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