2. What Is Operations
Management?
Production is the creation of
goods and services
Operations management (OM) is the
set of activities that create value in
the form of goods and services by
transforming inputs into outputs
3. Historical Development of OM
Industrial revolution Late 1700s
Scientific management Early 1900s
◦ Hawthorne Effect 1930s
Human relations movement 1930s-
Management science 1940s-
Computer age 1960s-
Environmental Issues 1970s-
JIT & TQM* 1980s-
*JIT= Just in Time, TQM= Total Quality Management
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4. Historical Development
Reengineering 1990-
Global competition 1980-
Flexibility 1990-
Time-Based Competition
1990-
Supply chain Management
1990-
Electronic Commerce 2000-
Outsourcing & flattening of world
2000-
For long-run success, companies must place much importance on their
operations
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6. The Heritage of OM
Division of labor (Adam Smith 1776; Charles
Babbage 1852)
Standardized parts (Whitney 1800)
Scientific Management (Taylor 1881)
Assembly line (Ford/ Sorenson 1913)
Gantt charts (Gantt 1916)
Motion study (Frank and Lillian Gilbreth
1922)
Quality control (Shewhart 1924; Deming
1950)
7. The Heritage of OM
First Digital Computer (Atanasoff 1938)
CPM/PERT (DuPont 1957, Navy 1958)
Material requirements planning (Orlicky 1960)
Computer aided design (CAD 1970)
Flexible manufacturing system (FMS 1975)
Baldrige Quality Awards (1980)
Computer integrated manufacturing (1990)
Globalization (1992)
Internet (1995)
Mass Customization (2000s)
8. Today’s OM Environment
Customers demand better quality, greater
speed, and lower costs
Companies implementing lean system
concepts – a total systems approach to
efficient operations
Recognized need to better manage
information using ERP and CRM systems
Increased cross-functional decision making
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9. OM 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
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10. Operations are everywhere !
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Operations Examples
Goods producing Farming, mining, construction
Storage/transportati-
on
Warehousing, trucking, mail, taxis, buses, hotels
Exchange Trade, retailing, wholesaling, renting, leasing,
loans
Entertainment Radio, movies, TV, concerts, recording
Communication Newspapers, journals, radio, TV, telephones,
satellite
11. 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
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12. OM Decisions
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
Strategic decisions less frequent
Tactical and Strategic decisions must align
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16. OM at the core of Businesses
Three basic functions
◦ Operations/Production
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)
Provision of funds (the necessary funding of the operations)
◦ Marketing
Selling, Promoting
Assessing customer wants and needs
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Organization
Finance Operations Marketing
18. What is Role of OM?
OM Transforms inputs to outputs
◦ Inputs are resources such as
People, Material, and Money
◦ Outputs are goods and services
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20. 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
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22. OM Across the Organization
Most businesses are supported by the
functions of operations, marketing,
and finance
The major functional areas must
interact to achieve the organization
goals
23. 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
24. Manufacturing vs. Service
Operations
Production of goods
◦ Tangible products
Automobiles, Refrigerators, Aircrafts, Coats, Books,
Sodas
Services
◦ Repairs, Improvements, Transportation,
Regulation
Regulatory bodies: Government, Judicial system, FAA,
FDA
Entertainment services: Theaters, Sport activities
Exchange services: Wholesale/retail
Appraisal services: Valuation, House appraisal
Security services: Police force, Army
Financial services: Banks
Education: Universities, K-12 schools 24
25. Characteristics of Goods
Tangible product
Consistent
product definition
Production
usually separate
from
consumption
Can be
inventoried
Low customer
interaction
26. Characteristics of Service
Intangible product
Produced and consumed
at same time
Often unique
High customer interaction
Inconsistent product
definition
Often knowledge-based
Frequently dispersed
27. Manufacturing vs. Services
Characteristic Manufacturing Service
Output Tangible Intangible
Customer contact Low High
Uniformity of output High Low
Labor content Low High
Uniformity of input High Low
Measurement of productivity Easy Difficult
Opportunity to correct quality problems Easy Difficult
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Steel production
Automobile fabrication
Home remodeling
Retail sales
Auto Repair
Appliance
repair
Maid Service
Manual car wash
Teaching
Lawn mowing
High percentage goods Low percentage goods
28. 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
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SUPPLY SIDE DEMAND SIDE
Controlling
– Inventory
– Quality
– Costs
Organization
– Degree of standardization
– Subcontracting
– Process selection
Staffing
– Hiring/lay off
– Use of overtime
– Incentive plans
In a nutshell, the challenge is
“Matching the Supply with Demand”
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Supply Does Not Naturally Match
Demand
Inventory results from a mismatch between supply and demand
Mismatch can take one of the following two forms
– Supply waits for Demand
» Inventory = Finished goods and resources
– Demand waits for Supply
» Inventory is negative or said to be backordered in manufacturing
» Inventory = Waiting customers in services
Mismatch happens because
– the demand varies
– the capacity is rigid and finite.
» If the capacity is infinite, products (or services) can be provided at an
infinite rate and instantaneously as the demand happens. Then there is
no mismatch.
30. 30
Consequences of the Mismatch are
Severe
Air travel Emergency room Retailing Iron ore plant Pacemakers
Supply Seats on specific
flight
Medical service Consumer
electronics
Iron ore Medical equipment
Demand Travel for specific
time and destination
Urgent need for
medical service
Consumers buying a
new video system
Steel mills Heart surgeon
requires pacemaker
at exact time and
location
Supply
exceeds
demand
Empty seat Doctors, nurses, and
infrastructure are
under-utilized
High inventory costs;
few inventory turns
Prices fall Pacemaker sits in
inventory
Demand
exceeds
supply
Overbooking;
customer has to take
different flight (profit
loss)
Crowding and delays
in the ER, potential
diversion of
ambulances
Foregone profit
opportunity;
consumer
dissatisfaction
Prices rise Foregone profit
(typically not
associated with
medical risk)
Actions to
match supply
and demand
Dynamic pricing;
booking policies
Staffing to predicted
demand; priorities
Forecasting; quick
response
If prices fall too low,
production facility is
shut down
Distribution system
holding pacemakers
at various locations
Managerial
importance
About 30% of all
seats fly empty; a 1-
2% increase in seat
utilization makes
difference between
profits and losses
Delays in treatment or
transfer have been
linked to death;
Per unit inventory
costs for consumer
electronics retailing
commonly exceed
net profits.
Prices are so
competitive that the
primary emphasis is
on reducing the
cost of supply
Most products
(valued $20k) spend
4-5 months waiting in
a trunk of a sales
person before being
used
31. Particular Examples of Demand-Supply
Mismatch
Compaq estimated that it lost $0.5 B to $1 B in sales in 1995 because laptops
were not available when and where needed
In 02-03 flu season, 12 M of 95 M doses of flu vaccines were not used in the
US. For 03-04 season, 83=95-12 M doses were produced. In 03-04 season,
there were widespread vaccine shortages causing flu-related deaths.
British Airways had seat utilization of 70.3% in the early 2000s. If it could
increase utilization by 0.33% (by flying one more person on a 300 seat
aircraft), it would create additional revenues equal to quarter 2 profits of 2001,
which was $65 M.
In 2000, Playstation 2 of Sony were backordered by several weeks due to high
demand. But X-Box of Microsoft did not sell well and was discounted by $100
per unit.
◦ Discounting is a symptom of a problem in operations rather than being a
usual practice.
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32. Changing Challenges
Traditional
Approach
Reasons for
Change
Current
Challenge
Ethics and
regulations
not at the
forefront
Public concern over
pollution, corruption,
child labor, etc.
High ethical and
social
responsibility;
increased legal
and professional
standards
Local or
national
focus
Growth of reliable, low
cost communication
and transportation
Global focus,
international
collaboration
Lengthy
product
development
Shorter life cycles;
growth of global
communication; CAD,
Internet
Rapid product
development;
design
collaboration
33. Changing Challenges
Traditional
Approach
Reasons for
Change
Current
Challenge
Low cost
production,
with little
concern for
environment;
free
resources
(air, water)
ignored
Public sensitivity to
environment; ISO 14000
standard; increasing
disposal costs
Environmentally
sensitive
production; green
manufacturing;
sustainability
Low-cost
standardized
products
Rise of consumerism;
increased affluence;
individualism
Mass
customization
34. Changing Challenges
Traditional
Approach
Reasons for
Change
Current
Challenge
Emphasis on
specialized,
often manual
tasks
Recognition of the
employee's total
contribution; knowledge
society
Empowered
employees;
enriched jobs
“In-house”
production;
low-bid
purchasing
Rapid technological
change; increasing
competitive forces
Supply-chain
partnering; joint
ventures,
alliances
Large lot
production
Shorter product life
cycles; increasing need
to reduce inventory
Just-In-Time
performance;
lean; continuous
improvement
35. Highlights
OM is the business function that is responsible for
managing and coordinating the resources needed
to produce a company’s products and services.
The role of OM is to transform organizational inputs
into company’s products or services outputs
OM is responsible for a wide range of decisions,
ranging from strategic to tactical.
Organizations can be divided into manufacturing
and service organizations, which differ in the
tangibility of the product or service
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36. Highlights
Many historical milestones have shaped OM.
Some of these are the Industrial Revolution,
scientific management, the human relations
movement, management science, and the
computer age
OM is highly important function in today’s dynamic
business environment. Among the trends with
significant impact are just-in-time, TQM,
reengineering, flexibility, time-based competition,
SCM, global marketplace, and environmental
issues
OM works closely with all other business functions
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