INTRODUCTION

Operations management is an area of management concerned with designing and

controlling the process of production and redesigning business operations in the
production of goods or services. It involves the responsibility of ensuring that
business operations are efficient in terms of using as few resources as needed and
effective in terms of meeting customer requirements. Operations management is
primarily concerned with planning, organizing and supervising in the contexts of
production, manufacturing or the provision of services.
It is concerned with managing an entire production or service system which is the
process that converts inputs (in the forms of raw materials, labor, consumers,
and energy) into outputs (in the form of goods and/or services for consumers).
Operations produce products, manage quality and create services. Operation
management covers sectors like banking systems, hospitals, companies, working with
suppliers, customers, and using technology. Operations is one of the major functions in
an organization along with supply chains, marketing, finance and human resources.
The operations function requires management of both the strategic and dayto-day
production of goods and services.

Ford Motor car assembly line: the classical example of a manufacturing production
system.
In managing manufacturing or service operations several types of decisions are made
including operations strategy, product design, process design, quality management,
capacity, facilities planning, production planning and inventory control. Each of these

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requires an ability to analyze the current situation and find better solutions to improve
the effectiveness and efficiency of manufacturing or service operations

LERNING OUTCOME:
 Explain the concept and importance of operations management.
 Describe what operations managers do.
 Explain the difference between goods and services
 Define the concept of value and explain how the value of goods and services
can be enhanced.
 Describe a customer benefit packages.
 Explain the difference between value chains and supply chains, and identify
three general types of processes in a business.
 Contrast the three different frameworks for describing value chains.
 Summarize the historical development of OM.
 Describe key challenges facing OM.
 Explain how organization seek to gain competitive advantage
 Explain approaches for understanding customer wants and needs
 Describe how customers evaluate goods and services
 Explain the five key competitive priorities
 Explain the role of OM, sustainability, and operations in strategic planning
 Describe Hill’s frame work for operations strategy
 Describe different types of technology and their role in manufacturing and
service operations.
 Explain how manufacturing and service technology is strengthening the value
chain.
 Explain the benefits and challenges of using technology.
 Describe key technology decisions and the processes of technology
adoption.
 Describe the steps involved in designing goods and services.
 Explain the concept of robust design and the Taguchi loss function.
 Explain how to calculate system reliability.
 Explain the concept and application of quality function deployment.
 Describe methods for designing goods.
 Explain the five elements of service delivery system design.
 Describe the four elements of service encounter design.
 Explain how goods and service design concepts are integrated at
LensCrafters.

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 Describe the four types of processes used to produce goods and services.
 Explain the logic and use of the product-process matrix.
 Explain the logic and use of the service-positioning matrix.
 Describe how to apply process and value stream mapping for process
design.  Explain how to improve process designs and analyze process
maps.
 Describe how to compute resource utilization and apply Little’s Law.
 Describe four layout patterns and when they should be used.
 Explain how to design product layouts using assembly line balancing.
 Explain the concepts of process layout.
 Describe issues related to workplace design.
 Describe the human issues related to workplace design.
 Describe the importance of forecasting to the value chain.
 Explain basic concepts of forecasting and time series.
 Explain how to apply single moving average and exponential smoothing
models
 Describe how to apply regression as a forecasting approach.
 Explain the role of judgment in forecasting.
 Describe how statistical and judgmental forecasting techniques are applied in
practice.
 Explain the concept of capacity.
 Describe how to compute and use capacity measures.
 Describe long-term capacity expansion strategies.
 Describe short-term capacity adjustment strategies.
 Explain the principles and logic of the Theory of Constraints.
 Describe the overall frameworks for resource planning framework in both
goods-producing and service-providing organizations.
 Explain options for aggregate planning.
 Describe how to evaluate level production and chase demand strategies for
aggregate planning.
 Describe ways to disaggregate aggregate plans using master production
scheduling and material requirements planning.
 Explain the concept and application of capacity requirements planning.

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CHAPTER 1: OPERATION MANAGEMENT AND VALUE CHAINS

OBJECTIVES:
 Explain the concept and importance of operations management.
 Describe what operations managers do.
 Explain the difference between goods and services
 Define the concept of value and explain how the value of goods and
services can be enhanced.
 Describe a customer benefit packages.
 Explain the difference between value chains and supply chains, and
identify three general types of processes in a business.
 Contrast the three different frameworks for describing value chains.
 Summarize the historical development of OM.
 Describe key challenges facing OM.

What is Operations Management (OM)

Operations management (OM) is the science and art of ensuring that goods and
services are created and delivered successfully to customers.
 Design of goods, services, and the processes that create them.
 Day-to-day management of those processes.
 Continual improvement of these goods, services, and processes.
The way in which goods and services, and the processes that create and support them,
are designed and managed can make the difference between a delightful or an
unhappy customer experience.

Three Issues at the Core of Operations Management

• Efficiency

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 • Cost
• Quality

What Do Operations Managers Do?

Some key activities that operations managers perform include the following:
 Forecasting; predict the future demand for raw materials, finished goods, and
services.
 Supply chain management; manage the flow of materials, information, people,
and money from suppliers to customers.
 Facility layout and design; determine the best configuration of machines,
storage, offices, and departments to provide the highest level of efficiency and
customer satisfaction.
 Technology selection; use technology to improve productivity and respond
faster to customers.
 Quality management; ensure that goods, services, and processes will meet
customer expectations and requirements.
 Purchasing; coordinate the acquisition of materials, supplies, and services.
 Resources and capacity management; ensure that the right amount of
resources (labor, equipment, materials, and information) is available when
needed.
 Process design; select the right equipment, information, and work methods to
produce high-quality goods and services efficiency.
 Job design; decide the best way to assign people to work tasks and job
responsibilities.
 Service encounter design; determine the best types of interactions between
service provider and customers, and how to recover from service upsets.
 Scheduling; determine when resources such as employees and equipment
should be assigned to work.
 Sustainability; decide the best way to manage the risks associated with
products and operations to preserve resources for future generations.

OM in the Workplace
Operations Managers have such titles as:
• Chief Operating Officer
• Hotel or Restaurant Manager
• Vice President of Manufacturing
• Customer Service Manager
• Plant Manager
• Field Services Manager
• Supply Chain Manager

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Shelly Decker, an accounting and information systems major in college, and her sister
created an entrepreneurial venture to manufacture and sell natural soaps and body
products.
Shelly uses OM skills every day:
• Process design – When a new product is to be introduced, the best way to
produce it must be determined. This involves charting the detailed steps needed
to make the product.
• Inventory management – Inventory is tightly controlled to keep cost down and
to avoid production that isn't needed. Inventory is taken every four weeks and
adjusted in the inventory management system accordingly.
• Scheduling – Production schedules are created to ensure that enough product
is available for both retail and wholesale customers, taking into account such
factors as current inventory and soap production capacity.
• Quality management – Each product is inspected and must conform to the
highest quality standards. If a product does not conform to standard (for
example, wrong color, improper packaging, improper labeling, improper weight,
size, or shape), then it is removed from inventory to determine where the process
broke down and to initiate corrective action.
Brooke Wilson is a Process Manager for J.P. Morgan Chase in the Credit Card Division.
He was an accounting major in college. Among his OM-related activities are:
Planning and budgeting: Representing the plastic card production area in all
meetings, developing annual budgets and staffing plans, and watching technology that
might affect the production of plastic credit cards.
Inventory management: Overseeing the management of inventory for items such as
plastic blank cards, inserts such as advertisements, envelopes, postage, and credit
card rules and disclosure inserts.
Scheduling and capacity: Daily to annual scheduling of all resources (equipment,
people, inventory) necessary to issue new credit cards and reissue cards that are up for
renewal, replace old or damaged cards, and one's that are stolen.
Quality: Embossing the card with accurate customer information and quickly getting
the card in the hands of the customer.
Understanding Goods and Services
A good is a physical product that you can see, touch, or possibly consume. Examples
of goods include: oranges, flowers, televisions, soap, airplanes, fish, furniture, coal,
lumber, personal computers, paper, and industrial machines.
A durable good is a product that typically lasts at least three years. Vehicles,
dishwashers, and furniture are some examples of durable goods.

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A non-durable good is perishable and generally lasts for less than three years.
Examples are toothpaste, software, shoes, and fruit.
A service is any primary or complementary activity that does not directly produce a
physical product.

Similarities Between Goods and Services

1. Goods and services provide value and satisfaction to customers who purchase
and use them.
2. They both can be standardized or customized to individual wants and needs.
3. A process creates and delivers each good or service, and therefore, OM is a
critical skill.
Differences Between Goods and Services
1. Goods are tangible while services are intangible.
2. Customers participate in many service processes, activities, and transactions.
3. The demand for services is more difficult to predict than the demand for goods.
4. Services cannot be stored as physical inventory.
5. Service management skills are paramount to a successful service encounter.
6. Service facilities typically need to be in close proximity to the customer.
7. Patents do not protect services.
Service management integrates marketing, human resources, and operations
functions to plan, create, and deliver goods and services, and their associated service
encounters.
A service encounter is an interaction between the customer and the service provider.
Service encounters consist of one or more moments of truth—any episodes,
transactions, or experiences in which a customer comes into contact with any aspect of
the delivery system, however remote, and thereby has an opportunity to form an
impression.
Examples:
o A gracious welcome by an employee at a hotel check-in counter
o A grocery store employee who seems too impatient to help o
Trying to navigate a confusing Web site

Exhibit 1.1 How Goods and Services Affect Operations Management Activities

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Customer Benefit Packages
A customer benefit package (CBP) is a clearly defined set of tangible (goods-content)
and intangible (service-content) features that the customer recognizes, pays for, uses,
or experiences.
In simple terms, a CBP is some combination of goods and services configured in a
certain way to provide value to customers.
A CBP consists of a primary good or service, coupled with peripheral goods and/or
services.
A primary good or service is the “core” offering that attracts customers and responds
to their basic needs. For example, the primary service of a personal checking account
is the capability to do convenient financial transactions.
Examples:
• an airline flight
• a checking account
• a brief case

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 • a football game
• tax preparation advice

Peripheral goods or services are those that are not essential to the primary good or
service, but enhance it.
Examples for a personal checking account:
• online access and bill payment
• debit card
• designer checks
• paper or electronic account statement

A variant is a CBP attribute that departs from the

standard CBP and is normally location-or firm-specific.
Example:
A fishing pond or pool at an automobile dealership where kids can fish while the
parents shop for vehicles.

Exhibit 1.2 A CBP Example for Purchasing a Vehicle

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Exhibit 1.2 Another Example of a Consumer Benefit Package

Many “goods” and “services” have a mixture of both goods and service content.

Exhibit 1.3 Examples of Goods and Service Content

Processes
A process is a sequence of activities that is intended to create a certain result.
Processes are the means by which goods and services—the components of a
CBP—are produced and delivered.
Key business processes:
• Value creation processes, focused on producing or delivering an organization’s
primary goods or services, such as filling and shipping a customer’s order,
assembling a dishwasher, or providing a home mortgage.

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 • Support processes, such as purchasing materials and supplies used in
manufacturing, managing inventory, installation, health benefits, technology
acquisition, day care on-site services, and research and development.
• General management processes, including accounting and information systems,
human resource management, and marketing.
• Nearly every major activity within an organization involves a process that crosses
traditional organizational boundaries.
• Networks of processes are called value chains,

Value Chain Frameworks

We will describe a value chain three different perspectives: an input-output frame work,
a pre and postproduction services framework, and a hierarchical supply chain
perspective.

Value Chains; An Input-Output Framework

Input-Output Model: A value chain begins with suppliers who provide inputs that are
transformed into value-added goods and services through processes that are supported
by resources such as equipment and facilities, labor, money, and information.
These goods and services are delivered or provided to customers and targeted market
segments.
Exhibit 1.4 An Input-Output Framework of a Value Chain

Finally, the value chain outputs- goods and services are delivered or provided to
customers and targeted market segments.

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The Value Chain at Buhrke Industries Inc.
Buhrke’s objective is to be a customer’s best total value producer with on-time
delivery, fewer rejects, and high-quality stampings.
However, the company goes beyond manufacturing goods; it prides itself in providing
the best service available as part of its customer value chain.
It’s also partnering with customers by providing personalized service for fast, accurate
response, customized engineering designs to meet customer needs, preventive
maintenance system to ensure high machine uptime, experienced, high trained,
longterm employees, and troubleshooting by a knowledgeable sales staff.

Exhibit 1.5 Examples of Goods-Producing and Service-Providing Value Chains

Buhrke Industries Inc., located in Arlington Heights, Illinois, provides stamped metal
parts to many industries, including automotive, appliance, computer, electronics,
hardware, house wares, power tools, medical, and telecommunications.

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Exhibit 1.6 The Value Chain at Buhrke Industries

Value Chain Pre- and Postproduction Services Framework

Pre- and Postproduction Services Perspective: Pre- and postproduction services
complete the ownership cycle for the good or service. Pre-production services are
focused on “gaining a customer.” Postproduction services focus on “keeping the
customer.” This view of the value chain emphasizes the notion that service is a critical
component of traditional manufacturing processes.
Exhibit 1.7 Pre- and Post-Service View of the Value Chain

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OM: A History of Change and Challenge
In the last century, operations management has undergone more changes than any
other functional area of business and is the most important factor in competitiveness.
That is one of the reason why every business student needs a basic understanding of
the field.

Exhibit 1.8 Seven Major Eras of Operations Management

Today, more than 90 percent of the jobs in the U.S. economy are in service processes
(half of the jobs in goods-producing industries, or about 9%, plus 81% in service
industries). Service involves designing and managing service-, information-, or
entertainment-intensive processes.
Most people in the United States are working in the service sector or service processes
such as health care and education, or in service-related aspects of manufacturing firms
such as human resource management and accounting.
Sustainability refers to an organization’s ability to strategically address current
business needs and successfully develop a long-term strategy that embraces
opportunities and manages risk for all products, systems, supply chains, and processes
to preserve resources for future generations.
Environmental sustainability is an organization’s commitment to the long-term quality
of our environment.
Social sustainability is an organization’s commitment to maintain healthy communities
and society that improve the quality of life.
Economic sustainability is an organization’s commitment to address current business
needs and economic vitality, and to have the agility and strategic management to

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prepare successfully for future business, markets, and operating environments.
Example of Sustainability Practices

Environmental Sustainability
• Waste management: reduce waste and manage recycling efforts
• Energy optimization: reduce consumption during peak energy demand times
• Transportation optimization: design efficient vehicles and routes to save fuel
• Technology upgrades: develop improvements to save energy and clean reuse
water in manufacturing processes.
• Air quality: reduce greenhouse gas emissions
• Sustainability products design: design goods whose parts can be recycled or
safety disposed of.

Social Sustainability
 Product safety: ensure consume safety in using goods and services
 Workplace health and safety: ensure a healthy and safe work environment
 Ethics and governance: ensure compliance with legal and regulatory
requirements and transparency in management decisions
 Community improve the quality of life through industry-community partnerships
Economic Sustainability
 Performance excellence build a high performing organization with a capable
leadership and workforce
 Financial management make sound financial plants to ensure long term
organizational survival.
 Resource management acquire and manage all resources effectively and
efficiently
 Emergency preparedness have plans in place for business, environmental, and
social emergencies.

Current Challenges in OM
• Technology
• Globalization
• Changing customer expectations
• Changing job designs
• Quality
• Global manufacturing

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