INTRODUCTION

to
Operation Management

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 Chapter Outline
• Definition of Operations Management
• Key Points in OM.
• Operations Decisions - A Framework
• Cross-Functional Decision Making
• Operations as a System
• Contemporary Operations Themes

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 Definition of
Operations Management
• Operations Management is concerned with the
production of goods and services.

• Operation Management is the study of decision making

in the operation function.

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Where are the OM Jobs

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Where are the OM Jobs

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 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.

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 Organizational
Functions
• Marketing
– Gets customers
• Operations
– creates product or service

• Finance/Accountin
g
– Obtains funds
© 1995 Corel Corp.
– Tracks money
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 Functions - Bank
Commercial Bank
© 1984-1994
T/Maker Co.

Marketing Operations Finance/

Accounting

Teller Check Transactions

Security
Scheduling Clearing Processing

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 Functions - Airline

Airline © 1984-1994 T/Maker Co.

Marketing Operations Finance/

Accounting

Flight Ground Facility

Catering
Operations Support Maintenance

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 Functions -
Manufacturer
Manufacturing

Marketing Operations Finance/

Accounting

Manufacturing Production Quality

Purchasing
Control Control

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 Operation Managers
• Operation Managers are the staff of the organization who have
particular responsibility of managing resources for producing
goods/services.
• Operation Manager are responsible for producing the supply
of goods or services in organization.
• Operations managers make decisions regarding the operations
function and its connection with other functions.
• Operations managers plan and control the production process
and its interfaces within the organization and with the external
environment.
• It means everything we wear, eat , sit on, read is because of
Operations Managers.

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What Is Operations Management?

Production is the creation of

goods and services
Operations management is the
set of activities that creates value
in the form of goods and
services by transforming inputs
into outputs

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 Key Points in OM
Definition
1. Functions of the operations manager.

2. Decisions in the organization.

3. Process for producing goods and

services

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 Operation Functions
• Arrangement of resources which are
devoted to the production and delivery
of products and services.
• Manufacturing companies- The
operation function may be called
manufacturing, production and operations
departments.

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What Operations
Managers Do
Plan - Organize - Staff - Lead -
Control

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 Operation Decision
Main Elements
• Quality
– Defining Criteria
• Standard must be set
• People trained
• Inspection of goods and services produced
• Process
– How to produce & deliver
• Type of equipments
• Layout of the facility
• Work force
– Managing People
• Selection, hiring, firing, training, supervision
• Capacity
– Physical facilities & labor
• Inventory
– What, when & how much?
Example CIIT
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 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?

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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?

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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?

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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?

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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?

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Cross-Functional Decision Making
• Operations are the primary
responsibility of Operation Manager.
• But have to take care of other primary
functions:
– Marketing
– Finance
AND
• Supporting functions: Accounts, IT,
Personnel
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Operations is about
managing Process

Transformation
Input (Conversion)
Output
Process

Transformation Process Model

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 Operations as a
Process

Input Transformation Transformation Output

Fabrication Assembly

Fabrication: making the parts

Assembly: putting the parts together

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Operations as a System
Energy
Materials
Labor Transformation
Goods or
(Conversion)
Capital Services
Process
Information

Feedback information for

control of process inputs
and process technology

Operation Manager used the feed back control to

continuously adjust the mix of inputs and technology
to achieve desired outputs

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 Relation of Operations to its Environment

SOCIETY

External
Human Environment
EngineeringMarketing
Resources

Suppliers Operations transformation system CUSTOMERS

Accounting Finance MIS

COMPETITORS
Internal Environment

GOVERNMEN
T
Internal Environment-Upper Management, Other Business Units
External Environment-PEST, Competitors
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 The Operations
Function
Operations as a transformation
process
Operations as a
basic function
Operations as the
technical core

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 Operations as a
Transformation Process
INPUT
Material
Machines
Labor
Management
Capital

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 Operations as a
Transformation Process
INPUT
Material
Machines TRANSFORMATION
Labor PROCESS
Management
Capital

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 Operations as a
Transformation Process
INPUT
Material
OUTPUT
Machines TRANSFORMATION Goods
Labor PROCESS Services
Management
Capital

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 Operations as a Transformation Process

INPUT
Material
OUTPUT
Machines TRANSFORMATION Goods
Labor PROCESS Services
Management
Capital

Feedback

Feed Back is used to adjust factors in the

transformation process which may in turn alter
the inputs

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Operations as the
Technical Core

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 Operations as the
Technical Core
Finance/Accounting
Production and Budgets
Inventory data Cost analysis
Capital budgeting requests Capital investments
Capacity expansion and Stockholder
Orders for materials Technology plans requirements Product/Service
Production and delivery Availability
Schedules Quality Lead-time estimates

Marketing
Suppliers

Requirements Design/ Status of order

Performance specs Delivery schedules

Operations
Material availability Sales forecasts
Quality data Customer orders
Delivery schedules Customer feedback
Designs Personnel needs Promotions
Hiring/firing
Skill sets
Training
Performance evaluations
Legal requirements
Job design/work
Union contract negotiations
measurement

Human Resources
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 OPERATIONS MANAGEMENT IN AN E-BUSINESS
ENVIRONMENT

• Trade occurs over the internet

– e-commerce (consumer trade)
– e-business (business trade)

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Categories of
E-Commerce

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 Categories of E-Commerce
Business Consumer

B2B B2C
Business
Commerceone.com Amazon.com

C2B C2C
Consumer
Priceline.com eBay.com

Priceline – customer bid on airline seats-C2B

General Electric Trading Process Network-B2B
Commerceone.com-B2B

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 Value Chain
• The set of activities that
create and deliver
products to the customer.

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A New Value Chain
(a) Traditional Value Chain

Manufacturer Wholesaler/ Retailer Consumer

distributor

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A New Value Chain
(a) Traditional Value Chain

Manufacturer Wholesaler/ Retailer Consumer

distributor

(b) Intermediaries Eliminated (Deintermediation)

Manufacturer Wholesaler/ Retailer Consumer

distributor

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 A New Value Chain
(a) Traditional Value Chain

Manufacturer Wholesaler/ Retailer Consumer

distributor

(b) Intermediaries Eliminated (Deintermediation)

Manufacturer Wholesaler/ Retailer Consumer

distributor

(b) New Intermediaries Introduced (Reintermediation)

Manufacturer Infomediary E-Retailer Aggregator Portal Consumer

Portal- through which consumer access

web e.g. Yahoo
Aggregator-that brings together the
related sites e.g. Google
Infomediary- having customer
information
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E-Retailer-Virtual storefronts
An Integrated
Value Chain

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 An Integrated
Value Chain

Customer Manufacturer Supplier

Flow of information (customer order)

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 An Integrated
Value Chain

Customer Manufacturer Supplier

Flow of information (customer order)

Flow of product (order fulfillment)

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 Impact of E-Business on OM
 Better customer relations – really?
 Consumer can Compare Prices
 Cost can cut because of no intermediaries
 More efficient processes
 Eliminate the Inefficiencies of business process
 Online transaction costs 1 cent, ATM 27 cents, 52 cents by branch
 Lower cost of materials – why??
 The cost reduction comes from competitive bidding
 Suppliers can reduce the cost because they know the customer can see
everyone of us
 Information technology synergy (combining)
 2.7 greater productivity than not using IT
 Better and faster decision making
 Timely information about the customers
 Needs can be known in advance
 Better decision making can take place by seeing what every one else is
doing
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 Impact of E-Business on OM
 New forms of organizations
 eBay
 Virtual company
 Outsourcing (No need to go Malaysia to find computer parts )
 Expanded supply chain
 SC issues order fulfillment, logistics, warehousing, transportation and
delivery
 Outsourcing have made SCM and important skill

 Higher customer expectations

 Power is shifted from manufacturer to consumer
 Customization rather than Standardization (DELL)
 New ways of doing business
 No face to face transaction-online business
 Globalization
 Global companies
 Global parts in one product

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 Competitiveness

How effectively a nation

competes in the global
marketplace

The degree to which a nation can produce goods

and services that meet the test of international
markets while simultaneously maintaining or
expanding the real incomes of its citizens.

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 Productivity as a measure to
Competitiveness

Output
Productivity =
Input

Partial measures=output/(single input)

Multi-factor measures=output/(multiple inputs)
Total measure=output/(total inputs)

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 Productivity
Output
Productivity =
Input

Partial Output Output Output Output

measures Labor Machine Capital Energy

Multifactor Output Output

measures Labor + Machine Labor + Capital + Energy

Total Goods or Services Produced

measure All inputs used to produce them
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Productivity in the ‘90s
–
7–
6–
5–
4–
3–
2–
1–
0–
-1 –
-2 –
-3 – | | | | | | | | | | | |
‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 2001

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Productivity in the ‘90s
–
7– United States
6– Germany
5– Japan

4–
3–
2–
1–
0–
-1 –
-2 –
-3 – | | | | | | | | | | | |
‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 2001

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 Measures of
Competitiveness
 Productivity
 GDP (Gross domestic product) growth
 Market capitalization
 Technological infrastructure
 Quality of education
 Efficiency of government (Stability)

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 Competitiveness of
Selected Countries
100
80
60
40
20
0 US Singapore Finland Ireland Germany UK Japan Mexico Russia

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 Competitiveness of
Selected Countries
100
80
60
40
20
0 US Singapore Finland Ireland Germany UK Japan Mexico Russia

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 Competitive Industries
• Competitiveness can also be viewed from an industry or
firm perspective.
• Competition within the industries is intense when the firms
have

– Equal size resources

– Products and Services are standardized
– Industry growth is slow

That will result in

– Price Wars
– Rapidly introduction of new products and services

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 Barriers to Entry
Companies with low barriers to entry are more
competitive
 Economies of scale – cost decreases with the volume

 Capital investment-high investment

 Access to supply and distribution channels

Name an industry Wal-Mart

 Learning curves- having an experience

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 Competition Within
Industries Increases When
 Firms are relatively equal in size
and resources
 Products and services are
standardized
 Industry growth is slow

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