CHAPTER

1 Introduction to
Operations
Management

1 Introduction CHAPTER OUTLINE The Historical Evolution of Operations

to Operations Management, 21
Introduction, 4
Management Production of Goods versus Delivery of
The Industrial Revolution, 21
Services, 7 Scientific Management, 21
2 Competitiveness, Strategy, and
Productivity Process Management, 9 The Human Relations Movement, 23

3 Forecasting Managing a Process to Meet Demand, 10 Decision Models and Management

Science, 24
4 Product and Service Design Process Variation, 10
The Influence of Japanese
5 Strategic Capacity Planning for The Scope of Operations Management, 11 Manufacturers, 24
Products and Services Why Learn about Operations Operations Today, 24
6 Process Selection and Facility Management?, 14
Key Issues for Today’s Business
Layout Career Opportunities and Professional Operations 27
7 Work Design and Measurement Societies, 17
Environmental Concerns 28
8 Location Planning and Analysis Operations Management and Decision
Ethical Conduct 29
Making, 17
9 Management of Quality The Need to Manage the Supply Chain, 30
Models, 18
10 Quality Control Elements of Supply Chain Management, 32
Quantitative Approaches, 19
11 Aggregate Planning and Master Operations Tour: Kabab-ji Grill, 33
Performance Metrics, 19
Scheduling Case: Eleni 38
Analysis of Trade-Offs, 19
12 MRP and ERP
Degree of Customization, 20
13 Inventory Management
A Systems Approach, 20
14 JIT and Lean Operations Establishing Priorities, 20
15 Supply Chain Management
16 Scheduling LEARNING OBJECTIVES
17 Project Management After completing this chapter, 5 Summarize the two major
18 Management of Waiting Lines you should be able to: aspects of process management.
19 Linear Programming 1 Define the term operations management. 6 Explain the key aspects of operations
2 Identify the three major functional areas management decision making.
of organizations and describe how they 7 Briefly describe the historical
interrelate. evolution of operations management.
3 Identify similarities and differences 8 Characterize current trends in business
between production and service that impact operations management.
operations.
4 Describe the operations function
and the nature of the operations
manager’s job.

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 Recalls of automobiles, eggs, produce, toys, and other
products; major oil spills; and even dysfunctional state
legislatures are all examples of operations failures.
This book is about operations management. The subject matter is They underscore the need for effective operations
fascinating and timely: Productivity, quality, e-business, global management.
competition, and customer service are very much in the news,
and all are part of operations management. This first chapter
presents an introduction and overview of operations management. Among the issues it addresses are: What is operations
management? Why is it important? What do operations management professionals do?
The chapter also provides a brief description of the historical evolution of operations management and a discussion of the
trends and issues that impact operations management.
More specifically, you will learn about (1) the economic balance that every business organization seeks to achieve;
(2) the condition that generally exists that makes achieving the economic balance challenging; (3) the line function that is the
core of every business organization; (4) key steps in the history and evolution of operations management; (5) the differences
and similarities between producing products and delivering services; (6) what a supply chain is, and why it is important to
manage it; and (7) the key issues for today’s business operations.

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 4 Chapter One Introduction to Operations Management

INTRODUCTION
Operations is that part of a business organization that is responsible for producing goods and/
Goods Physical items produced or services. Goods are physical items that include raw materials, parts, subassemblies such as
by business organizations. motherboards that go into computers, and final products such as cell phones and automobiles.
Services Activities that provide Services are activities that provide some combination of time, location, form, or psychologi-
some combination of time, loca- cal value. Examples of goods and services are found all around you. Every book you read,
tion, form, and psychological every video you watch, every e-mail you send, every telephone conversation you have, and
value. every medical treatment you receive involves the operations function of one or more organi-
zations. So does everything you wear, eat, travel in, sit on, and access the Internet with. The

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operations function in business can also be viewed from a more far-reaching perspective: The
collective success or failure of companies’ operations functions has an impact on the ability of
a nation to compete with other nations, and on the nation’s economy.
sERVicE
The ideal situation for a business organization is to achieve a match of supply and demand.
Having excess supply or excess capacity is wasteful and costly; having too little means lost
opportunity and possible customer dissatisfaction. The key functions on the supply side are
operations and supply chains, and sales and marketing on the demand side.
While the operations function is responsible for producing products and/or delivering
services, it needs the support and input from other areas of the organization. Business orga-
nizations have three basic functional areas, as depicted in Figure 1.1: finance, marketing, and
operations. It doesn’t matter whether the business is a retail store, a hospital, a manufacturing
firm, a car wash, or some other type of business; all business organizations have these three
basic functions.
Finance is responsible for securing financial resources at favorable prices and allocating those
resources throughout the organization, as well as budgeting, analyzing investment proposals,
and providing funds for operations. Marketing and operations are the primary, or “line,” func-
tions. Marketing is responsible for assessing consumer wants and needs, and selling and pro-
moting the organization’s goods or services. Operations is responsible for producing the goods
or providing the services offered by the organization. To put this into perspective, if a business
organization were a car, operations would be its engine. And just as the engine is the core of
what a car does, in a business organization, operations is the core of what the organization does.
Operations management Operations management is responsible for managing that core. Hence, operations manage-
The management of systems or ment is the management of systems or processes that create goods and/or provide services.
processes that create goods and/ Operations and supply chains are intrinsically linked and no business organization
or provide services. could exist without both. A supply chain is the sequence of organizations—their facilities,
Supply chain A sequence functions, and activities—that are involved in producing and delivering a product or service.
of activities and organizations The sequence begins with basic suppliers of raw materials and extends all the way to the
involved in producing and final customer, as seen in Figure 1.2. Facilities might include warehouses, factories, process-
delivering a good or service. ing centers, offices, distribution centers, and retail outlets. Functions and activities include
forecasting, purchasing, inventory management, information management, quality assur-
ance, scheduling, production, distribution, delivery, and customer service. Figure 1.3 provides
another illustration of a supply chain: a chain that begins with wheat growing on a farm and
ends with a customer buying a loaf of bread in a supermarket. Notice that the value of the
product increases as it moves through the supply chain.
supply chain

FIGURE 1.1
The three basic functions of Organization
business organizations

Finance Operations Marketing

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 Chapter One  Introduction to Operations Management 5

FIGURE 1.2
Suppliers’ Direct Final
suppliers suppliers
Producer Distributor
customers
A simple product supply chain

Supply chains are both external and internal to the organization. The external parts of a
supply chain provide raw materials, parts, equipment, supplies, and/or other inputs to the
organization, and they deliver outputs that are goods to the organization’s customers. The
internal parts of a supply chain are part of the operations function itself, supplying operations
with parts and materials, performing work on products and/or services, and passing the work
on to the next step in the process.
The creation of goods or services involves transforming or converting inputs into outputs.
Various inputs such as capital, labor, and information are used to create goods or services
using one or more transformation processes (e.g., storing, transporting, repairing). To ensure
that the desired outputs are obtained, an organization takes measurements at various points in
the transformation process (feedback) and then compares them with previously established
standards to determine whether corrective action is needed (control). Figure 1.4 depicts the
conversion system.
Table 1.1 provides some examples of inputs, transformation processes, and outputs.
Although goods and services are listed separately in Table 1.1, it is important to note that
goods and services often occur jointly. For example, having the oil changed in your car is a
service, but the oil that is delivered is a good. Similarly, house painting is a service, but the

FIGURE 1.3
$0.25 $0.33
A supply chain for bread

$0.48

$0.56

$1.00

$1.08

Bread
$1.29

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 6 Chapter One  Introduction to Operations Management

FIGURE 1.4 Value-added

The operations function involves
the conversion of inputs into Inputs Transformation/ Outputs
Land conversion Goods
outputs
Labor process Services
Capital
Information

Measurement and Feedback

Measurement and Measurement and
Feedback Feedback
Control

paint is a good. The goods–service combination is a continuum. It can range from ­primarily
goods, with little service, to primarily service, with few goods. Figure 1.5 illustrates this con-
tinuum. Because there are relatively few pure goods or pure services, companies usually sell
product packages, which are a combination of goods and services. There are elements of
both goods production and service delivery in these product packages. This makes managing
operations more interesting, and also more challenging.
Table 1.2 provides some specific illustrations of the transformation process.
Value-added The difference The essence of the operations function is to add value during the transformation process:
between the cost of inputs and Value-added is the term used to describe the difference between the cost of inputs and the value
the value or price of outputs. or price of outputs. In nonprofit organizations, the value of outputs (e.g., highway construction,

TABLE 1.1
Examples of inputs, Inputs Transformation Outputs
transformation, and outputs
Land Processes High goods percentage
Human    Cutting, drilling    Houses
   Physical labor    Transporting    Automobiles
   Intellectual labor    Teaching    Clothing
Capital    Farming    Computers
Raw materials    Mixing    Machines
   Water    Packing    Televisions
   Metals    Copying, faxing    Food products
   Wood    Analyzing    Textbooks
Equipment    Developing    CD players
   Machines    Searching High service percentage
   Computers    Researching    Health care
   Trucks    Repairing    Entertainment
   Tools    Innovating    Car repair
Facilities    Debugging    Legal
   Hospitals    Selling    Banking
   Factories    Communication
   Retail stores
Energy
Other
   Information
   Time
   Legal constraints
   Government regulations

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 Chapter One  Introduction to Operations Management 7

Goods Service FIGURE 1.5

The goods–service continuum

Surgery, teaching

Songwriting, software development

Computer repair, restaurant meal

Automobile repair, fast food

Home remodeling, retail sales

Automobile assembly, steelmaking

police and fire protection) is their value to society; the greater the value-added, the greater the
effectiveness of these operations. In for-profit organizations, the value of outputs is measured
by the prices that customers are willing to pay for those goods or services. Firms use the money
generated by value-added for research and development, investment in new facilities and equip-
ment, worker salaries, and profits. Consequently, the greater the value-added, the greater the
amount of funds available for these purposes. Value can also be psychological, as in branding.
Many factors affect the design and management of operations systems. Among them are the
degree of involvement of customers in the process and the degree to which technology is used
to produce and/or deliver a product or service. The greater the degree of customer involvement,
the more challenging it can be to design and manage the operation. Technology choices can
have a major impact on productivity, costs, flexibility, and quality and customer satisfaction.

Production of Goods versus Delivery of Services

Although goods and services often go hand in hand, there are some very basic differences
between the two, differences that impact the management of the goods portion versus man-
agement of the service portion. There are also many similarities between the two.
Production of goods results in a tangible output, such as an automobile, eyeglasses, a golf
ball, a refrigerator—anything that we can see or touch. It may take place in a factory, but
can occur elsewhere. For example, farming produces nonmanufactured goods. Delivery of
service, on the other hand, generally implies an act. A physician’s examination, TV and auto

TABLE 1.2
Inputs Processing Output Illustrations of the
transformation process
Food Processor Raw vegetables Cleaning Canned vegetables
Metal sheets Making cans
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment

Hospital Doctors, nurses Examination Treated patients

Hospital Surgery
Medical supplies Monitoring
Equipment Medication
Laboratories Therapy

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 8 Chapter One  Introduction to Operations Management

repair, lawn care, and the projection of a film in a theater are examples of services. The major-
ity of service jobs fall into these categories:
Professional services (e.g., financial, health care, legal).
Mass services (e.g., utilities, Internet, communications).
Service shops (e.g., tailoring, appliance repair, car wash, auto repair/maintenance).
Personal care (e.g., beauty salon, spa, barbershop).
Government (e.g., Medicare, mail, social services, police, fire).
Education (e.g., schools, universities).
Food service (e.g., restaurants, fast foods, catering, bakeries).
Services within organizations (e.g., payroll, accounting, maintenance, IT, HR, janitorial).
Retailing and wholesaling.
Shipping and delivery (e.g., truck, railroad, boat, air).
Residential services (e.g., lawn care, painting, general repair, remodeling, interior design).
Transportation (e.g., mass transit, taxi, airlines, ambulance).
Travel and hospitality (e.g., travel bureaus, hotels, resorts).
Miscellaneous services (e.g., copy service, temporary help).
Manufacturing and service are often different in terms of what is done but quite similar in
terms of how it is done.
Consider these points of comparison:

Degree of customer contact. Many services involve a high degree of customer contact,
although services such as Internet providers, utilities, and mail service do not. When
there is a high degree of contact, the interaction between server and customer becomes a
“moment of truth” that will be judged by the ­customer every time the service occurs.
Labor content of jobs. Services often have a higher degree of labor content than manufac-
turing jobs do, although automated services are an exception.
Uniformity of inputs. Service operations are often subject to a higher degree of vari-
ability of inputs. Each client, patient, customer, repair job, and so on presents a some-
what unique situation that requires assessment and flexibility. Conversely, manufacturing
operations often have a greater ability to control the variability of inputs, which leads to
more-uniform job requirements.
Measurement of productivity. Measurement of productivity can be more difficult
for service jobs due largely to the high variations of inputs. Thus, one doctor might
have a higher level of routine cases to deal with, while another might have more-
difficult cases. Unless a careful analysis is conducted, it may appear that the doctor
with the difficult cases
has a much lower pro-
ductivity than the one
with the routine cases.
Quality assurance. Qual-
ity assurance is usually
more challenging for ser-
vices due to the higher
variation in input, and
because delivery and
consumption occur at the
same time. Unlike manu-
facturing, which typi-
cally occurs away from
the customer and allows

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 Chapter One  Introduction to Operations Management 9

­ istakes that are identified to be corrected, services have less opportunity to avoid expos-
m
ing the customer to mistakes.
Inventory. Many services tend to involve less use of inventory than manufacturing opera-
tions, so the costs of having inventory on hand are lower than they are for manufacturing.
However, unlike manufactured goods, services cannot be stored. Instead, they must be
provided “on demand.”
Wages. Manufacturing jobs are often well paid, and have less wage variation than ser-
vice jobs, which can range from highly paid professional services to minimum-wage
workers.
Ability to patent. Product designs are often easier to patent than service designs, and
some services cannot be patented, making them easier for competitors to copy.
There are also many similarities between managing the production of products and manag-
ing services. In fact, most of the topics in this book pertain to both. When there are important
service considerations, these are highlighted in separate sections. Here are some of the pri-
mary factors for both:

a. Forecasting and capacity planning to match supply and demand.

b. Process management.
c. Managing variations.
d. Monitoring and controlling costs and productivity.
e. Supply chain management.
f. Location planning, inventory management, quality control, and scheduling.
supply chain
Note that many service activities are essential in goods-producing companies. These
include training, human resource management, customer service, equipment repair, procure-
ment, and administrative services.
Table 1.3 provides an overview of the differences between production of goods and service
operations. Remember, though, that most systems involve a blend of goods and services.

PROCESS MANAGEMENT
A key aspect of operations management is process management. A process consists of one or Process One or more actions
more actions that transform inputs into outputs. In essence, the central role of all management that transform inputs into
is process management. outputs.

TABLE 1.3
Characteristic Goods Services Typical differences between
production of goods and
Output Tangible Intangible provision of services
Customer contact Low High
Labor content Low High
Uniformity of input High Low
Measurement of productivity Easy Difficult
Opportunity to correct prob- High Low
lems before delivery
Inventory Much Little
Wages Narrow range Wide range
Patentable Usually Not usually

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 10 Chapter One  Introduction to Operations Management

Businesses are composed of many interrelated processes. Generally speaking, there are
three categories of business processes:
1. Upper-management processes. These govern the operation of the entire organization.
Examples include organizational governance and organizational strategy.
2. Operational processes. These are the core processes that make up the value stream.
Examples include purchasing, production and/or service, marketing, and sales.
3. Supporting processes. These support the core processes. Examples include accounting,
human resources, and IT (information technology).
Business processes, large and small, are composed of a series of supplier–customer rela-
tionships, where every business organization, every department, and every individual opera-
tion is both a customer of the previous step in the process and a supplier to the next step in the
process. Figure 1.6 illustrates this concept.
A major process can consist of many subprocesses, each having its own goals that contri-
bute to the goals of the overall process. Business organizations and supply chains have many
such processes and subprocesses and they benefit greatly when management is using a process
perspective. Business process management (BPM) activities include process design, process
supply chain execution, and process monitoring. Two basic aspects of this for operations and supply chain
management are managing processes to meet demand and dealing with process variability.

Managing a Process to Meet Demand

Ideally, the capacity of a process will be such that its output just matches demand. Excess
capacity is wasteful and costly; too little capacity means dissatisfied customers and lost rev-
enue. Having the right capacity requires having accurate forecasts of demand, the ability
to translate forecasts into capacity requirements, and a process in place capable of meeting
expected demand. Even so, process variation and demand variability can make the achieve-
ment of a match between process output and demand difficult. Therefore, to be effective, it is
also necessary for managers to be able to deal with variation.

Process Variation
Variation occurs in all business processes. It can be due to variety or variability. For example,
random variability is inherent in every process; it is always present. In addition, variation can
occur as the result of deliberate management choices to offer customers variety.
There are four basic sources of variation:
1. The variety of goods or services being offered. The greater the variety of goods and
services, the greater the variation in production or service requirements.
2. Structural variation in demand. These variations, which include trends and seasonal vari-
ations, are generally predictable. They are particularly important for capacity planning.
3. Random variation. This natural variability is present to some extent in all processes,
as well as in demand for services and products, and it cannot generally be influenced
by managers.
4. Assignable variation. These variations are caused by defective inputs, incorrect work
methods, out-of-adjustment equipment, and so on. This type of variation can be reduced
or eliminated by analysis and corrective action.

FIGURE 1.6 A business

Business processes form a organization, a
Supplier(s) Customer(s)
sequence of suppliers and department, or an
customers individual operation
Input(s) from one Transformation Output(s) to one or
or more suppliers more customers

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 Chapter One  Introduction to Operations Management 11

Variations can be disruptive to operations and supply chain processes, interfering with
optimal functioning. Variations result in additional cost, delays and shortages, poor quality,
and inefficient work systems. Poor quality and product shortages or service delays can lead to
dissatisfied customers and damage an organization’s reputation and image. It is not surpris-
ing, then, that the ability to deal with variability is absolutely necessary for managers.
Throughout this book, you will learn about some of the tools managers use to deal with
variation. An important aspect of being able to deal with variation is to use metrics to describe
it. Two widely used metrics are the mean (average) and the standard deviation. The stan-
dard deviation quantifies variation around the mean. The mean and standard deviation are
used throughout this book in conjunction with variation. So, too, is the normal distribution.
Because you will come across many examples of how the normal distribution is used, you
may find the overview on working with the normal distribution in the appendix at the end of
the book helpful.

THE SCOPE OF OPERATIONS MANAGEMENT

The scope of operations management ranges across the organization. Operations management
people are involved in product and service design, process selection, selection and manage-
ment of technology, design of work systems, location planning, facilities planning, and qual-
ity improvement of the organization’s products or services.
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.
We can use an airline company to illustrate a service organization’s operations system.
The system consists of the airplanes, airport facilities, and maintenance facilities, sometimes
spread out over a wide territory. The activities include:
Forecasting such things as weather and landing conditions, seat demand for flights, and
the growth in air travel.
Capacity planning, essential for the airline to maintain cash flow and make a reasonable
profit. (Too few or too many planes, or even the right number of planes but in the wrong
places, will hurt profits.)

Scheduling planes, cargo, and

flight and ground crews is an
operations function for an
airline.

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 12 Chapter One Introduction to Operations Management

Facilities and layout, important in achieving effective use of workers and equipment.
Scheduling of planes for flights and for routine maintenance; scheduling of pilots and
flight attendants; and scheduling of ground crews, counter staff, and baggage handlers.
Managing inventories of such items as foods and beverages, first-aid equipment, in-
flight magazines, pillows and blankets, and life preservers.
Assuring quality, essential in flying and maintenance operations, where the emphasis is on
safety, and important in dealing with customers at ticket counters, check-in, telephone and
electronic reservations, and curb service, where the emphasis is on efficiency and courtesy.
Motivating and training employees in all phases of operations.
Locating facilities according to managers’ decisions on which cities to provide service
for, where to locate maintenance facilities, and where to locate major and minor hubs.
Now consider a bicycle factory. This might be primarily an assembly operation: buying
components such as frames, tires, wheels, gears, and other items from suppliers, and then
assembling bicycles. The factory also might do some of the fabrication work itself, forming
frames, making the gears and chains, and it might buy mainly raw materials and a few parts
and materials such as paint, nuts and bolts, and tires. Among the key management tasks in
either case are scheduling production, deciding which components to make and which to
buy, ordering parts and materials, deciding on the style of bicycle to produce and how many,
purchasing new equipment to replace old or worn out equipment, maintaining equipment,
motivating workers, and ensuring that quality standards are met.
Obviously, an airline company and a bicycle factory are completely different types of oper-
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ations. One is primarily a service operation, the other a producer of goods. Nonetheless, these
two operations have much in common. Both involve scheduling activities, motivating employ-
sERVicE ees, ordering and managing supplies, selecting and maintaining equipment, satisfying quality
standards, and—above all—satisfying customers. And in both businesses, the success of the
business depends on short- and long-term planning.
The operations function consists of all activities directly related to producing goods or
providing services. Hence, it exists both in manufacturing and assembly operations, which are
goods-oriented, and in areas such as health care, transportation, food handling, and retailing,
which are primarily service-oriented.

Workers assemble road bikes at

the largest carbon fiber bicycle
factory in China.

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 Chapter One Introduction to Operations Management 13

A primary function of an operations manager is to guide the system by decision making.

Certain decisions affect the design of the system, and others affect the operation of the system.
System design involves decisions that relate to system capacity, the geographic location of
facilities, arrangement of departments and placement of equipment within physical structures,
product and service planning, and acquisition of equipment. These decisions usually, but not
always, require long-term commitments. Moreover, they are typically strategic decisions. Sys-
tem operation involves management of personnel, inventory planning and control, scheduling,
project management, and quality assurance. These are generally tactical and operational deci-
sions. Feedback on these decisions involves measurement and control. In many instances, the
operations manager is more involved in day-to-day operating decisions than with decisions
relating to system design. However, the operations manager has a vital stake in system design
because system design essentially determines many of the parameters of system operation. For
example, costs, space, capacities, and quality are directly affected by design decisions. Even
though the operations manager is not responsible for making all design decisions, he or she
can provide those decision makers with a wide range of information that will have a bearing
on their decisions.
A number of other areas are part of, or support, the operations function. They include pur-
chasing, industrial engineering, distribution, and maintenance.
Purchasing has responsibility for procurement of materials, supplies, and equipment.
Close contact with operations is necessary to ensure correct quantities and timing of
purchases. The purchasing department is often called on to evaluate vendors for quality,
reliability, service, price, and ability to adjust to changing demand. Purchasing is also
involved in receiving and inspecting the purchased goods.
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.
The operations manager is the key figure in the system: He or she has the ultimate respon-
sibility for the creation of goods or provision of services.
The kinds of jobs that operations managers oversee vary tremendously from organization
to organization largely because of the different products or services involved. Thus, manag-
ing a banking operation obviously requires a different kind of expertise than managing a
steelmaking operation. However, in a very important respect, the jobs are the same: They are
both essentially managerial. The same thing can be said for the job of any operations manager
regardless of the kinds of goods or services being created.
The service sector and the manufacturing sector are both important to the economy. The
service sector now accounts for more than 70 percent of jobs in the United States, and it is
growing in other countries as well. Moreover, the number of people working in services is
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increasing, while the number of people working in manufacturing is not. (See Figure 1.7.) sERVicE
The reason for the decline in manufacturing jobs is twofold: As the operations function in
manufacturing companies finds more productive ways of producing goods, the companies are
able to maintain or even increase their output using fewer workers. Furthermore, some manu-
facturing work has been outsourced to more productive companies, many in other countries,
that are able to produce goods at lower costs. Outsourcing and productivity will be discussed
in more detail in this and other chapters.
Many of the concepts presented in this book apply equally to manufacturing and service.
Consequently, whether your interest at this time is on manufacturing or on service, these con-
cepts will be important, regardless of whether a manufacturing example or service example is
used to illustrate the concept.
The reading on page 14 looks at the future of the European manufacturing sector.

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 14 Chapter One Introduction to Operations Management

FIGURE 1.7 90
U.S. manufacturing versus Service
service employment, 1940–2010 80 Mfg.
Source: U.S. Bureau of Labor Statistics.
70

60

Percent
50

40

30

20

10

0
'40 '50 '60 '70 '80 '90 '00 '08 '10

Year

European manufacturing—into the future? READING

By 2020 the European manufacturing sector will have undergone new economic powers (for example China, India, Korea, Malaysia,
many dramatic changes. This was the conclusion of an EU report Indonesia, and Brazil), global priorities in the governance of trade
which emerged from a scenario-building process on the drivers (e.g. WTO), political instability and threats of terrorism and armed
and challenges thought likely to shape the future of manufactur- conflicts that may limit energy and resource availability, are also
ing in Europe. The scenarios suggest that the interplay of a variety likely to bear heavily on manufacturing.
of drivers—most notably related to globalization, new technology, A number of key challenges will have to be addressed if
market demand, public values, fiscal measures, regulation and European manufacturing is to survive and prosper and continue to
overall societal change—will contribute to shaping the future enhance quality of life for Europe’s citizens. These challenges
landscape of manufacturing in Europe. In turn, industrial change include: the need to increase supply chain efficiency; minimizing
driven by new technological opportunities will impact on the the environmental burden of production and consumption; integrating
socio-economic structures in Europe, contributing to sustainable new knowledge and improving workforce skills; and anticipating
growth and improved quality of life for European citizens. new market and societal needs.
It is argued that the European manufacturing sector will be
confronted with an increasingly competitive economic climate
Questions
and global competition. The pressure on industry to successfully 1. What are the key benefits of a strong manufacturing sector?
compete in globalized markets will require rapid responses 2. Can you suggest some actions the European Union can take to
to continuously changing business environments. Geopolitical ensure that manufacturing continues to thrive and prosper?
factors, such as the future balance of economic and political Source: Based on European Commission, “The Future of Manufacturing in
powers between the main economic regions, the emergence of Europe 2015–2020, The Challenge for Sustainability”, March 2003.

WHY LEARN ABOUT OPERATIONS

MANAGEMENT?
There are many career-related reasons for wanting to learn about operations management,
whether you plan to work in the field of operations or not. This is because every aspect of
business affects or is affected by operations. Operations and sales are the two line functions
in a business organization. All other functions—accounting, finance, marketing, IT, and so
on—support the two line functions. Among the service jobs that are closely related to opera-

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 Chapter One  Introduction to Operations Management 15

FIGURE 1.8
The three major functions of
Operations business organizations overlap

Finance Marketing

tions are financial services (e.g., stock market analyst, broker, investment banker, and loan
officer), marketing services (e.g., market analyst, marketing researcher, advertising manager,
and product manager), accounting services (e.g., corporate accountant, public accountant,
and budget analyst), and information services (e.g., corporate intelligence, library services,
management information systems design services).
Apart from the career-related reasons is a not so obvious one: Through learning about
operations and supply chains, you will have a much better understanding of the world you live
in, the global dependencies of companies and nations, some of the reasons that companies
succeed or fail, and the importance of working with others.
Working together successfully means that all members of the organization understand not
only their own role, but they also understand the roles of others. This is precisely why all
business students, regardless of their particular major, are required to take a common core
of courses that will enable them to learn about all aspects of business. Because operations
management is central to the functioning of every business organization, it is included in the
core of courses business students are required to take. And even though individual courses
have a narrow focus (e.g., accounting, marketing), in practice, there is significant interfacing
and collaboration among the various functional areas, involving exchange of information and
cooperative decision making. For example, although the three primary functions in business
organizations perform different activities, many of their decisions impact the other areas of
the organization. Consequently, these functions have numerous interactions, as depicted by
the overlapping circles shown in Figure 1.8.
Finance and operations management personnel cooperate by exchanging information and
expertise in such activities as the following:
1. Budgeting. Budgets must be periodically prepared to plan financial requirements. Budgets
must sometimes be adjusted, and performance relative to a budget must be evaluated.
2. Economic analysis of investment proposals. Evaluation of alternative investments in
plant and equipment requires inputs from both operations and finance people.
3. Provision of funds. The necessary funding of operations and the amount and timing of
funding can be important and even critical when funds are tight. Careful planning can
help avoid cash-flow problems.
Marketing’s focus is on selling and/or promoting the goods or services of an organization.
Marketing is also responsible for assessing customer wants and needs, and for communicat-
ing those to operations people (short term) and to design people (long term). That is, opera-
tions needs information about demand over the short to intermediate term so that it can plan
accordingly (e.g., purchase materials or schedule work), while design people need informa-
tion that relates to improving current products and services and designing new ones. Mar-
keting, design, and production must work closely together to successfully implement design

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 16 Chapter One  Introduction to Operations Management

changes and to develop and produce new products. Marketing can provide valuable insight on
what competitors are doing. Marketing also can supply information on consumer preferences
so that design will know the kinds of products and features needed; operations can supply
information about capacities and judge the manufacturability of designs. Operations will also
have advance warning if new equipment or skills will be needed for new products or services.
Finance people should be included in these exchanges in order to provide information on what
funds might be available (short term) and to learn what funds might be needed for new prod-
ucts or services (intermediate to long term). One important piece of information marketing
Lead time The time between needs from operations is the manufacturing or service lead time in order to give customers
ordering a good or service and realistic estimates of how long it will take to fill their orders.
receiving it. Thus, marketing, operations, and finance must interface on product and process design,
forecasting, setting realistic schedules, quality and quantity decisions, and keeping each other
informed on the other’s strengths and weaknesses.
People in every area of business need to appreciate the importance of managing and coor-
dinating operations decisions that affect the supply chain and the matching of supply and
demand, and how those decisions impact other functions in an organization.
Operations also interacts with other functional areas of the organization, including legal,
management information systems (MIS), accounting, personnel/human resources, and public
relations, as depicted in Figure 1.9.
The legal department must be consulted on contracts with employees, customers, suppli-
ers, and transporters, as well as on liability and environmental issues.
Accounting supplies information to management on costs of labor, materials, and over-
head, 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. This occurs mainly through designing systems to
capture relevant information and designing reports. MIS is also important for managing the
control and decision-making tools used in operations management.
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 the health and safety of employees.
Public relations has responsibility for building and maintaining a positive public image
of the organization. Good public relations provides many potential benefits. An obvious
one is in the marketplace. Other potential benefits include public awareness of the orga-
nization as a good place to work (labor supply), improved chances of approval of zoning
change requests, community acceptance of expansion plans, and instilling a positive atti-
tude among employees.

FIGURE 1.9
Operations interfaces with a Public
number of supporting functions Legal
relations

Operations
Personnel/
Accounting Human
resources

MIS

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 Chapter One  Introduction to Operations Management 17

Career Opportunities and Professional Societies

There are many career opportunities in the operations management and supply chain fields.
Among the numerous job titles are operations manager, production analyst, production
manager, industrial engineer, time study analyst, inventory manager, purchasing manager,
schedule coordinator, distribution manager, supply chain manager, quality analyst, and
quality manager.
People who work in the operations field should have a skill set that includes both people
skills and knowledge skills. People skills include political awareness; mentoring ability; and
collaboration, negotiation, and communication skills. Knowledge skills, necessary for cred-
ibility and good decision making, include product and/or service knowledge, process knowl-
edge, industry and global knowledge, and financial and accounting skills.
If you are thinking of a career in operations management, you can benefit by joining one or
more of the professional societies.

APICS, the Association for Operations Management

8430 West Bryn Mawr Avenue, Suite 1000, Chicago, Illinois 60631  [Link]
American Society for Quality (ASQ)
230 West Wells Street, Milwaukee, Wisconsin 53203  [Link]
Institute for Supply Management (ISM)
2055 East Centennial Circle, Tempe, Arizona 85284  [Link]
Institute for Operations Research and the Management Sciences (INFORMS)
901 Elkridge Landing Road, Linthicum, Maryland 21090-2909  [Link]
The Production and Operations Management Society (POMS)
College of Engineering, Florida International University, EAS 2460,
10555 West Flagler Street, Miami, Florida 33174  [Link]
The Project Management Institute (PMI)
4 Campus Boulevard, Newtown Square, Pennsylvania 19073-3299  [Link]
Council of Supply Chain Management Professionals (CSCMP)
333 East Butterfield Road, Suite 140, Lombard, Illinois 60148  http//[Link]

APICS, ASQ, ISM, and other professional societies offer a practitioner certification
examination that can enhance your qualifications. Information about job opportunities can
be obtained from all of these societies as well as from other sources, such as the Decision
Sciences Institute (University Plaza, Atlanta, Georgia 30303) and the Institute of Industrial
Engineers (25 Technology Park, Norcross, Georgia 30092).

OPERATIONS MANAGEMENT
AND DECISION MAKING
The chief role of an operations manager is that of planner/decision maker. In this capacity,
the operations manager exerts considerable influence over the degree to which the goals and
objectives of the organization are realized. Most decisions involve many possible alternatives
that can have quite different impacts on costs or profits. Consequently, it is important to make
informed decisions.
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? When
should materials and other supplies be ordered? When is corrective action needed?
Where: Where will the work be done?

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 18 Chapter One  Introduction to Operations Management

How: How will the product or service be designed? How will the work be done (organi-
zation, methods, equipment)? How will resources be allocated?
Who: Who will do the work?
Throughout this book, you will encounter the broad range of decisions that operations
managers must make, and you will be introduced to the tools necessary to handle those deci-
sions. This section describes general approaches to decision making, including the use of
models, quantitative methods, analysis of trade-offs, establishing priorities, ethics, and the
systems approach. Models are often a key tool used by all decision makers.

Models
Model An abstraction of reality; A model is an abstraction of reality, a simplified representation of something. For example, a
a simplified representation of child’s toy car is a model of a real automobile. It has many of the same visual features (shape,
something. relative proportions, wheels) that make it suitable for the child’s learning and playing. But the
toy does not have a real engine, it cannot transport people, and it does not weigh 2,000 pounds.
Other examples of models include automobile test tracks and crash tests; formulas, graphs
and charts; balance sheets and income statements; and financial ratios. Common statistical
models include descriptive statistics such as the mean, median, mode, range, and standard
deviation, as well as random sampling, the normal distribution, and regression equations.
Models are sometimes classified as physical, schematic, or mathematical:
Physical models look like their real-life counterparts. Examples include miniature cars,
trucks, airplanes, toy animals and trains, and scale-model buildings. The advantage of
these models is their visual correspondence with reality.
Schematic models are more abstract than their physical counterparts; that is, they have
less resemblance to the physical reality. Examples include graphs and charts, blue-
prints, pictures, and drawings. The advantage of schematic models is that they are often
relatively simple to construct and change. Moreover, they have some degree of visual
correspondence.
Mathematical models are the most abstract: They do not look at all like their real-life
counterparts. Examples include numbers, formulas, and symbols. These models are usu-
ally the easiest to manipulate, and they are important forms of inputs for computers and
calculators.
The variety of models in use is enormous. Nonetheless, all have certain common features:
They are all decision-making aids and simplifications of more complex real-life phenomena.
Real life involves an overwhelming amount of detail, much of which is irrelevant for any par-
ticular problem. Models omit unimportant details so that attention can be concentrated on the
most important aspects of a situation.
Because models play a significant role in operations management decision making, they
are heavily integrated into the material of this text. For each model, try to learn (1) its pur-
pose, (2) how it is used to generate results, (3) how these results are interpreted and used, and
(4) what assumptions and limitations apply.
The last point is particularly important because virtually every model has an associated
set of assumptions or conditions under which the model is valid. Failure to satisfy all of the
assumptions will make the results suspect. Attempts to apply the results to a problem under
such circumstances can lead to disastrous consequences.
Managers use models in a variety of ways and for a variety of reasons. Models are benefi-
cial because they
1. Are generally easy to use and less expensive than dealing directly with the actual
situation.
2. Require users to organize and sometimes quantify information and, in the process, often
indicate areas where additional information is needed.

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 Chapter One  Introduction to Operations Management 19

3 . Increase understanding of the problem.

4. Enable managers to analyze what-if questions.
5. Serve as a consistent tool for evaluation and provide a standardized format for analyzing
a problem.
6. Enable users to bring the power of mathematics to bear on a problem.

This impressive list of benefits notwithstanding, models have certain limitations of which
you should be aware. The following are three of the more important limitations:

1 . Quantitative information may be emphasized at the expense of qualitative information.

2. Models may be incorrectly applied and the results misinterpreted. The widespread use of
computerized models adds to this risk because highly sophisticated models may be placed
in the hands of users who are not sufficiently knowledgeable to appreciate the subtleties
of a particular model; thus, they are unable to fully comprehend the circumstances under
which the model can be successfully employed.
3. The use of models does not guarantee good decisions.

Quantitative Approaches
Quantitative approaches to problem solving often embody an attempt to obtain mathematically
optimal solutions to managerial problems. Linear programming and related mathematical
techniques are widely used for optimum allocation of scarce resources. Queuing techniques
are useful for analyzing situations in which waiting lines form. Inventory models are widely
used to control inventories. Project models such as PERT (program evaluation and review
technique) and CPM (critical path method) are useful for planning, coordinating, and control-
ling large-scale projects. Forecasting techniques are widely used in planning and scheduling.
Statistical models are currently used in many areas of decision making.
In large measure, quantitative approaches to decision making in operations management
(and in other functional business areas) have been accepted because of calculators and com-
puters capable of handling the required calculations. Computers have had a major impact on
operations management. Moreover, the growing availability of software packages for quanti-
tative techniques has greatly increased management’s use of those techniques.
Although quantitative approaches are widely used in operations management decision
making, it is important to note that managers typically use a combination of qualitative and
quantitative approaches, and many important decisions are based on qualitative approaches.

Performance Metrics
All managers use metrics to manage and control operations. There are many metrics in use,
including those related to profits, costs, quality, productivity, flexibility, assets, inventories,
schedules, and forecast accuracy. As you read each chapter, note the metrics being used and
how they are applied to manage operations.

Analysis of Trade-Offs
Operations personnel frequently encounter decisions that can be described as trade-off deci-
sions. For example, in deciding on the amount of inventory to stock, the decision maker must
take into account the trade-off between the increased level of customer service that the addi-
tional inventory would yield and the increased costs required to stock that inventory.
Throughout this book you will be presented with decision models that reflect these kinds
of trade-offs. Decision makers sometimes deal with these decisions by listing the advantages
and disadvantages—the pros and cons—of a course of action to better understand the conse-
quences of the decisions they must make. In some instances, decision makers add weights to
the items on their list that reflect the relative importance of various factors. This can help them
“net out” the potential impacts of the trade-offs on their decision.

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 20 Chapter One  Introduction to Operations Management

Degree of Customization
A major influence on the entire organization is the degree of customization of products or ser-
vices being offered to its customers. Providing highly customized products or services such as
home remodeling, plastic surgery, and legal counseling tends to be more labor intensive than
providing standardized products such as those you would buy “off the shelf ” at a mall store
or a supermarket or standardized services such as public utilities and Internet services. Fur-
thermore, production of customized products or provision of customized services is generally
more time consuming, requires more highly skilled people, and involves more flexible equip-
ment than what is needed for standardized products or services. Customized processes tend
to have a much lower volume of output than standardized processes, and customized output
carries a higher price tag. The degree of customization has important implications for pro-
cess selection and job requirements. The impact goes beyond operations and supply chains. It
affects marketing, sales, accounting, finance, and information systems.

A Systems Approach
System A set of interrelated A systems viewpoint is almost always beneficial in decision making. A system can be defined
parts that must work together. as a set of interrelated parts that must work together. In a business organization, the organi-
zation can be thought of as a system composed of subsystems (e.g., marketing subsystem,
operations subsystem, finance subsystem), which in turn are composed of lower subsystems.
The systems approach emphasizes interrelationships among subsystems, but its main theme
is that the whole is greater than the sum of its individual parts. Hence, from a systems view-
point, the output and objectives of the organization as a whole take precedence over those of
any one subsystem. An alternative approach is to concentrate on efficiency within subsystems
and thereby achieve overall efficiency. But that approach overlooks the facts that organiza-
tions must operate in an environment of scarce resources and that subsystems are often in
direct competition for those scarce resources, so that an orderly approach to the allocation of
resources is called for.
A systems approach is essential whenever something is
being designed, redesigned, implemented, improved, or other-
wise changed. It is important to take into account the impact
on all parts of the system. For example, if the upcoming model
of an automobile will add antilock brakes, a designer must
take into account how customers will view the change, instruc-
tions for using the brakes, chances for misuse, the cost of
producing the new brakes, installation procedures, recycling
worn-out brakes, and repair procedures. In addition, workers
will need training to make and/or assemble the brakes, produc-
tion scheduling may change, inventory procedures may have to
change, quality standards will have to be established, advertis-
ing must be informed of the new features, and parts suppliers
must be selected.
Global competition and outsourcing are increasing the
length of companies’ supply chains, making it more important
The big picture—a Systems view. than ever for companies to use a systems approach to take the “big picture” into account in
their decision making.

Establishing Priorities
In virtually every situation, managers discover that certain issues or items are more important
supply chain than others. Recognizing this enables the managers to direct their efforts to where they will
do the most good.
Pareto phenomenon A few Typically, a relatively few issues or items are very important, so that dealing with those
factors account for a high per- factors will generally have a disproportionately large impact on the results achieved.
centage of the occurrence of This well-known effect is referred to as the Pareto phenomenon. The implication is that
some event(s). a manager should examine each situation, searching for the few factors that will have

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 Chapter One  Introduction to Operations Management 21

the greatest impact, and give them the highest priority. This is one of the most important
and pervasive concepts in operations management. In fact, this concept can be applied
at all levels of management and to every aspect of decision making, both professional
and personal.

THE HISTORICAL EVOLUTION OF

OPERATIONS MANAGEMENT
Systems for production have existed since ancient times. The production of goods for sale,
at least in the modern sense, and the modern factory system had their roots in the Industrial
Revolution.

The Industrial Revolution

The Industrial Revolution began in the 1770s in England and spread to the rest of Europe
and to the United States during the 19th century. Prior to that time, goods were produced in
small shops by craftsmen and their apprentices. Under that system, it was common for one
person to be responsible for making a product, such as a horse-drawn wagon or a piece of
furniture, from start to finish. Only simple tools were available; the machines in use today
had not been invented.
Then, a number of innovations in the 18th century changed the face of production forever
by substituting machine power for human power. Perhaps the most significant of these was the
steam engine, because it provided a source of power to operate machines in factories. Ample
supplies of coal and iron ore provided materials for generating power and making machin-
ery. The new machines, made of iron, were much stronger and more durable than the simple
wooden machines they replaced.
In the earliest days of manufacturing, goods were produced using craft production: Craft production System in
highly skilled workers using simple, flexible tools produced goods according to customer which highly skilled workers use
specifications. simple, flexible tools to produce
Craft production had major shortcomings. Because products were made by skilled crafts- small quantities of customized
men who custom fitted parts, production was slow and costly. And when parts failed, the goods.
replacements also had to be custom made, which was also slow and costly. Another shortcom-
ing was that production costs did not decrease as volume increased; there were no economies
of scale, which would have provided a major incentive for companies to expand. Instead,
many small companies emerged, each with its own set of standards.
A major change occurred that gave the Industrial Revolution a boost: the development of
standard gauging systems. This greatly reduced the need for custom-made goods. Factories
began to spring up and grow rapidly, providing jobs for countless people who were attracted
in large numbers from rural areas.
Despite the major changes that were taking place, management theory and practice had not
progressed much from early days. What was needed was an enlightened and more systematic
approach to management.

Scientific Management
The scientific management era brought widespread changes to the management of factories.
The movement was spearheaded by the efficiency engineer and inventor Frederick Winslow
Taylor, who is often referred to as the father of scientific management. Taylor believed in a
“science of management” based on observation, measurement, analysis and improvement of
work methods, and economic incentives. He studied work methods in great detail to identify
the best method for doing each job. Taylor also believed that management should be respon-
sible for planning, carefully selecting and training workers, finding the best way to perform
each job, achieving cooperation between management and workers, and separating manage-
ment activities from work activities.

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 22 Chapter One  Introduction to Operations Management

Taylor’s methods emphasized maximizing output. They were not always popular with
workers, who sometimes thought the methods were used to unfairly increase output without
a corresponding increase in compensation. Certainly some companies did abuse workers in
their quest for efficiency. Eventually, the public outcry reached the halls of Congress, and
hearings were held on the matter. Taylor himself was called to testify in 1911, the same year
in which his classic book, The Principles of Scientific Management, was published. The pub-
licity from those hearings actually helped scientific management principles to achieve wide
acceptance in industry.
A number of other pioneers also contributed heavily to this movement, including the
following:
Frank Gilbreth was an industrial engineer who is often referred to as the father of motion
study. He developed principles of motion economy that could be applied to incredibly
small portions of a task.
Henry Gantt recognized the value of nonmonetary rewards to motivate workers, and
developed a widely used system for scheduling, called Gantt charts.
Harrington Emerson applied Taylor’s ideas to organization structure and encouraged
the use of experts to improve organizational efficiency. He testified in a congressional
hearing that railroads could save a million dollars a day by applying principles of scien-
tific management.
Henry Ford, the great industrialist, employed scientific management techniques in his
factories.
During the early part of the 20th century, automobiles were just coming into vogue in the
United States. Ford’s Model T was such a success that the company had trouble keeping up
with orders for the cars. In an effort to improve the efficiency of operations, Ford adopted the
scientific management principles espoused by Frederick Winslow Taylor. He also introduced
the moving assembly line, which had a tremendous impact on production methods in many
Mass production System in industries.
which low-skilled workers Among Ford’s many contributions was the introduction of mass production to the automo-
use specialized machinery tive industry, a system of production in which large volumes of standardized goods are produced
to ­produce high volumes of by low-skilled or semiskilled workers using highly specialized, and often costly, equipment.
­standardized goods. Ford was able to do this by taking advantage of a number of important concepts. Perhaps the

Row of “Tin Lizzies,” or Model

T’s, being manufactured on the
Ford assembly line.

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 Chapter One  Introduction to Operations Management 23

ASSEMBLY LINES craft production methods to assembly lines, producers were

able to successfully employ large numbers of unskilled work-
Assembly lines are one of several approaches to the production
ers. By using assembly lines, they achieved tremendous gains
of goods and delivering services. But the importance of assembly
in industrial productivity, produced affordable products, and in
lines to business and society is hard to overstate. Often associ-
the process greatly increased the standard of living of people in
ated with Henry Ford’s automobile production, they were the hall-
industrial nations. As you will learn later in the book, assembly
mark of mass production, achieving high volumes of standardized
lines also play an important role in a newer approach to opera-
products. As such, they played a pivotal role in the development
tions called lean production or, more generally, lean operations.
of what we now refer to as industrialized nations. By shifting from

key concept that launched mass production was interchangeable parts, sometimes attributed Interchangeable parts 
to Eli Whitney, an American inventor who applied the concept to assembling muskets in the Parts of a product made to such
late 1700s. The basis for interchangeable parts was to standardize parts so that any part in a precision that they do not have
batch of parts would fit any automobile coming down the assembly line. This meant that parts to be custom fitted.
did not have to be custom fitted, as they were in craft production. The standardized parts could
also be used for replacement parts. The result was a tremendous decrease in assembly time and
cost. Ford accomplished this by standardizing the gauges used to measure parts during produc-
tion and by using newly developed processes to produce uniform parts.
A second concept used by Ford was the division of labor, which Adam Smith wrote about Division of labor The break-
in The Wealth of Nations (1776). Division of labor means that an operation, such as assem- ing up of a production process
bling an automobile, is divided up into a series of many small tasks, and individual workers into small tasks, so that each
are assigned to one of those tasks. Unlike craft production, where each worker was respon- worker performs a small portion
sible for doing many tasks, and thus required skill, with division of labor the tasks were so of the overall job.
narrow that virtually no skill was required.
Together, these concepts enabled Ford to tremendously increase the production rate at his
factories using readily available inexpensive labor. Both Taylor and Ford were despised by
many workers, because they held workers in such low regard, expecting them to perform like
robots. This paved the way for the human relations movement.

The Human Relations Movement

Whereas the scientific management movement heavily emphasized the technical aspects of
work design, the human relations movement emphasized the importance of the human ele-
ment in job design. Lillian Gilbreth, a psychologist and the wife of Frank Gilbreth, worked
with her husband, focusing on the human factor in work. (The Gilbreths were the subject of
a classic 1950s film, Cheaper by the Dozen.) Many of her studies in the 1920s dealt with
worker fatigue. In the following decades, there was much emphasis on motivation. During the
1930s, Elton Mayo conducted studies at the Hawthorne division of Western Electric. His stud-
ies revealed that in addition to the physical and technical aspects of work, worker motivation
is critical for improving productivity. During the 1940s, Abraham Maslow developed moti-
vational theories, which Frederick Hertzberg refined in the 1950s. Douglas McGregor added
Theory X and Theory Y in the 1960s. These theories represented the two ends of the spectrum
of how employees view work. Theory X, on the negative end, assumed that workers do not like
to work, and have to be controlled—rewarded and punished—to get them to do good work.
This attitude was quite common in the automobile industry and in some other industries, until
the threat of global competition forced them to rethink that approach. Theory Y, on the other
end of the spectrum, assumed that workers enjoy the physical and mental aspects of work and
become committed to work. The Theory X approach resulted in an adversarial environment,
whereas the Theory Y approach resulted in empowered workers and a more cooperative spirit.
In the 1970s, William Ouchi added Theory Z, which combined the Japanese approach with
such features as lifetime employment, employee problem solving, and consensus building,
and the traditional Western approach that features short-term employment, specialists, and
individual decision making and responsibility.

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 24 Chapter One  Introduction to Operations Management

Decision Models and Management Science

The factory movement was accompanied by the development of several quantitative techniques.
F. W. Harris developed one of the first models in 1915: a mathematical model for inventory
order size. In the 1930s, three coworkers at Bell Telephone Labs, H. F. Dodge, H. G. Romig,
and W. Shewhart, developed statistical procedures for sampling and quality control. In 1935,
L.H.C. Tippett conducted studies that provided the groundwork for statistical-sampling theory.
At first, these quantitative models were not widely used in industry. However, the onset
of World War II changed that. The war generated tremendous pressures on manufacturing
output, and specialists from many disciplines combined efforts to achieve advancements in
the military and in manufacturing. After the war, 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.
During the 1960s and 1970s, management science techniques were highly regarded; in the
1980s, they lost some favor. However, the widespread use of personal computers and user-
friendly software in the workplace contributed to a resurgence in the popularity of these techniques.

The Influence of Japanese Manufacturers

A number of Japanese manufacturers developed or refined management practices that increased
the productivity of their operations and the quality of their products, due in part to the influence
of Americans W. Edwards Deming and Joseph Juran. This made them very competitive, spark-
ing interest in their approaches by companies outside Japan. Their approaches emphasized
quality and continual improvement, worker teams and empowerment, and achieving customer
satisfaction. The Japanese can be credited with spawning the “quality revolution” that occurred
in industrialized countries, and with generating widespread interest in lean production.
The influence of the Japanese on U.S. manufacturing and service companies has been
enormous and promises to continue for the foreseeable future. Because of that influence, this
book will provide considerable information about Japanese methods and successes.
Table 1.4 provides a chronological summary of some of the key developments in the evolu-
tion of operations management.

OPERATIONS TODAY
Advances in information technology and global competition have had a major influence on opera-
tions management. While the Internet offers great potential for business organizations, the poten-
tial as well as the risks must be clearly understood in order to determine if and how to exploit this
potential. In many cases, the Internet has altered the way companies compete in the marketplace.
E-business Use of the Internet Electronic business, or e-business, involves the use of the Internet to transact business.
to transact business. E-business is changing the way business organizations interact with their customers and their
E-commerce Consumer-to- suppliers. Most familiar to the general public is e-commerce, consumer–business transactions
business transactions. such as buying online or requesting information. However, business-to-business transactions
such as e-procurement represent an increasing share of e-business. E-business is receiving
increased attention from business owners and managers in developing strategies, planning,
and decision making.
Technology The application The word technology has several definitions, depending on the context. Generally, tech-
of scientific discoveries to the nology refers to the application of scientific discoveries to the development and improve-
development and improvement ment of goods and services. It can involve knowledge, materials, methods, and equipment.
of goods and services. The term high technology refers to the most advanced and developed machines and methods.
Operations management is primarily concerned with three kinds of technology: product and
service technology, process technology, and information technology (IT). All three can have a
major impact on costs, productivity, and competitiveness.
Product and service technology refers to the discovery and development of new products
and services. This is done mainly by researchers and engineers, who use the scientific
approach to develop new knowledge and translate that into commercial applications.

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 Chapter One  Introduction to Operations Management 25

TABLE 1.4
Approximate Historical summary of operations
Date Contribution/Concept Originator management

1776 Division of labor Adam Smith

1790 Interchangeable parts Eli Whitney
1911 Principles of scientific management Frederick W. Taylor
1911 Motion study, use of industrial psychology Frank and Lillian
Gilbreth
1912 Chart for scheduling activities Henry Gantt
1913 Moving assembly line Henry Ford
1915 Mathematical model for inventory F. W. Harris
ordering
1930 Hawthorne studies on worker motivation Elton Mayo
1935 Statistical procedures for sampling and H. F. Dodge,
quality control H. G. Romig,
W. Shewhart,
L.H.C. Tippett
1940 Operations research applications in warfare Operations research
groups
1947 Linear programming George Dantzig
1951 Commercial digital computers Sperry Univac, IBM
1950s Automation Numerous
1960s Extensive development of quantitative tools Numerous
1960s Industrial dynamics Jay Forrester
1975 Emphasis an manufacturing strategy W. Skinner
1980s Emphasis on flexibility, time-based competition, T. Ohno, S. Shingo,
lean production Toyota
1980s Emphasis on quality W. Edwards Deming,
J. Juran, K. Ishikawa
1990s Internet, supply chain management Numerous
2000s Applications service providers and outsourcing Numerous

Process technology refers to methods, procedures, and equipment used to produce goods
and provide services. They include not only processes within an organization but also
supply chain processes.
Information technology (IT) refers to the science and use of computers and other elec-
tronic equipment to store, process, and send information. Information technology is
heavily ingrained in today’s business operations. This includes electronic data processing,
the use of bar codes to identify and track goods, obtaining point-of-sale information, data
transmission, the Internet, e-commerce, e-mail, and more.
Management of technology is high on the list of major trends, and it promises to be
high well into the future. For example, computers have had a tremendous impact on busi-
nesses in many ways, including new product and service features, process management,
medical diagnosis, production planning and scheduling, data processing, and communica-
tion. Advances in materials, methods, and equipment also have had an impact on competi-
tion and productivity. Advances in information technology also have had a major impact
on businesses. Obviously there have been—and will continue to be—many benefits from
technological advances. However, technological advance also places a burden on manage-
ment. For example, management must keep abreast of changes and quickly assess both
their benefits and risks. Predicting advances can be tricky at best, and new technologies
often carry a high price tag and usually a high cost to operate or repair. And in the case of
computer operating systems, as new systems are introduced, support for older versions is

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 26 Chapter One  Introduction to Operations Management

discontinued, making periodic upgrades necessary. Conflicting technologies can exist that
make technological choices even more difficult. Technological innovations in both prod-
ucts and processes will continue to change the way businesses operate, and hence require
continuing attention.
The North American Free Trade Agreement (NAFTA) opened borders for trade between the
United States and Canada and Mexico. The General Agreement on Tariffs and Trade (GATT)
of 1994 reduced tariffs and subsidies in many countries, expanding world trade. The resulting
global competition and global markets have had an impact on the strategies and operations of
businesses large and small around the world. One effect is the importance business organiza-
tions are giving to management of their supply chains.
Globalization and the need for global supply chains have broadened the scope of supply
chain management. However, tightened border security in certain instances has slowed some
movement of goods and people. Moreover, in some cases, organizations are reassessing their
supply chain use of offshore outsourcing.
Competitive pressures and changing economic conditions have caused business organiza-
tions to put more emphasis on
Operations strategy.
Working with fewer resources.
Revenue management.
Process analysis and improvement, and quality improvement.
Agility
Lean production.
During the 1970s and 1980s, many companies neglected to include operations strategy in
their corporate strategy. Some of them paid dearly for that neglect. Now more and more com-
panies are recognizing the importance of operations strategy on the overall success of their
business as well as the necessity for relating it to their overall business strategy.
Working with fewer resources due to layoffs, corporate downsizing, and general cost cutting
is forcing managers to make trade-off decisions on resource allocation, and to place increased
emphasis on cost control and productivity improvement.
Revenue management is a method used by some companies to maximize the revenue they
receive from fixed operating capacity by influencing demand through price manipulation.
Also known as yield management, it has been successfully used in the travel and tourism
industries by airlines, cruise lines, hotels, amusement parks, and rental car companies, and in
other industries such as trucking and public utilities.
Process analysis and improvement includes cost and time reduction, productivity improve-
ment, process yield improvement, and quality improvement and increasing customer satisfac-
Six sigma A process for reduc- tion. This is sometimes referred to as a six sigma process.
ing costs, improving quality, and Given a boost by the “quality revolution” of the 1980s and 1990s, quality is now ingrained
increasing customer satisfaction. in business. Some businesses use the term total quality management (TQM) to describe their
quality efforts. A quality focus emphasizes customer satisfaction and often involves team-
work. Process improvement can result in improved quality, cost reduction, and time reduction.
Time relates to costs and to competitive advantage, and businesses seek ways to reduce the
time to bring new products and services to the marketplace to gain a competitive edge. If two
companies can provide the same product at the same price and quality, but one can deliver
it four weeks earlier than the other, the quicker company will invariably get the sale. Time
reductions are being achieved in many companies now. Kodak was able to cut in half the time
needed to bring a new camera to market; Union Carbide was able to cut $400 million of fixed
expenses; and Bell Atlantic was able to cut the time needed to hook up long-distance carriers
from 15 days to less than 1, at a savings of $82 million.
Agility The ability of an Agility refers to the ability of an organization to respond quickly to demands or oppor-
o­ rganization to respond quickly tunities. It is a strategy that involves maintaining a flexible system that can quickly respond
to demands or opportunities. to changes in either the volume of demand or changes in product/service offerings. This is

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 Chapter One  Introduction to Operations Management 27

particularly important as organizations scramble to remain competitive and cope with increas-
ingly shorter product life cycles and strive to achieve shorter development times for new or
improved products and services.
Lean production, a new approach to production, emerged in the 1990s. It incorporates a
number of the recent trends listed here, with an emphasis on quality, flexibility, time reduc-
tion, and teamwork. This has led to a flattening of the organizational structure, with fewer
levels of management.
Lean systems are so named because they use much less of certain resources than typical Lean system System that uses
mass production systems use—space, inventory, and workers—to produce a comparable minimal amounts of resources to
amount of output. Lean systems use a highly skilled workforce and flexible equipment. In produce a high volume of high-
effect, they incorporate advantages of both mass production (high volume, low unit cost) quality goods with some variety.
and craft production (variety and flexibility). And quality is higher than in mass produc-
tion. This approach has now spread to services, including health care, offices, and shipping
and delivery.
The skilled workers in lean production systems are more involved in maintaining and
improving the system than their mass production counterparts. They are taught to stop an
operation if they discover a defect, and to work with other employees to find and correct the
cause of the defect so that it won’t recur. This results in an increasing level of quality over time
and eliminates the need to inspect and rework at the end of the line.
Because lean production systems operate with lower amounts of inventory, additional
emphasis is placed on anticipating when problems might occur before they arise and avoiding
those problems through planning. Even so, problems can still occur at times, and quick reso-
lution is important. Workers participate in both the planning and correction stages.
Compared to workers in traditional systems, much more is expected of workers in lean
production systems. They must be able to function in teams, playing active roles in operating
and improving the system. Individual creativity is much less important than team success.
Responsibilities also are much greater, which can lead to pressure and anxiety not present in
traditional systems. Moreover, a flatter organizational structure means career paths are not as
steep in lean production organizations. Workers tend to become generalists rather than spe-
cialists, another contrast to more traditional organizations.

KEY ISSUES FOR TODAY’S BUSINESS

OPERATIONS
There are a number of issues that are high priorities of many business organizations.
Although not every business is faced with these issues, many are. Chief among the issues
are the following:
Economic conditions. The lingering recession and slow recovery in various sectors of
the economy has made managers cautious about investment and rehiring workers that had
been laid off during the recession.
Innovating. Finding new or improved products or services are only two of the many
possibilities that can provide value to an organization. Innovations can be made in pro-
cesses, the use of the Internet, or the supply chain that reduce costs, increase productivity,
expand markets, or improve customer service.
supply chain
Quality problems. The numerous operations failures mentioned at the beginning of the
chapter underscore the need to improve the way operations are managed. That relates to
product design and testing, oversight of suppliers, risk assessment, and timely response
to potential problems.
Risk management. The need for managing risk is underscored by recent events that
include the crisis in housing, product recalls, oil spills, and natural and man-made disas-
ters, and economic ups and downs. Managing risks starts with identifying risks, assessing

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 28 Chapter One  Introduction to Operations Management

vulnerability and potential damage (liability costs, reputation, demand), and taking steps
to reduce or share risks.
Competing in a global economy. Low labor costs in third-world countries have increased
pressure to reduce labor costs. Companies must carefully weigh their options, which
include outsourcing some or all of their operations to low-wage areas, reducing costs
internally, changing designs, and working to improve productivity.
Three other key areas require more in-depth discussion: environmental concerns, ethical
conduct, and managing the supply chain.

Environmental Concerns
Concern about global warming and pollution has had an increasing effect on how businesses
operate.
Stricter environmental regulations, particularly in developed nations, are being imposed.
Furthermore, business organizations are coming under increasing pressure to reduce their
carbon footprint (the amount of carbon dioxide generated by their operations and their sup-
Sustainability Using resources ply chains) and to generally operate sustainable processes. Sustainability refers to service
in ways that do not harm ecolog- and production processes that use resources in ways that do not harm ecological systems that
ical systems that support human support both current and future human existence. Sustainability measures often go beyond
existence. traditional environmental and economic measures to include measures that incorporate social
criteria in decision making.
All areas of business will be affected by this. Areas that will be most affected include
product and service design, consumer education programs, disaster preparation and response,
supply chain waste management, and outsourcing decisions. Note that outsourcing of goods
production increases not only transportation costs, but also fuel consumption and carbon
released into the atmosphere. Consequently, sustainability thinking may have implications for
outsourcing decisions.
Because they all fall within the realm of operations, operations management is central
to dealing with these issues. Sometimes referred to as “green initiatives,” the possibilities
include reducing packaging, materials, water and energy use, and the environmental impact
of the supply chain, including buying locally. Other possibilities include reconditioning used
equipment (e.g., printers and copiers) for resale, and recycling.

Puma’s “Clever Little Bag”

changes the idea of the shoebox
by wrapping footwear in a
cardboard structure with 65
percent less cardboard. It uses
a bag made of recycled plastic
as the outer layer that holds
the inner cardboard structure
together. Puma expects to
cut carbon dioxide emissions
by 10,000 tons per year and
water, energy, and diesel use
by 60 percent by using fewer
materials—8,500 fewer tons of
paper to be specific—and the
new packaging’s lighter weight.

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 Online Service Providers Embrace Sustainability READING
Whilst we all appreciate the smart online services which are now in their data center. All billing and customer communication is by
available to us, less welcome is the fact that many online service email rather than post saving significant paper quantities each year.
providers use toxic chemicals which deplete the ozone layer con- [Link] also works to keep their offices green through the use
tributing to global warming and severe weather patterns. of natural light, recycling programs and reusable kitchen supplies.
However, [Link], a German company, uses highly efficient
power supplies with less than 20% heat loss, omits unnecessary Source: Based on “1&1 Going Green,” [Link]
components within their servers and uses energy saving components [Link]

The following reading suggests that even our choice of diet can affect the environment.

Diet and the Environment: Vegetarian vs. Nonvegetarian READING

It is interesting to examine the environmental impact of dietary “study conducted by researchers from the Departments of Environ-
choices. There’s ample evidence that agricultural practices mental Health and Nutrition of Loma Linda University in California.
pollute the soil, air, and water. Factors range from the distance They compared the environmental effects of a vegetarian vs.
food travels to get to the consumer, to the amount of water nonvegetarian diet in California in terms of agricultural production
and fertilizer used. Of particular concern is the environmental inputs, including pesticides and fertilizers, water and energy.
impact of a diet high in animal protein. The Food and Agricultural “The study results showed that for the combined production of
Organization (FAO) of the United Nations recently reported that 11 food items the nonvegetarian diet required 2.9 times more water,
livestock production is one of the major causes of global warming 2.5 times more primary energy, 13 times more fertilizer, and 1.4 times
and air and water pollution. Using a methodology that considers the more pesticides than did the vegetarian diet. The biggest differences
entire supply chain, the FAO estimated that livestock accounts for came from including beef in the diet.”
18 percent of greenhouse gas emissions. Source: Based on “Finding a Scientific Connection Between Food Choices
A Vegetarian versus Nonvegetarian Diet and the Environment. and the Environment,” Environmental Nutrition Newsletter, October 2009,
The eco-friendliness of a meat eater’s diet was the subject of a p. 3.

Ethical Conduct
The need for ethical conduct in business is becoming increasingly obvious, given numer-
ous examples of questionable actions in recent history. In making decisions, managers must
consider how their decisions will affect shareholders, management, employees, customers,
the community at large, and the environment. Finding solutions that will be in the best inter-
ests of all of these stakeholders is not always easy, but it is a goal that all managers should
strive to achieve. Furthermore, even managers with the best intentions will sometimes make
mistakes. If mistakes do occur, managers should act responsibly to correct those mistakes as
quickly as possible, and to address any negative consequences.
Operations managers, like all
managers, have the responsibility
to make ethical decisions. Ethical The Fair Trade label
issues arise in many aspects of oper- guarantees to consumers that
ations management, including strict economical, social, and
environmental criteria were
• Financial statements: accurately
met in the production and trade
representing the organization’s
of an agricultural product.
financial condition.
• Worker safety: providing ade-
quate training, maintaining
equipment in good working
condition, maintaining a safe
working environment.

29

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 30 Chapter One  Introduction to Operations Management

• Product safety: providing products that minimize the risk of injury to users or damage to
property or the environment.
• Quality: honoring warranties, avoiding hidden defects.
• The environment: not doing things that will harm the environment.
• The community: being a good neighbor.
• Hiring and firing workers: avoiding false pretenses (e.g., promising a long-term job when that
is not what is intended).
• Closing facilities: taking into account the impact on a community, and honoring commitments
that have been made.
• Workers’ rights: respecting workers’ rights, dealing with workers’ problems quickly and
fairly.
Many organizations have developed codes of ethics to guide employees’ or members’ con-
Ethics A standard of behavior duct. Ethics is a standard of behavior that guides how one should act in various situations.
that guides how one should act The Markula Center for Applied Ethics at Santa Clara University identifies five principles for
in various situations. thinking ethically:
• The Utilitarian Principle is that the good done by an action or inaction should outweigh
any harm it causes or might cause. An example is not allowing a person who has had too
much to drink to drive.
• The Rights Principle is that actions should respect and protect the moral rights of others.
An example is not taking advantage of a vulnerable person.
• The Fairness Principle is that equals should be held to, or evaluated by, the same stan-
dards. An example is equal pay for equal work.
• The Common Good Principle is that actions should contribute to the common good of
the community. An example is an ordinance on noise abatement.
• The Virtue Principle is that actions should be consistent with certain ideal virtues.
Examples include honesty, compassion, generosity, tolerance, fidelity, integrity, and
self-control.
Ethical framework  The center expands these principles to create a framework for ethical conduct. An ethical
A sequence of steps intended to framework is a sequence of steps intended to guide thinking and subsequent decisions or
guide thinking and subsequent actions. Here is the one developed by the Markula Center for Applied Ethics:
decision or action.
1. Recognize an ethical issue by asking if an action could be damaging to a group or an
individual. Is there more to it than just what is legal?
2. Make sure the pertinent facts are known, such as who will be impacted, and what options
are available.
3. Evaluate the options by referring to each of the preceding five ethical principles.
4. Identify the “best” option and then further examine it by asking how someone you respect
would view it.
5. In retrospect, consider the effect your decision had and what you can learn from it.
More detail is available at the Center’s Web site: [Link]
decision/[Link].

The Need to Manage the Supply Chain

Supply chain management is being given increasing attention as business organizations face
mounting pressure to improve management of their supply chains. In the past, most organiza-
tions did little to manage their supply chains. Instead, they tended to concentrate on their own
operations and on their immediate suppliers. Moreover, the planning, marketing, production
and inventory management functions in organizations in supply chains have often operated
independently of each other. As a result, supply chains experienced a range of problems that
were seemingly beyond the control of individual organizations. The problems included large

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 Chapter One  Introduction to Operations Management 31

Chinese-made Mr. Cool tainted

toothpaste is displayed at
the Ministry of Health in San
Jose, Costa Rica. China said
it was investigating reports
that toothpaste containing a
potentially deadly chemical
had been exported to Central
America, one in a series of
scandals involving tainted
Chinese products. Costa Rica
has ordered the removal of
Chinese toothpaste and other
brands from store shelves.

oscillations of inventories, inventory stockouts, late deliveries, and quality problems. These
and other issues now make it clear that management of supply chains is essential to business
success. The other issues include the following:
1. The need to improve operations. During the last decade, many organizations adopted
practices such as lean operation and total quality management (TQM). As a result, they were
able to achieve improved quality while wringing much of the excess costs out of their systems.
Although there is still room for improvement, for many organizations, the major gains have
been realized. Opportunity now lies largely with procurement, distribution, and ­logistics—the
supply chain.
2. Increasing levels of outsourcing. Organizations are increasing their levels of outsourcing, Outsourcing Buying goods or
buying goods or services instead of producing or providing them themselves. As outsourc- services instead of producing or
ing increases, organizations are spending increasing amounts on supply-related activities providing them in-house.
(wrapping, packaging, moving, loading and unloading, and sorting). A significant amount
of the cost and time spent on these and other related activities may be unnecessary. Issues
with imported products, including tainted food products, toothpaste, and pet foods, as well
as unsafe tires and toys, have led to questions of liability and the need for companies to take
responsibility for monitoring the safety of outsourced goods.
3. Increasing transportation costs. Transportation costs are increasing, and they need to
be more carefully managed.
4. Competitive pressures. Competitive pressures have led to an increasing number of new
products, shorter product development cycles, and increased demand for customization. And
in some industries, most notably consumer electronics, product life cycles are relatively short.
Added to this are adoption of quick-response strategies and efforts to reduce lead times.
5. Increasing globalization. Increasing globalization has expanded the physical length of
supply chains. A global supply chain increases the challenges of managing a supply chain.
Having far-flung customers and/or suppliers means longer lead times and greater opportuni-
ties for disruption of deliveries. Often currency differences and monetary fluctuations are
factors, as well as language and cultural differences. Also, tightened border security in some
instances has slowed shipments of goods.
6. Increasing importance of e-business. The increasing importance of e-business has
added new dimensions to business buying and selling and has presented new challenges.

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 32 Chapter One  Introduction to Operations Management

7. The complexity of supply chains. Supply chains are complex; they are dynamic, and
they have many inherent uncertainties that can adversely affect them, such as inaccurate
forecasts, late deliveries, substandard quality, equipment breakdowns, and canceled or
changed orders.
8. The need to manage inventories. Inventories play a major role in the success or
failure of a supply chain, so it is important to coordinate inventory levels throughout a supply
chain. Shortages can severely disrupt the timely flow of work and have far-reaching impacts,
while excess inventories add unnecessary costs. It would not be unusual to find inventory
shortages in some parts of a supply chain and excess inventories in other parts of the same
supply chain.

Elements of Supply Chain Management

Supply chain management involves coordinating activities across the supply chain. Central to
this is taking customer demand and translating it into corresponding activities at each level of
the supply chain.
The key elements of supply chain management are listed in Table 1.5. The first element,
supply chain
customers, is the driving element. Typically, marketing is responsible for determining what
customers want as well as forecasting the quantities and timing of customer demand. Product
and service design must match customer wants with operations capabilities.
Processing occurs in each component of the supply chain: it is the core of each organiza-
tion. The major portion of processing occurs in the organization that produces the product or
service for the final customer (the organization that assembles the computer, services the car,
etc.). A major aspect of this for both the internal and external portions of a supply chain is
scheduling.
Inventory is a staple in most supply chains. Balance is the main objective; too little causes
delays and disrupts schedules, but too much adds unnecessary costs and limits flexibility.
Purchasing is the link between an organization and its suppliers. It is responsible for obtain-
ing goods and or services that will be used to produce products or provide services for the
organization’s customers. Purchasing selects suppliers, negotiates contracts, establishes alli-
ances, and acts as liaison between suppliers and various internal departments.
The supply portion of a value chain is made up of one or more suppliers, all links in the
chain, and each one capable of having an impact on the effectiveness—or the ineffectiveness—
of the supply chain. Moreover, it is essential that the planning and execution be carefully coor-
dinated between suppliers and all members of the demand portion of their chains.

TABLE 1.5
Elements of supply chain Element Typical Issues Chapter(s)
management
Customers Determining what products and/or services customers want 3, 4
Forecasting Predicting the quantity and timing of customer demand 3
Design Incorporating customers, wants, manufacturability, and time 4
to market
Capacity planning Matching supply and demand 5, 11
Processing Controlling quality, scheduling work 10, 16
Inventory Meeting demand requirements while managing the costs of 12, 13, 14
holding inventory
Purchasing Evaluating potential suppliers, supporting the needs of 15
operations on purchased goods and services
Suppliers Monitoring supplier quality, on-time delivery, and flexibility; 15
maintaining supplier relations
Location Determining the location of facilities 8
Logistics Deciding how to best move information and materials 15

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 Chapter One Introduction to Operations Management 33

Location can be a factor in a number of ways. Where suppliers are located can be important,
as can location of processing facilities. Nearness to market, nearness to sources of supply, or
nearness to both may be critical. Also, delivery time and cost are usually affected by location.
Two types of decisions are relevant to supply chain management—strategic and opera-
tional. The strategic decisions are the design and policy decisions. The operational decisions
relate to day-to-day activities: managing the flow of material and product and other aspects of
the supply chain in accordance with strategic decisions.
The major decision areas in supply chain management are location, production, distribu-
tion, and inventory. The location decision relates to the choice of locations for both produc-
tion and distribution facilities. Production and transportation costs and delivery lead times are
important. Production and distribution decisions focus on what customers want, when they
want it, and how much is needed. Outsourcing can be a consideration. Distribution decisions
are strongly influenced by transportation cost and delivery times, because transportation costs
often represent a significant portion of total cost. Moreover, shipping alternatives are closely
tied to production and inventory decisions. For example, using air transport means higher
costs but faster deliveries and less inventory in transit than sea, rail, or trucking options. Dis-
tribution decisions must also take into account capacity and quality issues. Operational deci-
sions focus on scheduling, maintaining equipment, and meeting customer demand. Quality
control and workload balancing are also important considerations. Inventory decisions relate
to determining inventory needs and coordinating production and stocking decisions through-
out the supply chain. Logistics management plays the key role in inventory decisions.

Operations Tours
Throughout the book you will discover operations tours that describe operations in all sorts of
companies. The tour you are about to read is Kabab-ji Grill, a fast growing restaurant chain
serving Lebanese cuisine. Having started in Lebanon in 1993, the concept was expanded
through the Middle East, starting with Kuwait, and now has expanded beyond that region, to
the USA.

Kabab-ji Grill OPERATIONS TOUR

just north of the capital, Beirut. The restaurant became an instant
success, with its concept of fast, home-style, healthy grills.
Kabab-ji Grill was the idea of Touific Khoueiri. His idea was to
introduce the concept of the quick casual restaurant to Lebanese
cuisine. The quick casual restaurant is more refined than a fast
food outlet, but more informal than a traditional restaurant. Service
is rapid, but items are prepared and cooked to order. Kabab-ji’s
emphasis on healthy, fresh, and rapid cooking powered the rest-
aurant chain to spread across the region.

Concept
Khoueiri’s simple concept has led to a successful formula. Kabab-ji
aims to combine traditional culinary excellence with a modern
casual setting, emphasizing fresh ingredients and timely service.
The company’s mission statement is to “Serve healthy food for
today’s and future generations, simply ‘Because We Care’ ”. The
vision is to “Redefine and fulfil consumer appetite for new taste
Many “Mediterranean” restaurants worldwide in fact serve Leba-
sensations with carefully developed recipes that appeal to all
nese cuisine, or cuisines influenced by it. Now operating in seven
tastes and introduce the concept of eating pleasure once again
countries, Kabab-ji Grill was a concept developed in Lebanon in
the early 1990s. The first store opened in Jounieh, a commuter city (continued)

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 34 Chapter One  Introduction to Operations Management

to markets that are bored with the mundane”. Accordingly, the Founder and Chairman of the Board Khoueiri said: “The Lebanese
company’s operations emphasizes freshness of ingredients, on- are able to produce interesting and viable concepts simply because,
demand preparation, and healthy cooking, combined with a casual as people, they are exposed to global trends in food, and as providers
ambience and highly-trained, customer-focused staff. they are constantly developing their productions to match the
Lebanese cuisine is famed for its variety of ingredients and advanced food culture of the public.”
variety of dishes. Kabab-ji adopts the traditional Lebanese– The company solicits and actively supports franchisees. It has
Mediterranean menu and presents it from an open grill in a con- defined standard manuals, menus, and training modules, and has
temporary design. outsourced proprietary mixes for its seasonings, marinades, mixes,
The menu comprises varieties of Lebanese flavours. The re­ and sauces. Its Franchise Program includes support, operational
staurant serves an array of kababs (marinated skewered meat), training, and design, launch, and operational manuals. It awards
dips (notably the famous hummus), sandwiches, and salads franchises by territorial region—typically by country or state.
(including tabbouleh). Appealing to modern tastes, the kababs are
barbecued without additives, charcoal-grilled to retain no fat, and Location
smoked at distance from a flame grill. Small round bread is served
fresh from the oven. Kabab-ji prefers to situate its branches at strategic locations,
Kabab-ji offers a rapid waiter service for dining in. Restaurants primarily in high traffic locales, on main roads with easy access to
typically open from late morning to late evening, serving lunch and major residential areas. In this way, demand comes from passing
dinner, and also provide take-out, delivery, and a catering menu; individuals and families, as well as local offices and businesses.
some branches have bar areas. The concept of a Kabab-ji Express in mall food courts was pio-
neered in Kuwait, Saudi Arabia, and U.A.E.
Marketing and Growth Since its founding in Lebanon, the company has opened five
Kabab-ji’s stated aim is “a long-term brand building strategy further branches in the country. In the region, it has expanded
focused on creating a loyal and sustainable customer base”. The mainly by franchising, to Kuwait (11 branches; the first country
first restaurant opened in 1993 and catering services were to open the Kabab-ji franchise), Saudi Arabia (6 branches in
begun in 1995. More restaurants in Lebanon followed over the next the capital), Jordan (1 branch), U.A.E. (2 branches in Dubai, 1 in
10 years, all situated around the Greater Beirut area. Largely Sharjah), and Qatar (3 branches). In 2009 the first franchise branch
through licensing to franchisees, the concept was expanded outside the Middle East was opened, in Washington DC, USA.
through the Middle East, starting with Kuwait, and has now The company sees other restaurants in a given area as an
expanded beyond the region, to the USA. advantage, due to the draw of customers. It argues that “regard-
The company targets perceived customer demands. To develop less of the extent of advertising and the number of restaurants
its customer base, it seeks to create through its operations and in any particular area, consumers will ultimately settle on taste
marketing an image of creditability, integrity, and perceived value. preferences and products with the highest perceived value”.
Akin to fast food chains, the Kabab-ji group intends customers to One reviewer of the Washington DC branch wrote: “It’s a little
experience the same level of product and service at each branch. more stylish than most kebab shops and an extremely popular
It has standardized processes, an actively managed supply chain place to sit and sample fresh and delicious kebabs and grills.”
and quality assurance, and an emphasis on staff selection and training.
Processes
A typical restaurant processes more than 100 orders during the
lunchtime peak (dine-in, take-away, and delivery, but excluding
catering, which is operated separately).
From a process viewpoint, a restaurant is divided into the
front of house and back of house processes. The front of house
concerns all activities directly serving the customer, such as
order taking. The back of house executes orders and places
them on plates or packages them for delivery. Kabab-ji’s back of
house comprises six workstations: cold station, bakery, butchery,
barbecue (i.e., grill), hot kitchen, and drink station. Each of these
stations is responsible for managing its inventory and for having
the necessary personnel.
One front of house staff greets and, if necessary, shows
customers to seats. Waiters take orders from customers and input
A typical dish served at Kabab-ji Grill. them into a computer system through terminals at the “nucleus”
of the restaurant. The system splits the order into components

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 Chapter One  Introduction to Operations Management 35

and passes them to screens in the relevant stations. After an between tables for two or four people, which can be assembled to
order is completed, it is taken by a runner from the nucleus to accommodate larger groups. There is a small waiting area, possibly
the table. a bar area, a single cashier, and a delivery preparation area.
The back of house stations are grouped together, except for
Inventory Management the drink station which may be placed closer to the customer area.
At a company level, Kabab-ji sources ingredients for all branches The barbecue grill and the “nucleus” order entry and assembly
in an area. Fresh ingredients are delivered to each branch every area form the interface of the front and back of house areas.
morning. Within each restaurant, each station stores its own
inventory. A safety stock of 10 –20% (no more, since ingredients Employees
are perishable) is stored at a nearby warehouse. The Kabab-ji operations manual suggests that a dine-in branch
Part of Kabab-ji’s competitive advantage is its proprietary mixes requires about 55 employees, depending on its size; an Express
for its seasonings, marinades, mixes, and sauces, which provide unit requires about a third of the number. During a given shift, a
the consistent taste. These are produced in a centralized way restaurant’s front of house will have 4 waiters who take orders,
by means of an outsourced contract to suppliers. The company 3 runners who take food to the table, and 1 cashier; the back of
deliberately invokes its Lebanese heritage in ingredients as well house will have 3–4 chefs who process the orders.
as decor and menu; branches worldwide serve Lebanese olive oil
and bottled water. Quality
In line with its operations strategy, Kabab-ji aligns decor, design,
Layout layout, food, menu, policies, and service to target consistency.
All Kabab-ji branches adopt a distinctive decoration. The style is Employees undergo intensive training to the “Kabab-ji Way”.
clean lines of dark wood and stainless steel. Walls have exposed Its quality of ingredients, market niche, and customer service
red brick with large, rough cut stones (the Lebanese style) and allow Kabab-ji to adopt a price premium relative to comparable
wood panels. In accord with Kabab-ji’s emphasis on the fresh- restaurants. The company’s marketing motto is “Kabab-ji goes the
ness of its recipes, the centrepiece grill sits behind a giant display extra mile to bring you fresh quality food that tastes great every
of prepared but uncooked kebabs in a glass-fronted refrigerator. time”. Note how the company’s marketing aligns with its strategy
Chefs can be seen preparing the grills to order; the barbecue station of retaining its customer base and providing consistency.
is located to face the dining area. Kabab-ji implements a HACCP management system (Hazard
Branches usually adopt a product-focused layout in order to Analysis and Critical Control Points). Food safety is sought using
maximize capacity during busy periods. In Lebanon, this corresponds a combination of testing and prevention in the supply chain and
to noon to 4pm (the Lebanese typically eat a late Mediterranean during the pre-production and final preparation of the food.
lunch, around 2pm). Seating in a standard branch is allocated (continued)

A chef prepares an evening meal from fresh ingredients. The inside of a typical Kabab-ji Grill restarant.

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 36 Chapter One  Introduction to Operations Management

(concluded) d. Location.
Questions e. Inventory management.
f. Layout.
1. How do customers judge the quality of a restaurant?
g. Scheduling.
2. Indicate how and why each of these factors is important to the
successful operation of a restaurant: 3. What are some of the ways Kabab-ji links strategy and opera-
a. Customer satisfaction. tions to gain an edge over its competition?
b. Forecasting.
c. Capacity planning. Source: [Link]

SUMMARY The operations function in business organizations is responsible for producing goods and providing
services. It is a core function of every business. Supply chains are the sequential system of suppliers
and customers that begins with basic sources of inputs and ends with final customers of the system.
Operations and supply chains are interdependent—one couldn’t exist without the other, and no business
organization could exist without both.
Operations management involves system design and operating decisions related to product and ser-
vice design, capacity planning, process selection, location selection, work management, inventory and
supply management, production planning, quality assurance, scheduling, and project management.
The historical evolution of operations management provides interesting background information on
the continuing evolution of this core business function.
The Operations Tours and Readings included in this and subsequent chapters provide insights into
actual business operations.

Key Points 1. The operations function is that part of every business organization that produces products and/or
delivers services.
2. Operations consists of processes that convert inputs into outputs. Failure to manage those processes
effectively will have a negative impact on the organization.
3. A key goal of business organizations is to achieve an economic matching of supply and demand. The
operations function is responsible for providing the supply or service capacity for expected demand.
4. All processes exhibit variation that must be managed.
5. Although there are some basic differences between services and products that must be taken into
account from a managerial standpoint, there are also many similarities between the two.
6. Environmental issues will increasingly impact operations decision making.
7. Ethical behavior is an integral part of good management practice.
8. All business organizations have, and are part of, a supply chain that must be managed.

KEY TERMS agility, 26 interchangeable parts, 23 process, 9

craft production, 21 lead time, 16 services, 4
division of labor, 23 lean system, 27 six sigma, 26
e-business, 24 mass production, 22 supply chain, 4
e-commerce, 24 model, 18 sustainability, 28
ethical framework 30 operations management, 4 system, 20
ethics, 30 outsourcing, 31 technology, 24
goods, 4 Pareto phenomenon, 20 value-added, 6

DISCUSSION 1. Briefly describe the term operations management.

AND REVIEW 2. Identify the three major functional areas of business organizations and briefly describe how they
interrelate.
QUESTIONS
3. Describe the operations function and the nature of the operations manager’s job.

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 Chapter One  Introduction to Operations Management 37

4. List five important differences between goods production and service operations; then list five
important similarities.
5. Briefly discuss each of these terms related to the historical evolution of operations management:
a.  Industrial Revolution
b.  Scientific management
c.  Interchangeable parts
d.  Division of labor
6. Why are services important? Why is manufacturing important? What are nonmanufactured goods?
7. What are models and why are they important?
8. Why is the degree of customization an important consideration in process planning?
9. List the trade-offs you would consider for each of these decisions:
a. Driving your own car versus public transportation.
b. Buying a computer now versus waiting for an improved model.
c. Buying a new car versus buying a used car.
d. Speaking up in class versus waiting to get called on by the instructor.
e. A small business owner having a Web site versus newspaper advertising.
10. Describe each of these systems: craft production, mass production, and lean production.
11. Why might some workers prefer not to work in a lean production environment?
12. Discuss the importance of each of the following:
a. Matching supply and demand
b. Managing a supply chain
13. List and briefly explain the four basic sources of variation, and explain why it is important for man-
agers to be able to effectively deal with variation.
14. Why do people do things that are unethical?
15. Explain the term value-added.
16. Discuss the various impacts of outsourcing.
17. Discuss the term sustainability, and its relevance for business organizations.

This item appears at the end of each chapter. It is intended to focus your attention on three key issues for TAKING STOCK
business organizations in general, and operations management in particular. Those issues are trade-off
decisions, collaboration among various functional areas of the organization, and the impact of technol-
ogy. You will see three or more questions relating to these issues. Here is the first set of questions:
1. What are trade-offs? Why is careful consideration of trade-offs important in decision making?
2. Why is it important for the various functional areas of a business organization to collaborate?
3. In what general ways does technology have an impact on operations management decision making?

This item also will appear in every chapter. It allows you to critically apply information you learned in CRITICAL
the chapter to a practical situation. Here is the first set of exercises:
THINKING
1. Many organizations offer a combination of goods and services to their customers. As you learned in
this chapter, there are some key differences between production of goods and delivery of services.
EXERCISES
What are the implications of these differences relative to managing operations?
2. Why is it important to match supply and demand? If a manager believes that supply and demand
will not be equal, what actions could the manager take to increase the probability of achieving a
match?
3. One way that organizations compete is through technological innovation. However, there can be
downsides for both the organization and the consumer. Explain.
4. a.  What are some possible reasons a business person would make an unethical decision?
b.  What are the risks of doing so?

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 Eleni CASE
Eleni had worked for the same FT Global 500 company for almost Questions
16 years. Although the company had gone through some tough 1. In what ways are Eleni’s customers most likely to judge the
times, things were starting to turn around. Customer orders were quality of her garden care services?
up, and quality and productivity had improved dramatically from 2. Eleni is the operations manager of her business. Among her
what they had been only a few years earlier following a company- responsibilities are forecasting, inventory management, sched-
wide quality improvement program. So it came as a real shock to uling, quality assurance, and maintenance.
Eleni and about 350 of her co-workers when they were suddenly a. What kinds of things would likely require forecasts?
made redundant following the new CEO’s decision to downsize the b. What inventory items does Eleni probably have? Name one
company. inventory decision she has to make periodically.
After recovering from the initial shock, Eleni tried to find employ- c. What scheduling must she do? What things might occur to
ment elsewhere. Despite her efforts, after eight months of search- disrupt schedules and cause Eleni to reschedule?
ing she was no closer to finding a job than the day she started. d. How important is quality assurance to Eleni’s business?
Her funds were being depleted and she was getting more discour- Explain.
aged. There was one bright spot, though: she was able to bring e. What kinds of maintenance must be performed?
in a little money by gardening for her neighbors. She got involved 3. What are some of the trade-offs that Eleni probably considered
quite by chance when she heard one neighbor remark that now relative to:
that his children had left the family home, nobody was around to a. Working for a company instead of for herself?
cut the grass and water some plants. Almost jokingly, Eleni asked b. Expanding the business?
him how much he’d be willing to pay. Soon Eleni was doing the c. Launching a Web site?
basic gardening of five neighbors. Other neighbors wanted her to 4. The town is considering an ordinance that would prohibit
work on their gardens, but she didn’t feel that she could spare any putting grass clippings at the curb for pickup because local
more time from her job search. landfills cannot handle the volume. What options might Eleni
However, as the rejection letters began to pile up, Eleni knew consider if the ordinance is passed? Name two advantages
she had to make a decision. On a sunny Wednesday morning, she and two drawbacks of each option.
decided, like many others in a similar situation, to go into busi- 5. Eleni decided to offer the students who worked for her a bonus
ness for herself—taking care of neighborhood gardens. She was of €25 for ideas on how to improve the business, and they pro-
relieved to give up the stress of job hunting, and she was excited vided several good ideas. One idea that she initially rejected
about the prospect of being her own boss. But she was also fearful now appears to hold great promise. The student who proposed
of being completely on her own. Nevertheless, Eleni was deter- the idea has left, and is currently working for a competitor.
mined to make a go of it. Should Eleni send that student a check for the idea? What are
At first, business was a little slow, but once people realized the possible trade-offs?
Eleni was available, many asked her to take care of their gardens. 6. All managers have to cope with variation.
Some people were simply glad to turn the work over to her; oth- a. What are the major sources of variation that Eleni has to
ers switched from professional garden maintenance services. By contend with?
the end of her first year in business, Eleni knew she could earn a b. How might these sources of variation impact Eleni’s ability
living this way. Business became so good that Eleni hired two part- to match supply and demand?
time workers to assist her and, even then, she believed she could c. What are some ways she can cope with variation?
expand further if she wanted to. 7. Eleni is thinking of making some of her operations sustainable.
What are some ideas she might consider?

SELECTED Bowie, Norman E., ed. The Blackwell Guide to Business Shinn, Sharon. “What About the Widgets?” BizEd,
Ethics. Malden, MA: Blackwell, 2002. November–December 2004, pp. 30–35.
BIBLIOGRAPHY Colvin, Geoffrey. “Managing in the Info Era.” Fortune, Womack, James P., Daniel Jones, and Daniel Roos. The
AND FURTHER March 6, 2000, pp. F6–F9. Machine That Changed the World. New York: Harper
READINGS Crainer, Stuart. The Management Century. New York: Perennial, 1991, 2007.
Jossey-Bass, 2000. Wisner, Joel D., and Linda L. Stanley. Process Man-
Fitzsimmons, James, and Mona Fitzsimmons. Service agement: Creating Value Along the Supply Chain.
Management, 4th ed. New York: McGraw-Hill/Irwin, Mason, OH: Thomson South-Western, 2008.
2004.
Hanke, John E. and Dean W. Wichern. Business Fore-
casting, 9th ed. Upper Saddle River, NJ: Pearson
Prentice-Hall, 2009.

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