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Introduction to Operations Management

Operations Management

William J. Stevenson

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Introduction to Operations Management

CHAPTER

Introduction to
Operations Management

McGraw-Hill/Irwin

Operations Management, Eighth Edition, by William J. Stevenson

Copyright 2005 by The McGraw-Hill Companies, Inc. All rights

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Introduction to Operations Management

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Introduction to Operations Management

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Introduction to Operations Management

This strategy is based on the corporate mission, and in essence reflects how the firm
plans to use all its resources and functions (marketing, finance, and operations) to
gain competitive advantage. The operations strategy specifies how the firm will employ
its production capabilities to support its corporate strategy. (We will discuss the extent
to which operations influences corporate strategy in subsequent chapters.)
Operations management deals with the direct production resources of the firm. These
resources may be thought of as the five Ps of operations management People,
Plants, Parts, Processes, and Planning and control systems. The people are the direct
and indirect work force, the plants include the factories or service branches where
production is carried out; the parts include the materials (or in the case of services, the
supplies) that go through the system: the process include the equipment and the steps
by which production is accomplished; and the planning and control systems are the
procedures and information used by management to operate the system.

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Introduction to Operations Management

Scope of Operations Management

Operations Management includes:

Forecasting
Capacity planning
Scheduling
Managing inventories
Assuring quality
Motivating employees
Deciding where to locate facilities
And more . . .

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Introduction to Operations Management

Why Study Operations

You may be wondering
why you need to study operation
Management?

Management. There are number of very good reasons.

1. Operations Management activities are at the core of all business
organizations, regardless of what business they are in.
2.50% or more of all jobs are in operations management related
areas such as customer services, quality assurance, production
planning, and control scheduling, job design, inventory
management, and many more.
3.Activities in all of the other areas of business organizations, such
as finance, accounting, human resources, logistics, marketing,
purchasing as well as other all interrelated with operation
management activities.
4.So it is essential for these people to have basic understanding of
operations management
5.Also you will learn how to use a range of quantitative tools that
enhance managerial decision making

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Introduction to Operations Management

Functions within the business

organizations
Figure 1.1
The management of systems or processes
that create goods and/or provide services
Organization

Finance

Operations

Marketing

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Introduction to Operations Management

Business Operations Overlap

Figure 1.5

Operations

Marketing

Finance

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Value-Added
Figure 1.2

The difference between the cost of inputs

and the value or price of outputs.
Value added
Inputs
Land
Labor
Capital

Transformation/
Conversion
process

Outputs
Goods
Services

Feedback

Control
Feedback

Feedback

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Operations Interfaces
Industrial
Engineering
Maintenance

Distribution

Purchasing

Operations

Public
Relations

Legal
Personnel
Accounting

MIS

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Goods-service Continuum
Figure 1.3

Steel production
Home remodeling
Auto Repair
Maid Service
Teaching
Automobile fabrication
Retail sales
Appliance repair Manual car wash Lawn mowing

High percentage goods

Low percentage service

Low percentage goods

High percentage service

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Manufacturing or Service?

Tangible

Act

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Types of Operations
Table 1.4

Operations
Goods Producing

Examples

Farming, mining, construction,

manufacturing, power generation
Storage/Transportation Warehousing, trucking, mail
service, moving, taxis, buses,
hotels, airlines
Exchange
Retailing, wholesaling, banking,
renting, leasing, library, loans
Entertainment
Films, radio and television,
concerts, recording
Communication
Newspapers, radio and television
newscasts, telephone, satellites

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Food Processor
Table 1.2

Inputs

Processing

Outputs

Raw Vegetables
Metal Sheets
Water
Energy
Labor
Building
Equipment

Cleaning
Making cans
Cutting
Cooking
Packing
Labeling

Canned
vegetables

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Hospital Process
Table 1.2

Inputs
Doctors, nurses
Hospital
Medical Supplies
Equipment
Laboratories

Processing

Outputs

Examination
Surgery
Monitoring
Medication
Therapy

Healthy
patients

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Production of Goods vs. Delivery of Services

Production of goods tangible output
Delivery of services an act
Service job categories

Government
Wholesale/retail
Financial services
Healthcare
Personal services
Business services
Education

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Manufacturing vs Service, Key

Differences

Characteristic

Manufacturing Service

Output

Tangible

Customer contact

Low

High

Uniformity of input

High

Low

Labor content

Low

High

Uniformity of output

High

Low

Measurement of productivity

Easy

Difficult

Opportunity to correct
quality problems

High

Low

High

Amount of inventory

Intangible

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The operations function

Consists of all activities directly related to

producing goods or providing services

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Responsibilities of Operations Management

Table 1.6

Planning

Capacity
Location
Products & services
Make or buy
Layout
Projects
Scheduling

Controlling/Improving

Inventory
Quality
Costs
Productivity

Organizing

Degree of centralization
Process selection

Staffing

Hiring/laying off
Use of Overtime

Directing

Incentive plans
Issuance of work orders
Job assignments

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Models
A model is an abstraction of reality.
Physical
Schematic
Mathematical

Tradeoffs

What are the pros and cons of models?

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THE USE OF MODELS

The model is an abstract of reality. That is to say, a model presents a
simplified, incomplete version of something, e.g. a childs toy car is a
model of a real automobile.
Models are sometimes classified as PHYSICAL, SCHEMATIC, &
MATHEMATICAL:
PHYSICAL MODELS look like their real life counter parts. Examples
include miniature cars, trucks, airplanes, toy animals and trains & scale
model buildings, Adv: their visual correspondence with reality.
SCHEMATIC MODELS are more abstract e.g. include graphs & Charts
blueprints pictures & drawing. Less physicals features of reality adv:
relatively simple to construct and to change.
MATHEMATICAL MODELS are based on physical and chemical laws
(mass & energy balances), laws of thermodynamics, chemical reaction
kinetic are frequently used in optimization application. They are the most
abstract; height of abstraction; they do not look all like their real life
counterparts. Examples include numbers, formulas, & certain symbols.
They are easiest to manipulate and are in essential forms of inputs for
computers & calculators.

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Managers use models in a variety of ways and for a variety of reasons

Generally easy to use and less expensive than dealing directly with
the actual situation.
Model requires users to organize and quantify information and in
the process, often indicate areas where additional information is
needed.
Provide systematic approach to problem solving
Understanding of problem
They enable manage to ask What If question
Require users to be very specific about objectives
Serve as a consistent tool for evaluation.
Enable users to bring the power of mathematics to bear on a
problem
Provide a standardized format for analyzing a proble m

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LIMITATIONS

Quantitative information may be emphasis

at the expense of qualitative information.
Models may be incorrectly applied and the
results misinterpreted.
May be some users are unable to
comprehend the circumstances under
which the model can be successfully
employed.
Model building can become an end in itself.

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Key Decisions of Operations Managers

What
What resources/what amounts

When
Needed/scheduled/ordered

Where
Work to be done

How
Designed

Who
To do the work

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Decision Making
System Design

capacity
location
arrangement of departments
product and service planning
acquisition and placement of
equipment

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Decision Making
System operation
personnel
inventory
scheduling
project
management
quality assurance

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Decision Making
Models
Quantitative approaches
Analysis of trade-offs
Systems approach

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Models Are Beneficial

Easy to use, less expensive
Require users to organize
Systematic approach to problem solving
Increase understanding of the problem
Enable what if questions
Specific objectives
Consistent tool
Power of mathematics
Standardized format

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Quantitative Approaches
Linear programming
Queuing Techniques
Inventory models
Project models
Statistical models

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Systems Approach
The whole is greater than
the sum of the parts.

Suboptimization

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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?

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Historical Evolution of Operations

Management

Table 1.7

Industrial revolution (1770s)

Scientific management (1911)

Mass production
Interchangeable parts
Division of labor

Human relations movement (1920-60)

Decision models (1915, 1960-70s)
Influence of Japanese manufacturers

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Trends in Business

Major trends
The Internet, e-commerce, e-business
Management technology
Globalization
Management of supply chains
Agility

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Simple Product Supply Chain

Figure 1.7
Suppliers
Suppliers

Direct
Suppliers

Producer

Distributor

Supply Chain: A sequence of activities

And organizations involved in producing
And delivering a good or service

Final
Consumer

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A Supply Chain for Bread

Stage of Production

Value
Added

Value of
Product

Farmer produces and harvests wheat

$0.15

$0.15

Wheat transported to mill

$0.08

$0.23

Mill produces flour

$0.15

$0.38

Flour transported to baker

$0.08

$0.46

Baker produces bread

$0.54

$1.00

Bread transported to grocery store

$0.08

$1.08

Grocery store displays and sells bread

$0.21

$1.29

Total Value-Added

$1.29

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Other Important Trends

Global Marketplace
Markets and companies are becoming increasingly global in
nature. The North American Free Trade Agreement
(NAFTA) has opened borders for trade between the United
States, Canada, and Mexico. Even more far-reaching is the
General Agreement on Tariffs and Trade (GATT). 124
Countries have agreed to open their economies, reduce tariffs
and subsidies, and expand protection of intellectual property.
Operations strategy
At present various companies are recognizing the importance
of operations strategy on the overall success of their business,
and the necessity for relating it to their overall business
strategy.

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Other Important Trends

Total Quality Management

Many firms are now adopting a total quality management
approach to their business. In this approach organization
involved in a never ending quest to improve the quality of
goods and services. Key features are; a team approach,
finding and eliminating problems, emphasis on serving the
customer, and continuously working to improve the system.
Flexibility
The ability to adopt quickly to changes in volume of demand, in the
mix of products demanded, and in product design, has become a
major competitive strategy. In manufacturing, the term agile
manufacturing is sometimes used to connote flexibility.

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Other Important Trends

Technology
Technological advances have led to a vast array of new products
and processes. Undoubtedly the computer has had and will
continue to have the greatest impact on business organizations.
It has truly revolutionized the way companies operate.
Technological advances in new materials, new methods, and
new equipment have also made their mark on operations.

Worker involvement
Various companies are pushing the responsibility for decision
making and problem solving to lower levels in the
organizations. The reasons for this include recognition of the
knowledge workers possess about the production process and
system. A key to worker involvement is the use of teams of
workers who solve problems and make decisions on a consensus
basis.

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Reengineering

Some companies are taking drastic measures to improve their

performance. The are conceptually starting from scratch inn
redesigning their processes. Engineering focuses on significantly
improving business processes, such as the steps required to fill a
customers request or the steps required to bring a new product to
market
Environmental Issues.
Pollution control and waste disposal are key issues managers must contend with.
There is increasing emphasis on reducing waste, using less toxic chemicals (e.g,
lawncare services shifting to environmentally friendly approaches) recycling,
making it easier for consumers to recycle products (e.g., including s shipping
container for returning used laser printer cartridges) and designing products and
parts that can be reused (remanufacturing products such as copying machines.)

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Supply Chain Management organization are

increasing their attention to managing the supply
chain, from suppliers and buyers of raw materials all
the way to final customers
Lean Production
This new approach to production emerged in the
1990s. It in corporates a number of the recent trends
listed here, with an emphasis on quality flexiblity,
time reduction, and teamwork. This has led to a
flattening of the organizational structure, with fewer
levels of management.