Operations Management
Chapter 1
Introduction to Operations Management
What is Operations Management?
OM is the set of activities that creates value in
the form of goods and services by
transforming inputs into output.
Why Should we study OM?
What are the three basic functions of a firm?
Marketing generates demand
Production/operations creates the product
Finance/accounting tracks how well the organization is
doing, pays bills, collects the money
Core of all business organizations
Many areas interrelated with OM activities
Management of operations is critical to create and maintain
competitive advantages
Organization of Businesses
Three
Operations/Production
basic functions
Goods oriented (manufacturing and assembly)
Service oriented (health care, transportation and retailing)
Value-added (the essence of the operations functions)
Finance-Accounting
Budgets (plan financial requirements)
Economic analysis of investment proposals
Provision of funds (the necessary funding of the
operations)
5
Organization of Businesses
(Cont.)
Marketing
Selling
Promoting
Assessing customer wants and needs
Communicating those needs to operations
The
need for working closely
Operations
Marketing
6
Finance
Value-Added
The difference between the cost of inputs
and the value or price of outputs.
Value added
Inputs
Land
Labor
Transformation/
Outputs
Conversion
Goods
Services
process
Capital
Feedback
Control
Feedback
Feedback
Operations example in Manufacturing:
Food Processing
INPUTS
PROCESS
OUTPUTS
Raw vegetables
Cleaning
Metal sheets
Cutting/Rolling/Welding Cans
Energy, Vegetables
Cutting
Cut vegetables
Energy, Water,
Vegetables
Cooking
Boiled
vegetables
Energy, Cans, Boiled Placing
vegetables
8
Clean vegetables
Can food
Operations example in service:
Health care
Inputs
Doctors, nurses
Hospital
Medical Supplies
Equipment
Laboratories
Processing
Outputs
Examination
Surgery
Monitoring
Medication
Therapy
Healthy
patients
Types of Operations
Operation
Examples
Goods producing
Farming, mining, construction
Storage/transportation
Warehousing, trucking, mail, taxis,
buses, hotels, location
Exchange
Trade, retailing, wholesaling, renting,
leasing, loans
Entertainment
Radio, movies, TV, concerts, recording
Communication
Newspapers, journals, magazines, radio,
TV, telephones, satellite
10
Organizing Charts for an
Service Organizations
and
manufacturing Organization
Organizational Charts
Commercial Bank
Operations
Finance
Marketing
Teller
Scheduling
Check Clearing
Collection
Transaction
processing
Facilities
design/layout
Vault operations
Maintenance
Security
Investments
Security
Real estate
Loans
Commercial
Industrial
Personal
Mortgage
Accounting
Auditing
Trust Department
Organizational Charts
Airline
Operations
Ground support
equipment
Maintenance
Ground Operations
Facility
maintenance
Catering
Flight Operations
Crew scheduling
Flying
Communications
Dispatching
Management science
Finance/
accounting
Accounting
Payables
Receivables
General Ledger
Finance
Cash control
International
exchange
Marketing
Traffic
administration
Reservations
Schedules
Tariffs (pricing)
Sales
Advertising
Organizational
Charts
Manufacturing
Operations
Facilities
Construction; maintenance
Production and inventory control
Scheduling; materials control
Quality assurance and control
Supply chain management
Manufacturing
Tooling; fabrication; assembly
Design
Product development and design
Detailed product specifications
Industrial engineering
Efficient use of machines, space,
and personnel
Process analysis
Development and installation of
production tools and equipment
Finance/
accounting
Disbursements/
credits
Receivables
Payables
General ledger
Funds Management
Money market
International
exchange
Capital requirements
Stock issue
Bond issue
and recall
Marketing
Sales
promotion
Advertising
Sales
Market
research
Continue : Why Should we study OM?
1.
OM is one of three major functions (marketing, finance,
and operations) of any organization and we study how
people organize themselves for productive enterprise.
2.
We want to know how goods and services are
produced.
To understand what operations managers do.
3.
4.
It provides a major opportunity for an organization to
improve its profitability and enhance its service to
society.
What are 10 decision areas of operations
management?
8.
Product Design: What good or service should we offer?
Quality: How to define quality?
Process: What process will these products require?
Location: Where should we put the facility?
Layout: How should we arrange the facility?
Human Resources :How to provide a reasonable work environment?
Supply Chain Management: should we make or buy this component?
Inventory: How much inventory of each item should we have?
9.
Planning (aggregate and short-term): which job do we perform next?
10.
Maintenance: who is responsible for maintenance?
1.
2.
3.
4.
5.
6.
7.
Responsibilities of Operations
Management
Planning
Capacity, utilization
Location
Choosing products or services
Make or buy
Layout
Projects
Scheduling
Market share
Plan for risk reduction, plan B?
Forecasting
17
Operations Managers
Controlling
Organization
Inventory
Quality
Costs
Degree of standardization
Subcontracting
Process selection
Staffing
Hiring/lay off
Use of overtime
Incentive plans
Job assignments
18
Where are the OM jobs?
Disciplines
in operation part of organizations
you need to have the knowledge of
accounting, statistics, finance and OM.
Try to take courses in accounting, statistics,
information systems and math.
About 40% of all jobs are in OM.
What are the changing challenges for the
Operations Managers?
How OM is related to productivity?
What is the productivity?
Productivity is the ratio of outputs (goods and services) divided
by one or more inputs (such as labor, capital, or management)
The operations managers job is to enhance this
ratio of outputs to inputs.
Example
If units produced = 1000 and labor-hours used is 250
then:
Productivity = units produced / Input Used
Productivity = 1000/250 = 4 units labor-hour
What are five reasons why productivity is difficult
to improve in the service sector?
1.
2.
3.
4.
5.
many services are labor intensive,
they are individually (personally) processed
(the customer is paying for that
service the hair cut),
it may be an intellectual task performed
by professionals,
it is often difficult to mechanize and
automate, and
often difficult to evaluate for quality.
Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways to
save time. Some
improvements:
Stop requiring signatures
on credit card purchases
under $25
Saved 8 seconds
per transaction
Change the size of the ice
scoop
Saved 14 seconds
per drink
New espresso machines
Saved 12 seconds
per shot
Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways to
shave time. Some
improvements:
Operations improvements have helped Starbucks
increase yearly revenue per outlet by $200,000 to
Stop requiring signatures
$940,000 in six years. Saved 8 seconds
on credit card purchases
per transaction
Productivity has improved by 27%, or about 4.5%
under $25
per year.
Change the size of the ice
scoop
Saved 14 seconds
per drink
New espresso machines
Saved 12 seconds
per shot
Productivity
Productivity =
Units produced
Input used
Measure of process improvement
Represents output relative to input
Only through productivity increases
can our standard of living improve
Productivity Calculations
Labor Productivity
Productivity =
Units produced
Labor-hours used
1,000
=
= 4 units/labor-hour
250
One resource input single-factor productivity
Multi-Factor Productivity
Productivity =
Output
Labor + Material + Energy +
Capital + Miscellaneous
Also known as total factor productivity
Output and inputs are often expressed in
dollars
Multiple resource inputs multi-factor productivity
