CH APTER 1

INTRODUCTION

Operation – a part of business organization

responsible for producing goods and/or services Operations management – the management
Goods – physical items produced by business of systems or processes that create goods
organizations and/or provide services.

Services – activities that provide some • Operations & Supply chains are intrinsically
combination of time, location, form, and linked, and no business organizations could
psychological value exist without both.

Finance – responsible for securing financial

resources at favorable prices and allocating
those resources throughout the organization, as
well as budgeting, analyzing investment
proposals, and providing funds for operations.
Supply chain – a sequence of organizations –
their facilities, functions, and activities – that
are involved in producing and delivering a
product or service.

* The internal parts of SC are part of the

operations function itself, supplying operations
Marketing – responsible for assessing with parts and materials, performing work on
consumer wants and needs, and selling and products and/or services, and passing the work
promoting the organization’s goods or services. on the next step in the process.

Operations management affects:

- companies’ ability to compete
- nation’s ability to compete internationally

Product supply chain

Operations – responsible for producing the

goods or providing the services offered by the
organization.
 Supply chain for bread Value-added – the difference between the cost
of inputs and the value or price of outputs.

Illustration of the transformation process

* The creating of goods or services involves

transforming or converting inputs into outputs.

The operations function involves the conversion

of inputs into outputs

PRODUCTION OF GOODS VS PROVIDING

SERVICES

• Products are typically neither purely service

– or purely goods – based
• Production of goods result in tangible
output – E.g. an automobile, eyeglasses,
etc.
Feedback = measurements taken at various • Delivery of service, generally implies an act.
points in the transformation process E.g. A physician’s examination, TV and auto
Control = The comparison of feedback against repair, etc.
previously established standards to determine • Manufacturing and service are often
if corrective action is needed. different in terms of “what” is done but
similar in terms of “how” it is done.
Goods-service continuum
Differences: Manufacturing Service
Degree of Low contact High
customer contact
contact
Labor of Task-focused Customer-
content of focused
jobs
Uniformity of Standardized Variable
inputs
Measurement Output metrics Service
The goods-service combination is a continuum. of productivity metrics
It can range from primarily goods, with little Quality Standardized Service
service, to primarily service, with few goods. assurance testing standards
Inventory Physical No
inventory inventory
 Wages Standardized Variable
pay pay
Ability to Common Less
patent common
Similarities between managing the production
of products and managing services:

• Forecasting and capacity planning to match

supply and demand
• Process management
• Managing variations
• Monitoring and controlling costs and
productivity
• Supply chain management
• Location planning, inventory management,
quality control, and scheduling

Typical differences between production of

goods and provision of services

Manufacturing and Service Organizations differ

clearly because manufacturing is goods -
oriented and service is act - oriented

To objectives of Operations Management

Operations and sales are the two-line functions Three Categories of Business Process:
in a business organization. All other functions –
1. Upper-management processes. These
accounting, finance, marketing, IT, and so on –
govern the operation of the entire
support the two-line functions.
organization. E.g. organizational
Finance and operations management personnel governance and organizational strategy.
cooperate by exchanging information and 2. Operational processes. There are the core
expertise in such activities as the following: processes that make up the value stream.
E.g. purchasing, production and/or service,
1. Budgeting
marketing, and sales.
2. Economic analysis of investment proposals
3. Supporting processes. These support the
3. Provision of funds
core processes. E.g. accounting, human
Lead time – the time between ordering a good resources, and IT.
or service and receiving it.
Business process management (BPM) –
Management Information System (MIS) – activities include process design, process
concerned with providing management with execution.
the information it needs to effectively manage.
Managing a Process to Meet Demand
Personnel or human resources department -
• Ideally, the capacity of a process will be
concerned with the recruitment and training
such that its output just matches demand.
Public relations - responsible for building and
maintaining a positive image of the
organization.

CAREER OPPORTUNITIES AND PROFESSIONAL

SOCIETIES

• Among the numerous job titles are

operations, manager, production analyst, • Excess Capacity is wasteful and costly
production manager, inventory manager, • Too Little Capacity means dissatisfied
purchasing manager, schedule coordinator, customers & Lost Revenue
distribution manager, supply chain
manager, quality analyst, and quality Having the right capacity requires having
manager. accurate forecasts of demand, the ability to
translate forecasts into capacity requirements,
PROCESS MANAGEMENT and a process in place capable of meeting
expected demand.
Process – one or more actions that transform
inputs into outputs. Process Variation
• In essence, the central role of all • Variation occurs in all business processes.
Management is Process Management • It can be due to Variety or Variability.
• Businesses are composer of many
interrelated process There are four basic sources of variation:

1. The variety of goods/services being

offered – greater the variety, the greater
the variation in production or service
requirements.
2. Structural variation in demand – includes - System Design Decisions
trends & seasonal variation and are - System Operations Decisions
generally predictable
System Design involves decisions that relate to
3. Random variation – natural variability is
present to some extent in all processes, as ➢ Capacity
well as demand for services and products, ➢ Facility location
and it can generally influence by managers. ➢ Facility layout
4. Assignable variation – caused by defective ➢ Product and service planning
inputs, incorrect work methods, out-of- ➢ Acquisition and placement of equipment
adjustment, and so on. Can be reduced by
or eliminated by analysis and corrective These are typically strategic decisions that
action. require

SCOPE OF OPERATIONS MANAGEMENT • Long-term commitment of resources

• Determine parameters of system operation
• The scope of operations management
ranges across the organization. System Operation involves

The operations function includes many ➢ Management of personnel

interrelated activities such as: ➢ Inventory management and control
➢ Scheduling
➢ Forecasting ➢ Project management
➢ Capacity planning ➢ Quality assurance
➢ Locating facilities
➢ Facilities and layout
➢ Scheduling • Operations managers spend more time on
➢ Managing inventories system operation decision than any other
➢ Assuring quality decision area
➢ Motivating and training employees • They still have a vital stake in system in
Type of Operations design

A number of other areas are part if, or

support, the operations function such as:

Purchasing – responsible for the procurement

of materials, supplies, and equipment.

Industrial engineering – often concerned with

scheduling, performance standards, work
methods, quality control, and material
handling.
Role of the Operations Manager
Distribution – involves the shipping of goods to
• The Operations Function consists of all warehouses, retail outlets, or finals customers.
activities directly related to producing
Maintenance – responsible for general upkeep
goods or providing services.
and repair of equipment, the buildings and
• A primary function of the operations grounds, heating and air-conditioning, parking,
manager is to guide the system by decision removing toxic wastes, and perhaps security.
making.
The Operations Manager and the Management • This section describes general approaches
Process to Decision-Making; including
1. Models
• The kinds of jobs that operations managers
2. Quantitative Approaches
oversee vary tremendously from
3. Performance Metrics
organizations to organization largely
4. Analysis of Trade-Offs
because of different products or services
5. Degree of Customization
involved
6. A Systems Perspective
• The operations managers must coordinate
7. Establishing Priorities
the use of resources through management
process of planning, organizing, staffing, Models
directing, and controlling.
Model – an abstraction of reality; a simplified
Operations Manager – Planner and decision representation of something.
maker, exerts considerable influence over the
Common features of models are:
degree to which the goals and objectives of the
organization are realized. ➢ They are simplifications of real-life
phenomena
Responsibilities of Operations Managers
➢ They omit unimportant details of the
real-life systems they mimic so that
attention can be focused on the most
important aspects of the real-life
system
• Type of Models:
➢ Physical Models – Look like their
real-life counterparts. E.g.
miniature cars, trucks, airplanes,
toy animals and trains, and scale-
model buildings.
➢ Schematic Models – more abstract
than their physical counterparts;
that is, have less resemblance to
the physical reality. E.g. graphs and
OPERATIONS MANAGEMENT & DECISION charts, blueprints, pictures, and
MAKING drawings.
• Most operations decisions involve many ➢ Mathematical Models – the most
alternatives that can have quite impacts on abstract: Do not look at all like their
costs or profits real-life counterparts. E.g. numbers,
• Typical operations decisions include: formulas, and symbols.

Models are beneficial because they:

1. Are generally easy to use and less expensive

than dealing directly
2. Require users to organize and sometimes
quantify information
3. Increase understanding of the problem
4. Enable managers to analyze "What if?" Analysis of Trade-Offs
questions
5. Serve as a consistent tool for evaluation • A trade off is giving up one thing in return
for something else.
and provide a standardized format for
analyzing a problem • carrying more inventory (an expense) in
6. Enable users to bring the power of order to achieve a greater level of customer
mathematics to bear on a problem. service.

Models important limitations: Degree of Customization

1. Quantitative information may be • The Degree of Customization affects an

emphasized at the expense of qualitative organization by increasing labor, time, and
information. skill requirements, leading to lower output
2. Models may be incorrectly applied and the volumes and higher prices.
results misinterpreted. The widespread use • It impacts process selection, job roles, and
of computerized models adds to this risk various business functions such as
became highly sophisticated models may be marketing, sales, and finance.
placed in the hands of users who are not A Systems Perspective
sufficiently knowledgeable to appreciate
the subtleties of a particular model: this, • A Systems Perspective is almost always
they are unable to fully comprehend the beneficial in decision making.
circumstances under which the model can • It is essential whenever something is being
be successfully employed. designed, redesigned, implemented,
3. The use of models does not guarantee good improved, or otherwise change.
decisions.
System – a set of interrelated parts that must
Quantitative Approaches work together.

• Quantitative Approaches to problem • The systems approach emphasizes

solving often embody an attempt to obtain interrelationships among subsystems, but
mathematically optimal solutions to its main theme is that the whole is greater
managerial problems. than the sum of its individual parts.
• These includes; • From a systems viewpoint, the output and
➢ Linear programming objectives of the organization as a whole
➢ Queuing techniques take precedence over those of any one
➢ Inventory models subsystem.
➢ Project models
Establishing Priorities
➢ Forecasting techniques
➢ Statistical models • In nearly all cases, certain issues or items are
more important than other
Performance Metrics
• Recognizing this allows managers to focus
• All managers use metrics to manage and
their attention to those efforts that will do
control operations:
the most good
• Profits, costs, productivity and forecast
• Pareto Phenomenon - a few factors
accuracy
account for a high percentage of
occurrence of some events)
➢ 80-20 Rule: 80% of problems are job, achieving cooperation
caused by 20% of the activities. between management and
➢ The critical few factors should receive workers, and separating
the highest priority management activities from
➢ This is a concept that is appropriately work activities
applied to all areas and levels of ➢ Emphasis was on maximizing
management output
• The Principles of Management
HISTORICAL EVOLUTION OF OPERATIONS
published on 1911.
MANAGEMENT
• A number of other pioneers also
The Industrial Revolution contributed heavily to this movement,
including the following:
• Pre-Industrial Revolution ➢ Frank Gilbreth - father of motion
Craft production – system in which highly study
skilled workers use simple, flexible tools to ➢ Henry Gantt developed the Gantt
produce small quantities of customized charts scheduling system and
goods. recognized the value of non-
monetary rewards for motivating
• Some key elements of the industrial employees.
revolution ➢ Harrington Emerson applied
➢ Began in England in the 1770s - Taylor's ideas to organization
Division of labor structure
➢ Adam Smith, 1776 - ➢ Henry Ford employed scientific
Application of the "rotative" management techniques in his
steam engine, 1780s factories.
➢ Cotton Gin and Interchangeable • During the early part of 20th century
parts - Eli Whitney, 1792 Ford’s Model T was a success. He
• Management theory and practice did introduced the moving assembly line.
not advance appreciably during this
period 1-48 Mass production – system in which low-skilled
workers use specialized machinery to produce
Scientific Management high volumes of standardized goods. By Henry
• Movement was led by Frederick Ford
Winslow Taylor, who is often referred Interchangeable parts – parts of a product
to as the father of scientific made to such precision that they do not have to
management. be custom fitted. By Eli Whitney
➢ Believed in a "science of
management" based on Division of labor – the breaking up of a
observation, measurement, production process into small tasks, so that
analysis and improvement of each worker performs a small portion of the
work methods, and economic overall job. By Henry Ford
incentives The Human Relations Movement
➢ Management is responsible for
planning, carefully selecting • The human relations movement
and training workers, finding emphasized the importance of the human
the best way to perform each element in job design
 ➢ Lillian Gilbreth OPERATIONS TODAY
➢ Elton Mayo - Hawthorne
E-business – the use of electronic technology to
studies on worker motivation,
facilitate business transactions.
1930
➢ Abraham Maslow - motivation E-commerce – consumer to business
theory, 1940s; hierarchy of transaction
needs, 1954
➢ Frederick Hertzberg - Two Technology – application of scientific
Factor Theory, 1959 discoveries to the development and
➢ Douglas McGregor - Theory X improvement of products and services and
and Theory Y, 1960s operations processes.
➢ William Ouchi - Theory Z, 1981 Operations management is primarily concerned
Decision Models and Management Science with three kinds of technology:
(1915, 1960 -1970s) 1. Product and service technology – refers to
the discovery and development of new
• F.W. Harris - mathematical model for
products and services.
inventory management, 1915
2. Process technology – refers to methods,
• Dodge, Romig, and Shewart - statistical
procedures, and equipment used to
procedures for sampling and quality
produce goods and provide services.
control, 1930s
3. Information Technology (IT) – refers to the
• Tippett - statistical sampling theory, 1935
science and sue of computers and other
• Operations Research (OR) Groups - OR
electronic equipment to store, process and
applications in warfare
send information.
• George Dantzig - linear programming, 1947
General Agreement on Tariffs and Trade (GATT)
Influence of Japanese Manufacturers
Revenue management – is a method used by
• Refined and developed management
some companies to maximize the revenue they
practices that increased productivity
receive from fixed operating capacity by
➢ Credited with fueling the "quality
influencing demand through price
revolution
manipulation. Also known as yield management
➢ Just-in-Time production
Six Sigma – a process for reducing costs,
improving quality, and increasing customer
satisfaction.

Agility – the ability of an organization to

respond quickly to demands or opportunities.

Lean system – system that uses minimal

amounts of resources to produce a high volume
of high-quality goods with some variety.
 KEY ISSUES FOR TODAY’S BUSINESS allowing a person who has had too much to
OPERATIONS drink to drive.
2. The Rights Principle: Actions should respect
• Economic conditions. Trade disputes and
and protect the moral rights of others. E.g.
tariffs have created uncertainties for
not taking advantage of a vulnerable
decision makers. person.
• Innovating. Finding new or improved 3. The Fairness Principle: Equals should be
products or services are only two of the held to, or evaluated by, the same
many possibilities that can provide value to standards. E.g. equal pay for equal work.
an organization. 4. The Common Good Principle: Actions
• Quality problems. The numerous should contribute to the common good of
operations failures mentioned at the the community. E.g. ordinance on noise
beginning of the chapter underscore the abatement.
need to improve the way operations are 5. The Virtue Principle: Actions should be
managed. consistent with certain ideal virtues. E.g.
• Risk management. The need for managing honesty, compassion, generosity, tolerance,
risk is underscored by recent events that fidelity, integrity, and self-control.
include financial crises, product recalls,
accidents, natural and man-made disasters, Ethical framework – a sequence of steps
and economic ups and downs. intended to guide thinking and subsequent
• Cyber-security. The need to guard against decision or action.
intrusions from hackers whose goal is to Ethical issues arise in many aspects of
steal personal information of employees operations management, including:
and customers is becoming increasingly
necessary • Financial statements
• Competing in a global economy. Low labor • Worker safety
costs in third-world countries have • Product safety
increased pressure to reduce labor costs. • Quality
• Environment
Environmental Concerns
• Community
• Global warming and pollution • Hiring and firing workers
• Closing facilities
Sustainability – using resources in ways that do
• Workers’ rights
not harm ecological systems that support
human existence. The Need to Manage the Supply Chain

• Choice of diet can affect the environment Outsourcing’ buying goods or services instead
of producing or providing them in-house
Ethical Conduct
1. The need to improve operations
Ethics – a standard of behavior that guides how
2. Increasing levels of outsourcing
one should act in various situations.
3. Increasing transportation costs
Five principles for thinking ethically: 4. Competitive pressures
5. Increasing globalization
1. The Utilitarian Principle: The good done by 6. Increasing importance of e-business
an action or inaction should outweigh any
7. The complexity of supply chains
harm it causes or might cause. E.g. not 8. The need to manage inventories
9. The need to deal with trade wars 8. Ethical behavior is an integral part of good
management practice.
Elements of Supply Chain Management
9. All business organizations have, and are
Supply chain management involves part of, a supply chain that must be
coordinating activities across the supply chain. managed.

Key elements of supply chain management

KEY POINTS IN THIS CHAPTER

1. The operations function is that part of every

business organization that produces
products and/or delivers services.
2. Operations consists of processes that
convert inputs into outputs. Failure to
manage those processes effectively will
have a negative impact on the organization.
3. Organizations are systems made up of
interrelated subsystems. Because of this, a
systems perspective in decision making is
essential.
4. A key goal of business organizations is to
achieve an economic matching of supply
and demand. The operations function is
responsible for providing the supply or
service capacity for expected demand.
5. All processes exhibit variation that must be
managed.
6. Although there are some basic differences
between services and products that must
be taken into account from a managerial
standpoint, there are also many similarities
between the two.
7. Environmental issues will increasingly
impact operations decision making.