Operations Management
The business function responsible for planning, coordinating, and controlling the resources needed
to produce products and services for a company
Typical Organization Chart
What is Role of OM?
• OM Transforms inputs to outputs
INPUTS are resources such as - People, Material, and Money
OUTPUTS are goods and services
OM’s Transformation Process
Historical Development of OM
• Industrial revolution Late 1700s
• Scientific management Early 1900s
• Human relations movement 1930s-60s
• Management science 1940s-60s
• Computer age 1960s
• Environmental Issues 1970s
• JIT & TQM* 1980s
*JIT= Just in Time, TQM= Total Quality Manage
Historical Development
• Reengineering 1990s
• Global competition 1980s
• Flexibility 1990s
• Time-Based Competition 1990s
• Supply chain Management 1990s
• Electronic Commerce 2000s
• Outsourcing & flattening of world 2000s
For long-run success, companies must place much importance on their operations
Significant Events in Operations Management
OM’s Transformation Role
• To add value
– Increase product value at each stage
– Value added is the net increase between output product value and input material
value
• Provide an efficient transformation
– Efficiency – means performing activities well for least possible cost
Operations Manager in Practice
• OM has the most diverse organizational function
• Manages the transformation process
• OM has many faces and names such as;
– V. P. operations, Director of supply chains, Manufacturing manager
– Plant manger, Quality specialists, etc.
• All business functions need information from OM in order to perform their tasks
Scope of Operations Management
Operations Management includes:
– Forecasting
– Capacity planning
– Scheduling
– Managing inventories
– Assuring quality
– Motivating employees
– Deciding where to locate facilities
– Supply chain management
Types of Operations
Client’s View of the Business World
Supply-products or services a business offers to its customers.
Demand- set of products and services customer wants
Utility- measure of the strength of customer preferences for a given product or service. Customer
buy the product / service that maximizes their utility
Consumption Utility- measure of how much you like a product or service, ignoring the effects of
price and of the inconvenience of obtaining the product service. (attributes of the
Subcomponents of Consumption Utility:
(1) Performance- captures how much an average consumer desires a product or service
(2) Fit- captures how well the product or service matches with unique characteristics of a
given consumer
Client’s View of the Business World
Heterogenous Preferences– not all consumers have the same utility function
Inconvenience- reduction in the utility that results from the efforts of obtaining the product and
service.
Transaction Costs- another term used for the inconvenience of obtaining a product service
Location- the place where a consumer can obtain a product or service.
Timing- amount of time that passes between the consumer ordering a product or service and the
consumer obtaining the product or service.
Activity: Products and Services
A. Food and Hospitality
1. Jollibee
2. Subway
3. Starbucks
B. Bags and Apparels
1. MSE
2. Parisian Bags
3. Gucci
Strategic Trade Offs
Capabilities- dimensions of customers utility function a firm is able to satisfy.
Trade Offs- the need to sacrifice one capability in order to increase another one.
Market Segments- a set of customers who have similar utility functions.
Pareto Dominated- a firm’s product or service is inferior to one or multiple competitors on all
dimensions of the customer utility function.
Efficient Frontier- set of firms that are not Pareto dominated.
Inefficiency- the gap between a firm and the efficient frontier
Overcoming Inefficiencies
Three System Inhibitors:
Waste - consumption of inputs and resources that do not add value to the customer ( costly)
e.g. Triple wraps of sandwich during take out
Variability- predictable and unpredictable changes in the demand or the supply process
(Demand variability- customer arrivals, requests, behavior)
(Variability in Supply-time to serve, disruptions, defects)
Inflexibility- the inability to adjust to either changes in the supply process or changes in customer
demand
MATCHING SUPPLY WITH DEMAND
1. Design the operations that match the demand of the market segment with the supply of
products and services appropriate for the segment- “strategic trade off”
2. Utilize inputs and resources to their fullest potential -(identify inefficiencies)
Under Performing Operations
Demand Supply Mismatch
OM Across the Organization
❖ Marketing is not fully able to meet customer needs if they do not understand what
operations can produce
❖ Finance cannot judge the need for capital investments if they do not understand operations
concepts and needs
❖ Information systems enables the information flow throughout the organization
❖ Human resources must understand job requirements and worker skills
❖ Accounting needs to consider inventory management, capacity information, and labor
standards
Difference Between Manufacturing & Service Organization
Manufacturing- tangible
✓ Conformance/performance
✓ Reliability
✓ Feature
✓ Durability
✓ Serviceability
✓ Perceived Quality
Service – intangible
✓ Courtesy/friendliness of staff
✓ Promptness/Timeliness
✓ Atmosphere
✓ Time
✓ Consistency
Similarities for Service/Manufacturers
• Both use technology
• Both have quality, productivity, & response issues
• Both must forecast demand
• Both can have capacity, layout, and location issues
• Both have customers, suppliers, scheduling and staffing issues
Challenges of Managing Services
Comparison
What is Quality?
The definition of quality depends on the role of the people defining it.
Difficult to define one’s quality standards in precise terms.
• More common definition of quality:
• Conformance to specification
• Fitness for use
• Value for price paid
• Support services
• Psychological criteria
Quality in Products
Manufactured products have several quality dimensions that includes:
1. Performance – a product’s primary operating characteristics.
2. Features – the “ bells and whistles” of a product.
3. Reliability – the probability of a product’s surviving over a specified period of time under
stated conditions of use.
4. Conformance - the degree to which physical and performance characteristics of a product
match pre –established standards.
5. Durability – the amount of use that one gets from a product before it physically deteriorates
or until replacement is preferable.
6. Serviceability – the ability to repair a product quickly and easily.
7. Aesthetics – how a product looks, feels, sounds, tastes or smells.
8. Perceived Quality – subjective assessment resulting from image, advertising or brand
names.
Quality control in manufacturing is usually based on conformance, specifically, conformance to
specifications.
Quality in Products
Specifications are targets and tolerances determined by designers of products and services.
Targets are the ideal values for which production strives.
Tolerances are acceptable deviations from these ideal values.
Quality in Services
Service can be defined as “ any primary or complementary activity that does not directly produce a
physical product – that is the non goods part of the transaction between buyer ( customer ) and
seller ( provider ).
Hotel and restaurant, health, legal, engineering and other professional services; educational
institutions; financial services ; retailers; transportation and public utilities.
The most important dimensions of service quality include the following:
◼ Time : how much time must a customer wait ?
◼ Timeliness : Will a service be performed when promised ?
◼ Completeness : Are all items in the order included ?
◼ Courtesy : Do frontline employees greet each customer cheerfully ?
◼ Consistency : Are services delivered in the same passion for every customer and every time
for the same customer ?
◼ Accessibility and convenience : Is the service easy to obtain ?
◼ Accuracy : Is the service performed right the first time ?
◼ Responsiveness : Can service personnel react quickly and resolve
unexpected problems ?
Growth of the Service Sector
•
• Service sector growing to 50-80% of non-farm jobs
• Global competitiveness
• Demands for higher quality
• Huge technology changes
• Time based competition
• Work force diversity
OM Decisions
All organizations make decisions and follow a similar path
– First decisions very broad – Strategic decisions
• Strategic Decisions – set the direction for the entire company; they are
broad in scope and long-term in nature
– Following decisions focus on specifics - Tactical decision
– Tactical decisions: focus on specific day-to-day issues like resource needs,
schedules, & quantities to produce are frequent
Note: Tactical and Strategic decisions must align
Understand about Process
Three key process Metrics: Inventory, Flow Rate anf Flow Time
PROCESS METRIC: a scale of measure of process performance and capability
INVENTORY: The number of flow units within the process (ex. dollars in process, People in process)
FLOW RATE: The Rate at which flow units travel through a process
ex. dollars per week, people per month
* always remember the per unit of time
FLOW TIME: The time a flow unit spends in a processm from strat to finish
ex. hours, minutes, days, months
Flow rate
Little’s Law- Linking Process Metrics Together
Little Law = the Law that describes the relationship beween three key process metrics: inventory,
flow rate and flow time
Inventory= Flow Rate x Flow Time
I= R X T
Formula
Inventory = Rate x Time
Flow Rate (R) = I (inventory)
T (Flow Time)
Flow Time (T)= I (inventory)
R (Flow Rate)
Operations Management Decision Making
Keys in decision making
• What - What resources/what amounts
• When- Needed/scheduled/ordered
• Where- Work to be done
• How - Designed
• Who - To do the work
Decision Making
System Design
• Capacity
• location
• arrangement of departments
• product and service planning
• acquisition and placement of equipment
System operation
• personnel
• inventory
• scheduling
• project management
• quality assurance
Decision Making
• Models
• Quantitative approaches
• Analysis of trade-offs
• Systems approach
Models - A model is an abstraction of reality.
• Physical
• Schematic
• Mathematical
What are the pros and cons of models?
Models Are Beneficial
• Easy to use, less expensive
• Require users to organize
• Increase understanding of the problem
• Enable “what if” questions
• Consistent tool for evaluation and standardized format
• Power of mathematics
Limitations of Models
Quantitative Approaches
• Linear programming
• Queuing Techniques
• Inventory models
• Project models
• Statistical models
Analysis of Trade-Offs
Decision on the amount of inventory to stock
Increased cost of holding inventory
vs
Level of customer service
Systems Approach
The whole is greater than the sum of the parts.” – Suboptimization
Pareto Phenomenon
• A few factors account for a high percentage of the occurrence of some event(s).
• 80/20 Rule - 80% of problems are caused by 20% of the activities.
How do we identify the vital few?
Ethical Issues
• Financial statements
• Worker safety
• Product safety
• Quality
• Environment
• Community
• Hiring/firing workers
• Closing facilities
• Worker’s rights
TQM - It is an integrated organizational effort designed to improve quality at every level.
TQM is comprehensive and integrated way of managing any organization in order to:
1. meet the needs of the customer consistently
2. achieve continuous improvement in every aspect of the organization’s activities
Concepts of TQM Philosophy
The Three (3) Paradigms of TQM
Total - involves the entire organization, supply chain or product life cycle.
Quality - a dynamic state associated with products, services, people, processes and environment
that meets or exceeds expectations.
Management – the system of managing with steps like planning, organizing, controlling,
leading and staffing.
Achieving TQM
Quality Gurus and Their Contributions
CONTINOUS IMPROVEMENT
EMPLOYEE EMPOWERMENT
BENCHMARKING
JUST IN TIME (JIT)
JIT EXAMPLE
CAUSE AND EFFECT DIAGRAM EXAMPLE
SHEWART’s PDCA MODEL
