs (Kanigel, 1999).

A third innovation was the development of the moving assembly line by Henry Ford.
Instead of workers bringing all the parts and tools to a fixed location where one car
was put together at a time, the assembly line brought the cars to the workers. Ford
thus extended the ideas of scientific management, with the assembly line controlling
the pace of production. This completed the development of a system through which
large volumes of standardized products could be assembled by unskilled workers at
constantly decreasing costs – the apogee of mass production.

The modern period

Mass production worked well as long as high volumes of mass-produced goods could
be produced and sold in predictable and slowly changing markets. However, during
the 1970s, markets became highly fragmented, product life cycles reduced
dramatically, and consumers had far greater choice than ever before.

An unforeseen challenge to Western manufacturers emerged from Japan. New

Japanese production techniques, such as total quality management (TQM), just-in-
time (JIT) and employee involvement were emulated elsewhere in the developed
world with mixed results. More recently, the mass production paradigm has been
replaced, but there is yet no single approach to managing operations that has become
similarly dominant. The different approaches for managing operations that are
currently popular include:

Flexible specialization (Piore and Sabel, 1984) in which firms (especially small
firms) focus on separate parts of the value-adding process and collaborate within
networks to produce whole products. Such an approach requires highly
developed networks, effective processes for collaboration and the development of
long-term relationships between firms.
Lean production (Womack et al., 1990) which developed from the highly
successful Toyota Production System. It focuses on the elimination of all forms of
waste from a production system. A focus on driving inventory levels down also
exposes inefficiencies, reduces costs, and cuts lead times.
 Mass customisation (Pine et al., 1993) which seeks to combine high volume, as
in mass production, with adapting products to meet the requirements of individual
customers. Mass customisation is becoming increasingly feasible with the advent
of new technology and automated processes.
Previous:
Agile manufacturing (Kidd, 1994) whichAcknowledgements
emphasizes the need for an
organization to be able to switch frequently from one market-driven objective to
another. Again, agile manufacturing has only become feasible on a large scale
with the advent of enabling technology.

In various ways, these approaches all seek to combine the high volume and low cost
associated with mass production with the product customization, high levels of
innovation and high levels of quality associated with craft production.

Figure 1.5: A chart summarizing characteristics of craft manufacturing, mass productions, and the
modern period.

Producing Goods and Services

The production and goods and the performance of services are both part of operations
management. There are however some key differences in the two.

In the production of goods the result is the creation of a tangible product such as a
vehicle, an article of clothing, a cell phone or a shovel. A service on the other hand is
an intangible such as a car repair, a haircut, or a medical treatment. There are some
key differences in managing these two types of businesses.

1. Services have a much higher amount of customer contact. The customer will
generally come to the service provider for the service to take place, or the service
provider will come to the customer.
 In manufacturing the customer rarely comes to our facility. The purchase
generally takes place at a different location than the one where the
manufacturing occurred. That simplifies matters quite a bit.
2. Services have a higher amount of labour content than manufacturing
organizations. Previous: Acknowledgements

.
3. Services have a much higher degree of input variability than do manufacturing
companies. Each customer often arrives to a service with a unique set of
circumstances that may require extra time and skills on the part of the service
provider.
.
4. Measurement of quality is much more straight-forward in a manufacturing setting.
There are many technical ways of deciding if manufactured goods have the
required quality level.

In services many factors will affect the customers impression of the quality of
the service received.

5. Measurement of productivity is very straight-forward in a manufacturing operation

due to high degree of standardization in the inputs and outputs used.

In services it is more difficult to measure productivity.

6. Inventory can be stored in the case of a manufacturing organization. If goods are

not sold in the intended week, then they can be put into storage to be sold at a
later date.

In services, once the time period has passed, the opportunity to use that
capacity is gone.

Chapter Key Terms:

Agile manufacturing – Emphasizes the need for an organization to be able

to switch frequently from one market-driven objective to another.

Craft manufacturing – The production of goods in low volume, but with a

high degree of variety, performed by skilled, specialized craftspeople to meet
the requirements of their individual customers.

Effectiveness – Making the right actions and plans in order to improve the
business and add value for the customer.
Previous: Acknowledgements

Efficiency – Doing things well at the lowest cost possible and reducing
activities which add unnecessary costs.

Flexible specialization – Firms (especially small firms) focus on separate

parts of the value-adding process and collaborate within networks to produce
whole products. Such an approach requires highly developed networks,
effective processes for collaboration and the development of long-term
relationships between firms.

Lean production – Focuses on the elimination of all forms of waste from a

production system, especially from the perspective of keeping inventory levels
down to exposes inefficiencies, reduces costs, and cuts lead times.

Macro operations – The overall process within a company’s transformation

processes, e.g. in a brewery, the macro operation is making beer.

Mass customisation – Seeks to combine high volume, as in mass

production, with adapting products to meet the requirements of individual
customers.

Mass production – The production of goods in high volume with low variety
by using standardized parts, a system of scientific management, and
assembly lines; rose in popularity in the 19th century.

Micro operations – The detailed transformations that must occur, usually in a

specific sequence, for a company to complete their macro operation.

Operations management – The design, management, and improvement of

the systems and processes that create the organization’s goods or services.

Transformation process – Any activity or group of activities that takes one or

more inputs, transforms and adds value to them, and provides outputs for
customers or clients, e.g. milk (input) being transformed into cheese or butter
(outputs).
 Previous: Acknowledgements

LICENSE

Introduction to Operations Management Copyright © by Mary Drane and Hamid

Faramarzi is licensed under a Creative Commons Attribution-NonCommercial 4.0
International License, except where otherwise noted.