Chapter 1

Introduction to
Operations
Management

McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter 1: Learning Objectives
 You should be able to:
1. Define the term operations management
2. Identify the three major functional areas of organizations and
describe how they interrelate
3. Identify similarities and differences between production and
service operations
4. Describe the operations function and the nature of the operations
manager’s job
5. Summarize the two major aspects of process management
6. Explain the key aspects of operations management decision
making
7. Briefly describe the historical evolution of operations
management
8. Characterize current trends in business that impact operations
management 1-2
 Operations Management
What is operations?
The part of a business organization that is
responsible for producing goods or services
How can we define operations management?
The management of systems or processes that
create goods and/or provide services

Instructor Slides 1-3

 Good or Service?
Goods are physical items that include raw materials,
parts, subassemblies, and final products.
• Automobile
• Computer
• Oven
• Shampoo
Services are activities that provide some combination of
time, location, form or psychological value.
• Air travel
• Education
• Haircut
• Legal counsel
Instructor Slides 1-4
 Supply Chain
Supply Chain – a sequence of activities and
organizations involved in producing and delivering
a good or service

Suppliers’ Direct Final

Suppliers’ Direct Producer Distributor Final
suppliers suppliers Producer Distributor Customers
suppliers suppliers Customers

Instructor Slides 1-5

Supply Chain for Bread

1-6
 Basic Functions of the Business Organization

Organization
Organization

Marketing
Marketing Operations
Operations Finance
Finance

Instructor Slides 1-7

 The Transformation Process
Value-Added

Inputs Transformation/ Outputs

Inputs
• Land Transformation/ Outputs
• Goods
Conversion
• •Land
Labor Conversion • •Goods
Services
• Labor Process • Services
• Capital Process
• •Capital
Information
• Information

Measurement
and Feedback
Measurement Measurement
and Feedback and Feedback
Control
Control

Feedback = measurements taken at various points in the transformation process

Control = The comparison of feedback against previously established

standards to determine if corrective action is needed.
Instructor Slides 1-8
 Goods-service Continuum
Products are typically neither purely service- or purely goods-
based. There are elements of both goods production and
service delivery in these product packages.
This makes managing operations more interesting, and also
more challenging.

Goods Services
Goods Services
Surgery, Teaching
Surgery, Teaching
Songwriting, Software Development
Songwriting, Software Development
Computer Repair, Restaurant Meal
Computer Repair, Restaurant Meal
Home Remodeling, Retail Sales
Home Remodeling, Retail Sales
Automobile Assembly, Steelmaking
Automobile Assembly, Steelmaking
Instructor Slides 1-9
 Manufacturing vs. Service?
Manufacturing and Service Organizations differ chiefly because
Manufacturing and Service Organizations differ chiefly because
manufacturing is goods-oriented and service is act-oriented.
manufacturing is goods-oriented and service is act-oriented.

Goods Services
Goods Services

Tangible Act-Oriented

Instructor Slides 1-10

 Manufacturing vs. Service

Instructor Slides 1-11

 Managing Services is Challenging
1. Jobs in services are often less structured than in manufacturing
2. Customer contact is generally much higher in services compared to
manufacturing
3. In many services, worker skill levels are low compared to those of
manufacturing employees
4. Services are adding many new workers in low-skill, entry-level
positions
5. Employee turnover is high in services, especially in low-skill jobs
6. Input variability tends to be higher in many service environments
than in manufacturing
7. Service performance can be adversely affected by many factors
outside of the manager’s control (e.g., employee and customer
attitudes)

Instructor Slides 1-12

 Process Management
Process - one or more actions that transform inputs into
Process - one or more actions that transform inputs into
outputs
outputs
Three Categories of Business Processes:

Upper-management processes These govern the operation of the entire

organization. Examples include organizational
governance and organizational strategy.

Operational processes These are core processes that make up the

value stream. Examples include purchasing,
production and/or service, marketing, and sales.

Supporting processes These support the core processes. Examples

include accounting, human resources, and IT
(information technology).

Instructor Slides 1-13

 Process Management

Business processes, large and small, are composed of a series of supplier–

customer relationships, where every business organization, every department,
and every individual operation is both a customer of the previous step in the
process and a supplier to the next step in the process.

A major process can consist of many subprocesses, each having its own goals
that contribute 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.
Instructor Slides 1-14
 Supply & Demand

Operations &
Operations &
Supply Chains Sales & Marketing
Supply Chains Sales & Marketing

Wasteful

>
Supply Demand Wasteful
Costly
Costly

Opportunity Loss
Opportunity
Customer Loss
Supply
< Demand Customer
Dissatisfaction
Dissatisfaction

=
Supply Demand Ideal
Ideal

Instructor Slides 1-15

Process Variation
Four Sources of Variation:
Variety of goods or services The greater the variety of goods and
being offered services offered, the greater the
variation in production or service
requirements.
Structural variation in demand These are generally predictable. They
are important for capacity planning.
Random variation Natural variation that is present in all
processes. Generally, it cannot be
influenced by managers.
Assignable variation Variation that has identifiable sources.
This type of variation can be reduced, or
eliminated, by analysis and corrective
action.

Variations can be disruptive to operations and supply chain processes.

They may result in additional costs, delays and shortages, poor
quality, and inefficient work systems. 1-16
 Scope of Operations Management
The scope of operations management ranges across
The scope of operations management ranges across
the organization.
the organization.
The operations function includes many interrelated
activities such as:
 Forecasting
 Capacity planning
 Facilities and layout
 Scheduling
 Managing inventories
 Assuring quality
 Motivating employees
 Deciding where to locate facilities
 And more . . .
Instructor Slides 1-17
 Role of the Operations Manager
The Operations Function consists of all
activities directly related to producing goods or
providing services.

A primary function of the operations manager is

to guide the system by decision making.
System Design Decisions
System Operation Decisions

Instructor Slides 1-18

 System Design Decisions
• System Design
– Capacity
– Facility location
– Facility layout
– Product and service planning
– Acquisition and placement of equipment
• These are typically strategic decisions that
• usually require long-term commitment of resources
• determine parameters of system operation

Instructor Slides 1-19

 System Operation Decisions
• System Operation
• These are generally tactical and operational
decisions
– Management of personnel
– Inventory management and control
– Scheduling
– Project management
– Quality assurance
• Operations managers spend more time on system
operation decision than any other decision area
• They still have a vital stake in system design

Instructor Slides 1-20

 Decision Making
 Most operations decisions involve many alternatives
that can have quite different impacts on costs or
profits
 Typical operations decisions include:
 What: What resources are 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?
 Where: Where will the work be done?

 How: How will he product or service be designed? How will the

work be done? How will resources be allocated?

 Who: Who will do the work?
1-21
 General Approach to Decision Making
Modeling is a key tool used by all decision makers
Model - an abstraction of reality; a
simplification of something.
Common features of models:
They are simplifications of real-life
phenomena
They omit unimportant details of the real-life
systems they mimic so that attention can be
focused on the most important aspects of the
real-life system
Instructor Slides 1-22
 Models
Types of Models:
 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, blueprints, pictures,
and drawings.

Instructor Slides 1-23

 Models
Types of Models:
 Schematic Models
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 usually the easiest to manipulate, and they
are important forms of inputs for computers and calculators.

Instructor Slides 1-24

 Benefits of Models
1. Models are generally easier to use and less expensive than dealing
with the real system
2. Require users to organize and sometimes quantify information
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.

Instructor Slides 1-25

 Limitations of Models
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

Instructor Slides 1-26

 Quantitative Methods
A decision making approach that frequently
seeks to obtain a mathematically optimal
solution
Linear programming
Queuing techniques
Inventory models
Project models
Forecasting techniques
Statistical models

Instructor Slides 1-27

 Systems Approach
 System - a set of interrelated parts that must work
together
 The business organization is a system composed of subsystems
marketing subsystem
operations subsystem
finance subsystem
 The systems approach
 Emphasizes interrelationships among subsystems
 Main theme is that the whole is greater than the sum of its parts
 The output and objectives of the organization take precedence over
those of any one subsystem
Instructor Slides 1-28
 The Need for Supply Chain Management
In the past, organizations did little to manage the
supply chain beyond their own operations and
immediate suppliers which led to numerous
problems:
Oscillating inventory levels
Inventory stock-outs
Late deliveries
Quality problems

Instructor Slides 1-29

 Supply Chain Issues
1. The need to improve operations
2. Increasing levels of outsourcing
3. Increasing transportation costs
4. Competitive pressures
5. Increasing globalization
6. Increasing importance of e-business
7. The complexity of supply chains
8. The need to manage inventories

Instructor Slides 1-30

 Elements of Supply Chain Management
 Customers – what products/services do customers want
 Forecasting – predicting timing and volume of customer demand
 Design – incorporating customer wants, manufacturability, and time
to market
 Capacity planning – matching supply and demand
 Processing – controlling quality, scheduling work
 Inventory – meeting demand requirements while managing costs
 Purchasing – evaluating potential suppliers, supporting the needs of
operations on purchased goods and services
 Suppliers – monitoring supplier quality, on-time delivery, and
flexibility; maintaining supplier relations
 Location – determining the location of facilities
 Logistics – deciding how to best move information and materials

Instructor Slides 1-31