1

Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management

2007 Thomson South-Western
Chapter 1 Learning Objectives

1. To understand the nature of typical OM activities
in business, what operations managers do, and
how everyone uses OM principles in their work,
no matter what their functional job is.

2. To understand the nature of goods and services,
their similarities and differences, the concept of
a customer benefit package, and why they are
important for managing operations.
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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
3. To understand the concept of a process and
value chain, and how they are used in operations
to support the creation of goods and services.

Chapter 1 Learning Objectives
Transparency Masters to
accompany Heizer/Render
Principles of Operations
Management, 5e, and
Operations Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle
River, N.J. 07458
1-3
Why Study OM?
Transparency Masters to
accompany Heizer/Render
Principles of Operations
Management, 5e, and
Operations Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle
River, N.J. 07458
1-4
Why Study OM?
OM is one of three major functions
(marketing, finance, and operations) of any
organization.
We want (and need) to know how goods
and services are produced.
We want to understand what operations
managers do.
OM is such a costly part of an organization.

Transparency Masters to accompany
Heizer/Render Principles of Operations
Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle
River, N.J. 07458
1-5
Options for Increasing Contribution

Marketing
Option
Finance &
Accounting
Option
OM Option
Current Sales
Revenue :
+50%
Finance
Costs: -50%
Production
Costs: -20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of
Goods Sold
-80,000 -120,000 -80,000 -64,000
Gross
Margin
20,000 30,000 20,000 36,000
Finance
Costs
-6,000 -6,000 -3,000 -6,000
Net
Margin
14,000 24,000 17,000 30,000
Taxes @
25%
-3,500 -6,000 -4,250 -7,500
Contribution 10,500 18,000 12,750 22,500


Transparency Masters to
accompany Heizer/Render
Principles of Operations
Management, 5e, and
Operations Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle
River, N.J. 07458
1-6
What Operations Managers Do
Plan - Organize - Staff - Lead - Control
Transparency Masters to
accompany Heizer/Render
Principles of Operations
Management, 5e, and
Operations Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle
River, N.J. 07458
1-7
Ten Critical Decisions
Service, product design..
Quality management
Process, capacity design..
Location .
Layout design ..
Human resources, job design..
Supply-chain management
Inventory management .
Scheduling
Maintenance .
Ch. 5
Ch. 6, 6S
Ch. 7, 7S
Ch. 8
Ch. 9
Ch. 10, 10S
Ch. 11,11s
Ch. 12, 14, 16
Ch. 3, 13, 15
Ch. 17
Transparency Masters to
accompany Heizer/Render
Principles of Operations
Management, 5e, and
Operations Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle
River, N.J. 07458
1-8
The Critical Decisions
Quality management
Who is responsible for quality?
How do we define quality?
Service and product design
What product or service should we offer?
How should we design these products and
services?
Transparency Masters to
accompany Heizer/Render
Principles of Operations
Management, 5e, and
Operations Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle
River, N.J. 07458
1-9
The Critical Decisions - Continued
Process and capacity design
What processes will these products require
and in what order?
What equipment and technology is necessary
for these processes?
Location
Where should we put the facility
On what criteria should we base this location
decision?
Transparency Masters to
accompany Heizer/Render
Principles of Operations
Management, 5e, and
Operations Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle
River, N.J. 07458
1-10
The Critical Decisions - Continued
Layout design
How should we arrange the facility?
How large a facility is required?
Human resources and job design
How do we provide a reasonable work
environment?
How much can we expect our employees to
produce?
Transparency Masters to
accompany Heizer/Render
Principles of Operations
Management, 5e, and
Operations Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle
River, N.J. 07458
1-11
The Critical Decisions - Continued
Supply chain management
Should we make or buy this item?
Who are our good suppliers and how many
should we have?
Inventory, material requirements planning,
How much inventory of each item should we
have?
When do we re-order?

Transparency Masters to
accompany Heizer/Render
Principles of Operations
Management, 5e, and
Operations Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle
River, N.J. 07458
1-12
The Critical Decisions - Continued
Intermediate, short term, and project
scheduling
Is subcontracting production a good idea?
Are we better off keeping people on the payroll
during slowdowns?
Maintenance
Who is responsible for maintenance?
When do we do maintenance?
Transparency Masters to
accompany Heizer/Render
Principles of Operations
Management, 5e, and
Operations Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle
River, N.J. 07458
1-13
Where are the OM Jobs
Transparency Masters to
accompany Heizer/Render
Principles of Operations
Management, 5e, and
Operations Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle
River, N.J. 07458
1-14
Where are the OM Jobs
Transparency Masters to
accompany Heizer/Render
Principles of Operations
Management, 5e, and
Operations Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle
River, N.J. 07458
1-15
Where Are the OM Jobs?
Technology/methods
Facilities/space utilization
Strategic issues
Response time
People/team development
Customer service
Quality
Cost reduction
Inventory reduction
Productivity improvement


What is Operations???
What is Operations?
a function or system that transforms inputs into outputs of
greater value
What is a Transformation Process?
a series of activities along a value chain extending from
supplier to customer
activities that do not add value are superfluous and should
be eliminated


The Operations System
The operations system transforms inputs into
desired goods and services.
OUTPUTS INPUTS PROCESS
EXTERNAL
FACTORS
FEEDBACK
Material flow
Information Flow
What is Operations Mgt?

Operations Management is the systematic design, direction and control
of the processes that transform inputs into products and services.
It is a set of decisions

Create operational systems.
Manage (plan, organize, staff, direct and control) the activities relating to the
production of goods and/or services with maximum efficiency (at the lowest
cost) and effectiveness (in the eyes of the customer).
Improve those processes continuously to create competitive advantage.
What is Operations Management?
The business function responsible for planning, coordinating,
and controlling the resources needed to produce a
companys products and services.
R. Dan Reid & Nada R. Sanders
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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Operations management (OM) is the
science and art of ensuring that goods and
services are created and delivered
successfully to customers.
The principles of OM help one to view a
business enterprise as a total system, in
which all activities are coordinated not
only vertically throughout the organization,
but also horizontally across multiple
functions.
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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
OM Spotlight: Ferguson Metals
Ferguson Metals, located in Hamilton, Ohio, is a supplier of stainless steel
and high temperature alloys for the specialty metal market.

Fergusons primary production operations include slitting coil stock and
cutting sheet steel to customer specifications with rapid turnaround times
from order to delivery (see Exhibit 1.1).

Bob Vogel is the Vice President of Operations at Ferguson. He is involved in
a variety of daily activities that draw upon knowledge of not only OM and
engineering, but also finance, accounting, organizational behavior, and other
subjects.
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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Exhibit 1.1 Operations Management at Ferguson Metals
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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
OM Spotlight: Ferguson Metals

While understanding specialty metals is
certainly a vital part of Mr. Vogels job, the
ability to understand customer needs,
apply approaches to continuous
improvement, understand and motivate
people, work cross-functionally across the
business, and integrate processes and
technology within the value chain define
Scotts job as an operations manager.
Cross-Functional Linkages
Operations
Finance
Budgeting.
Analysis.
Funds.
Marketing
What products?
What volumes?
Costs? Quality?
Delivery?
Human
Resources
Skills? Training?
# of Employees?
Accounting
Performance measurement systems.
Planning and control.
MIS
What IT solutions
to make it all work
together?
Design
Sustainability.
Quality.
Manufacturability.
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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Example of What Operations Managers Do?

Brooke Wilson is a Process Manager for J.P.
Morgan Chase in the Credit Card Division.
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.
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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Example of What Operations Managers Do?
Inventory management overseeing the
management of inventory for items such as plastic
blank cards, inserts such as advertisements,
envelops, 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.
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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Example of What Operations Managers Do?


Quality embossing the card with accurate
customer information and quickly getting the
card in the hands of the customer.

Brooke was an accounting major in college.



End of Session 2
Operations Management, 2e/Ch. 1 Goods,
Services, and Operations Management
2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
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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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Understanding Goods and Services
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.
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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Understanding Goods and Services
Service management integrates
marketing, human resource, 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.

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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Understanding Goods and Services
A broader definition is
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.
Here, a service encounter includes the impression
an empty parking lot has on whether the customer
goes into a facility or the interaction with other
customers such as while waiting in line.
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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
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.
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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
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.
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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Exhibit 1.2 How Goods and Services Affect
Operations Management Activities
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Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Exhibit 1.3 Examples of Goods and Service Content
37
Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
2007 Thomson South-Western
Exhibit 1.7 How Primary, Support, Supplier, and Management Processes Are
Related
Historical Milestones in OM
The Industrial Revolution
Post-Civil War Period
Scientific Management
Human Relations and Behaviorism
Operations Research
The Service Revolution
The Industrial Revolution
The industrial revolution developed in England in
the 1700s.
The steam engine, invented by James Watt in
1764, largely replaced human and water power
for factories.
Adam Smiths The Wealth of Nations in 1776
touted the economic benefits of the
specialization of labor.
Thus the late-1700s factories had not only
machine power but also ways of planning and
controlling the tasks of workers.

The Industrial Revolution
The industrial revolution spread from England to other
European countries and to the United Sates.
In 1790 an American, Eli Whitney, developed the
concept of interchangeable parts.
The first great industry in the US was the textile
industry.
In the 1800s the development of the gasoline engine
and electricity further advanced the revolution.
By the mid-1800s, the old cottage system of production
had been replaced by the factory system.
. . . more
Post-Civil War Period
During the post-Civil War period great
expansion of production capacity occurred.
By post-Civil War the following developments
set the stage for the great production
explosion of the 20th century:
increased capital and production capacity
the expanded urban workforce
new Western US markets
an effective national transportation system
Scientific Management
Frederick Taylor is known as the father of
scientific management. His shop system
employed these steps:
Each workers skill, strength, and learning ability were
determined.
Stopwatch studies were conducted to precisely set
standard output per worker on each task.
Material specifications, work methods, and routing
sequences were used to organize the shop.
Supervisors were carefully selected and trained.
Incentive pay systems were initiated.
Scientific Management
In the 1920s, Ford Motor Companys
operation embodied the key elements of
scientific management:
standardized product designs
mass production
low manufacturing costs
mechanized assembly lines
specialization of labor
interchangeable parts


Human Relations and Behavioralism
In the 1927-1932 period, researchers in the
Hawthorne Studies realized that human
factors were affecting production.
Researchers and managers alike were
recognizing that psychological and sociological
factors affected production.
From the work of behavioralists came a
gradual change in the way managers thought
about and treated workers.


Operations Research
During World War II, enormous quantities of
resources (personnel, supplies, equipment, )
had to be deployed.
Military operations research (OR) teams were
formed to deal with the complexity of the
deployment.
After the war, operations researchers found their
way back to universities, industry, government,
and consulting firms.
OR helps operations managers make decisions
when problems are complex and wrong decisions
are costly.
The Service Revolution
The creation of services organizations accelerated
sharply after World War II.
Today, more than two-thirds of the US workforce
is employed in services.
About two-thirds of the US GDP is from services.
There is a huge trade surplus in services.
Investment per office worker now exceeds the
investment per factory worker.
Thus there is a growing need for service
operations management.
The Computer Revolution
Explosive growth of computer and communication
technologies
Easy access to information and the availability of more
information
Advances in software applications such as Enterprise
Resource Planning (ERP) software
Widespread use of email
More and more firms becoming involved in E-Business
using the Internet
Result: faster, better decisions over greater distances

Today's Factors Affecting OM
Global Competition
Quality, Customer Service, and Cost
Challenges
Rapid Expansion of Advanced Technologies
Continued Growth of the Service Sector
Scarcity of Operations Resources
Social-Responsibility Issues



End of Session 4

Studying Operations Management
Operations as a System
Decision Making in OM
Operations as a System
Inputs Outputs
Conversion
Subsystem
Production System
Control
Subsystem
Inputs of an Operations System
External
Legal, Economic, Social, Technological
Market
Competition, Customer Desires, Product Info.
Primary Resources
Materials, Personnel, Capital, Utilities
Conversion Subsystem
Physical (Manufacturing)
Locational Services (Transportation)
Exchange Services (Retailing)
Storage Services (Warehousing)
Other Private Services (Insurance)
Government Services (Federal)
Outputs of an Operations System
Direct
Products
Services
Indirect
Waste
Pollution
Technological Advances
Production as an Organization
Function
US companies cannot compete with marketing,
finance, accounting, and engineering alone.
We focus on OM as we think of global
competitiveness, because that is where the vast
majority of a firms workers, capital assets, and
expenses reside.
To succeed, a firm must have a strong operations
function teaming with the other organization
functions.
Decision Making in OM
Strategic Decisions
Operating Decisions
Control Decisions

Strategic Decisions
These decisions are of strategic importance
and have long-term significance for the
organization.
Examples include deciding:
the design for a new products production process
where to locate a new factory
whether to launch a new-product development
plan

Operating Decisions
These decisions are necessary if the ongoing
production of goods and services is to satisfy
market demands and provide profits.
Examples include deciding:
how much finished-goods inventory to carry
the amount of overtime to use next week
the details for purchasing raw material next
month
Control Decisions
These decisions concern the day-to-day
activities of workers, quality of products and
services, production and overhead costs, and
machine maintenance.
Examples include deciding:
labor cost standards for a new product
frequency of preventive maintenance
new quality control acceptance criteria
What Controls the Operations System?
Information about the outputs, the
conversions, and the inputs is fed back to
management.
This information is matched with
managements expectations
When there is a difference, management must
take corrective action to maintain control of
the system
Wrap-Up: World Class Practice
OM important in any organization
Global competition forces rapid evolution of
OM
Decision based framework focus of course
Strategic, Operating, and Control
End of Session 5