1. business and industrial
2. manufacturing

Operations Management
Definition
Operations management is defined
as the design, operation, and
improvement of the systems that
create and deliver the firm’s primary
products and services.
Irwin/McGraw-Hill
2
Why Study Operations Management?
Systematic Approach
to Org. Processes
Business Education/
Career Opportunities
Operations
Management
Increase Competitive
Advantage/Survival
Cross-Functional
Applications
Irwin/McGraw-Hill
3
Current Trends
 96 of the top 100 industries in the U.S. have large $
worth of exports. Exporting industries are
characterized by early ongoing investments in
advanced product and process technologies.
 Productivity is increasing and has become a basis
for competition. Success domestically and globally
is dependent on the ability to compete on many
fronts, including operations (e.g., internet - easy to
find potential customers, but hard to deliver)
 Outsourcing of manufacturing and services (e.g.,
India and China) is accelerating.
Irwin/McGraw-Hill
WS8
Factors Affecting a Firm's Ability to Ward off Imports and/or Export
Economic/Political
exchange rates
trade barriers
capital costs
inflation
capital availability
social costs/legal
funds flows
savings rate
interest rates
minimum wage
Corporate
Environmental/social
environmental protection
health costs
labor unions
education system
consumer tastes
retailing capabilities
employee
Technological
strategy
R&D
risk avoidance
engineering
role of functions
product development
Fin-Mktg-Mfg-Eng-R&D
process development
balance sheet
new products
financial capacity
development process
marketing policies
export sales competencies
Technological sophistication of mgt
External
transportation costs
logistics resources
labor supply, capabilities
training resources
communications
public infrastructure
Operations
Suppliers
costs/productivity
quality
delivery cycle
delivery reliability
flexibility for prod change
flexibility for vol. change
New product introduction
inventory mgt.
Prod. Planning Control
Equip. & process tech
#, size, location of facilities
logistics
customer service
information technology
abilities
coordination
location
competition
cooperation
**Wickham Skinner: The Role of the Industrial Managers in the Massive U.S. Negative Trade Balance, April 2000
WS6
Operations Decision Making
Marketplace
Corporate Strategy
Finance Strategy
Operations Strategy
Marketing Strategy
Operations Management
People
Materials &
Customers
Input
Irwin/McGraw-Hill
Plants
Parts
Planning and Control
Processes
Products &
Services
Output
The Transformation Process (value adding)
4
Key OM Concepts

Efficiency - Doing something at the lowest
possible cost

Effectiveness - Doing the right things to
create the most value for the organization

Value - Quality divided by price
Irwin/McGraw-Hill
8
Transformations

Physical--manufacturing

Locational--transportation

Exchange--retailing

Storage--warehousing

Physiological--health care

Informational--telecommunications
Irwin/McGraw-Hill
5
Examples of Production Systems
Irwin/McGraw-Hill
System
Inputs
Conversion
Output
(desired)
Hospital
Patients
MDs, Nurses
Medical Supplies
Equipment
Health Care
Healthy
Individuals
Restaurant
Hungry Customers Prepare Food
Food, Chef
Serve Food
Servers
Atmosphere
Automobile
Plant
Sheet Steel
Engine Parts
Tools, Equipment
Workers
University
High School Grads Transferring
Teachers, Books
of Knowledge
Classroom
and Skills
Satisfied
Customers
Fabrication
High Quality
and Assembly Automobiles
of Cars
Educated
Individuals
6
Service or Good?


“If you drop it on your foot, it won’t hurt
you.” (Good or service?)
“Services never include goods and
goods never include services.” (True or
false?)
Irwin/McGraw-Hill
7
What about McDonald’s?

Service or Manufacturing?

The company certainly manufactures tangible
products

Why then would we consider McDonald’s a
service business?
Irwin/McGraw-Hill
8
Front and Back Office
Back Office
Service Provider
Front Office
Customer
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9
Core “Factory Services”
Core Services are basic things that
customers want from products that they
purchase.
Irwin/McGraw-Hill

Quality

Flexibility

Speed

Price (or production cost)
10
Value-Added Services
Value-added services differentiate the
organization from competitors and build
relationships that bind customers to the firm
in a positive way.
Irwin/McGraw-Hill

Information

Problem Solving and Field Support

Sales Support
11
History of Operations







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

Cottage System <1700
Industrial Revolution 1700 - 1800
1850s
Civil War
Scientific Management 1890s
Moving Assembly Line 1910s
Hawthorne Studies 1930s
Operations Research 1940s
Global Competition 1970s
Service Revolution
1980s
Mass Customization 1990s
Irwin/McGraw-Hill
TIME
12
Development of OM as a Field – The Names
and Emphasis Change, but the Elements
Remain Basically the Same!
Scientific
Management
Manufacturing
Strategy
TQM &
Six Sigma
Moving Assembly
Line
JIT/Lean
Manufacturing
Business Process
Reengineering
Hawthorne
Studies
Manufacturing
Resources Planning
Electronic
Enterprise
Operations
Research
Service Quality
and Productivity
Global Supply
Chain Mgt.
Historical
Underpinnings
Irwin/McGraw-Hill
OM’s Emergence
as a Field
13
Some Current Issues

Implementing/sustaining Quality Management initiatives

Consolidating operations resulting from mergers

Speeding up the time to get new products to market

Developing flexible production systems to enable mass
customization of products and services

Developing and integrating new technologies

Managing global supplier, production and distribution
networks

Outsourcing
Irwin/McGraw-Hill
14
Purchasing Managers Index


Began 1931
Measures:






Index Measures Economic Activity


Irwin/McGraw-Hill
New Manufacturing Orders
Production Volume
Deliveries
Inventory Levels
Employment
>50.0% Expanding
<42.7% Contracting
15
Purchasing Managers Index


Irwin/McGraw-Hill
A “Leading Indicator” since:
- Manufacturing must order materials in
advance of production
- The indicator is based on plans of supply
management (purchasing) executives
Source: Institute for Supply Management
(ISM) – ism.org (previously National
Association of Purchasing Management)
15
Purchasing Managers Index
Dec-05
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Irwin/McGraw-Hill
55.6
54.8
56.7
55.2
57.3
54.4
53.8
54.7
54.5
52.9
51.2
49.5
42.7
42.7
42.7
42.7
42.7
42.7
42.7
42.7
42.7
42.7
42.7
42.7
50
50
50
50
50
50
50
50
50
50
50
50
Operations Management - Overview
Process Analysis
and Design
Process Control
and Improvement
Operations
Strategy
Quality
Management
Process Analysis
Statistical
Process Control
Project
Management
Supply Chain
Strategy
Just in Time
Planning for Production
Job Design
Manufacturing
Supply Chain
Management
Consulting and
Reengineering
Facility Layout
Services
Waiting Line Analysis and
Simulation
Capacity Management
Aggregate
Planning
Inventory Control
Materials Requirement Planning
Operations Strategy
Strategy Process
Example
Customer Needs
More Product
Corporate Strategy
Increase Org. Size
Operations Strategy
Increase Production Capacity
Decisions on Processes
and Infrastructure
Build New Factory
Irwin/McGraw-Hill
Competitive Dimensions



Cost
Quality and Reliability
Delivery




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Coping with Changes in Demand
New Product Introduction


Irwin/McGraw-Hill
Flexibility
Speed
Reliability
Speed
Flexibility
Dealing with Trade-offs
For example, if we reduce costs by reducing product
quality inspections, we might reduce product quality.
Example II, if we improve
customer service problem
solving by cross-training
personnel to deal with a
wider-range of problems,
they may become less
efficient at dealing with
commonly occurring
problems.
Irwin/McGraw-Hill
Cost
Flexibility
Delivery
Quality
Order Qualifiers and Winners
Order Qualifiers: Screening criterion
that permits a firm’s products or
services to be considered as possible
candidates for purchase
Order Winners: Criterion that
differentiates the products or services
of one firm from another
Irwin/McGraw-Hill
Strategy Begins with Priorities

Consider the personal computer assembler
1. How would we segment the market according to
product group?
2. How would we identify product requirements,
demand patterns, and profit margins for each group?
3. How do we identify order winners and order
qualifiers for each group?
4. How do we convert order winners into specific
performance requirements?
Competition
(Them)
Us
Differentiation (Core competencies)
Manufacturing’s Role in
Corporate Strategy
Irwin/McGraw-Hill

Stage I--Internally Neutral - minimize
potential manufacturing negative

Stage II--Externally Neutral - achieve parity
with competitors

Stage III--Internally Supportive - support
business strategy

Stage IV--Externally Supportive manufacturing based competitive strategy
Four Stages of Service Firm
Competitiveness

Stage I. Available for Service

Stage II. Journeyman

Stage III. Distinctive Competence Achieved

Stage IV. World Class Service Delivery
Irwin/McGraw-Hill
U. S. Competitiveness Drivers

Product Development


Waste Reduction (JIT Philosophy)


WIP, space, tool costs, and human effort
Improved Customer-Supplier Relationships


speed development & enhance
manufacturability
borrowed from Japanese Keiretsu
Improved Leadership

strong, independent boards of directors
Irwin/McGraw-Hill
Execution!!
•
Unless you translate big thoughts into concrete
steps for action, they’re pointless. (Larry Bossidy)
•
Strategy is execution. (Louis Gerstner)
•
In the business world, having a good objective
means nothing if you implement it badly. (Fareed
Zakaria)
•
You cannot have an execution culture without
robust dialogue - one that brings reality to the
surface through openness, candor, and informality.
Robust dialogue starts when people go in with
open minds. You cannot set realistic goals until
you’ve debated the assumptions behind them.
Irwin/McGraw-Hill
Productivity
Outputs
Productivi ty =
Inputs

Partial measures


Multi-factor measures


output/(multiple inputs)
Total measure

Irwin/McGraw-Hill
output/(single input)
output/(total inputs)
Example
10,000 Units Produced
Sold for $10/unit
500 labor hours
What is the
labor productivity?
Labor rate: $9/hr
Cost of raw material: $5,000
Cost of purchased material: $25,000
Irwin/McGraw-Hill
Example--Labor Productivity
10,000 units/500hrs = 20 units/hour ...
... or we can arrive at a unitless figure
(10,000 unit*$10/unit)/(500hrs*$9/hr) = 22.22
Irwin/McGraw-Hill
Example:
Productivity Measurement


You have just determined that your service
employees have used a total of 2400 hours
of labor this week to process 560 insurance
forms. Last week the same crew used only
2000 hours of labor to process 480 forms.
Is productivity increasing or decreasing?
Irwin/McGraw-Hill
Balanced Scorecard
1. Financial perspective
2. Internal perspective
3. Customer perspective
4. Innovation and learning perspective
Irwin/McGraw-Hill