1-1 Introduction to Operations Management

Operations Management

William J. Stevenson
 1-2 Introduction to Operations Management

CHAPTER
1

Introduction to
Operations Management

Operations Management, Eighth Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights
1-3 Introduction to Operations Management
1-4 Introduction to Operations Management
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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 P’s 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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Scope of Operations Management

 Operations Management includes:
 Forecasting
 Capacity planning

 Scheduling

 Managing inventories

 Assuring quality

 Motivating employees

 Deciding where to locate facilities

 And more . . .
 1-7
THE SCOPE OF OPERATIONS
Introduction to Operations Management

MANAGEMENT
The scope of operations management ranges across the organization.
Operations management people are involved in product and service design,
process selection, selection and management of technology, design of work
systems, location planning, facilities planning, and quality improvement of
the organization’s products or services.
The operations function includes many interrelated activities, such as
forecasting, capacity planning, scheduling, managing inventories, assuring
quality, motivating employees, deciding where to locate facilities, and more.
We can use an airline company to illustrate a service organization’s
operations system. The system consists of the airplanes, airport facilities, and
maintenance facilities, sometimes spread out over a wide territory. The
activities include:
 Forecasting such things as weather and landing conditions, seat demand

for flights, and the growth in air travel.

1-8 Introduction to Operations Management

Capacity planning, essential for the airline to maintain cash flow and make a
reasonable profit. (Too few or too many planes, or even the right number of planes
but in the wrong places, will hurt profits.)
Facilities and layout, important in achieving effective use of workers and
equipment. Scheduling of planes for flights and for routine maintenance;
scheduling of pilots and flight attendants; and scheduling of ground crews, counter
staff, and baggage handlers. Managing inventories of such items as foods and
beverages, first-aid equipment, in flight magazines, pillows and blankets, and life
preservers. Assuring quality, essential in flying and maintenance operations, where
the emphasis is on safety, and important in dealing with customers at ticket
counters, check-in, telephone and electronic reservations, and curb service, where
the emphasis is on efficiency and courtesy. Motivating and training employees in
all phases of operations. Locating facilities according to managers’ decisions on
which cities to provide service for, where to locate maintenance facilities, and where
to locate major and minor hubs. Now consider a bicycle factory. This might be
primarily an assembly operation: buying
 1-9 Introduction to Operations Management

Why Study Operations

Management?
You may be wondering why you need to study operation
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.Also you will learn how to use a range of quantitative tools that
enhance managerial decision making
So, it is essential for these people to have understanding of
operations management
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Functions within the business

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

Organization

Finance Operations Marketing

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Business Operations Overlap

Figure 1.2

Operations

Marketing Finance
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Value-Added
Figure 1.3
The difference between the cost of inputs
and the value or price of outputs.
Value added
Inputs
Transformation/ Outputs
Land
Conversion Goods
Labor
process Services
Capital
Feedback
Measurement and Measurement and
Feedback Feedback
Control
Feedback Feedback
1-13 Introduction to Operations Management

Food Processor
Table 1.1

Inputs Processing Outputs

Raw Vegetables Cleaning Canned
Metal Sheets Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment
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Hospital Process
Table 1.2

Inputs Processing Outputs

Doctors, nurses Examination Healthy

Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy
1-15 Introduction to Operations Management

Types of Operations
Table 1.3
Operations Examples
Goods Producing 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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Operations Interface with number of Supporting
Functions
Industrial
Engineering
Maintenance
Distribution

Purchasing Public
Operations Relations

Legal
Personnel

Accounting MIS
1-17 Introduction to Operations Management
A number of other areas are part of,
or support, the operations function
They include purchasing, industrial engineering, distribution, and
maintenance.
 Purchasing has responsibility for procurement of materials, supplies, and

equipment. Close contact with operations is necessary to ensure correct

quantities and timing of purchases. The purchasing department is often
called on to evaluate vendors for quality, reliability, service, price, and
ability to adjust to changing demand. Purchasing is also involved in
receiving and inspecting the purchased goods.
Industrial engineering is often concerned with scheduling, performance

standards, work methods, quality control, and material handling.

Distribution involves the shipping of goods to warehouses, retail outlets, or

final customers.
Maintenance is responsible for general upkeep and repair of equipment,

buildings and grounds, heating and air-conditioning; removing toxic wastes;

parking; and perhaps security.

1-18 Introduction to Operations Management

Goods-service Continuum
Figure 1.5

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 goods

Low percentage service High percentage service
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Manufacturing or Service?

Tangible Act
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Differentiating Features of Production Systems

 To understand better about the nature of

operations management some features will help-
three of following will help to understand fully:
 Degree of standardization
 Type of Operations
 Production of Goods vs. Service Operations
1-21 Introduction to Operations Management

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
 Manufacturing vs Service, Key
1-22 Introduction to Operations Management

Differences
Characteristic Manufacturing Service
Output Tangible Intangible
Customer contact High
Low
Uniformity of input High Low
Labor content Low High
Uniformity of output
High Low
Measurement of productivity Easy Difficult
Opportunity to correct High Low
quality problems
Inventory
High

Much Little
Wages Narrow range Wide range
Patentable Usually Not Usually
 Heirarchy of Operation Management
1-23 Introduction to Operations Management

Decision
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Top Level Management

President, CEO, VP, their decisions have broader scope,
They are involved in activities:
Make long-range plans, Establish policies, Represent the

company, product selection, New facility construction,

Choice of location and Technology
Upper-level managers have most power and who take

overall responsibility for the organization. An example is

chief executive officer (CEO). Top managers establish the
structure for the organization as a whole, and they select
the people who fill the upper-level positions. Represent
the company to the outside world at official functions and
fund-raisers.
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Middle Level Management

Controller, Marketing Manager, Sales Manager, Implement goals,
Make decisions, Direct first-line managers, Middle managers have
similar responsibilities, but usually for just one division or unit. They
develop plans for implementing the broad goals set by top managers,
and they coordinate the work of first-line managers. In traditional
organizations, managers at the middle level are plant managers,
division managers, branch managers, and other similar positions.
But in more innovative management structures, middle managers
often function as team leaders who are expected to supervise and lead
small groups of employees in a variety of job functions. Similar to
consultants, they must understand every department’s function, not
just their own area of expertise. Furthermore, they are granted
decision-making authority previously reserved for only high-ranking
executives.
1-26 Introduction to Operations Management

Lower Level Manager

Have narrow scope, include:

•Scheduling personnel,

•Adjusting output rates,

•Controlling quality,

•inventory replenishment,

•handling equipment breakdown,

•Absenteeism

•shortage
1-27 Introduction to Operations Management

Responsibilities of Operations Management

Planning Organizing
– Capacity – Degree of centralization
– Location – Process selection
– Products & services Staffing
– Make or buy – Hiring/laying off
– Layout – Use of Overtime
– Projects Directing
– Scheduling – Incentive plans
Controlling/Improving – Issuance of work orders
– Inventory – Job assignments
– Quality
– Costs
– Productivity
 1-28 Introduction to Operations Management

Key Decisions of Operations Managers

• The chief role of an operations manager is that of planner and
decision maker. Operations management professionals make a
number of key decisions that affect the entire organization.
These include the following:
What: What resources will be needed, and in what amounts?
When: When will each resource be needed? When should the
work be scheduled? When should materials and other supplies
be ordered? When is corrective action needed?
Where: Where will the work be done?
How: How will the product or service be designed? How will
the work be done (organization, methods, equipment)?
How will resources be allocated?
Who: Who will do the work? An operations manager’s daily
concerns include costs (budget), quality, and schedules (time).
1-29 Introduction to Operations Management

Next we will discuss general approaches to decision

making, including the use of models, quantitative
methods, analysis of trade-offs, establishing
priorities, ethics, and the systems approach. Models
are often a key tool used by all decision makers.
1-30 Introduction to Operations Management

Models

A model is an abstraction of reality.

– Physical
– Schematic
– Mathematical
Tradeoffs

What are the pros and cons of models?

1-31 Introduction to Operations Management

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 child’s 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.
 1-32 Introduction to Operations Management
Managers use models in a variety of ways and for a variety of reasons

Models are Beneficial

 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
 Increase understanding of the problem
 Enable manager to ask “what if” questions
 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 problem
1-33 Introduction to Operations Management

LIMITATIONS
 Quantitative information may be emphasized
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.
1-34 Introduction to Operations Management
Designing and Operating Production Systems
The primary function of operation managers is to guide
the system by decision making. Certain decisions effect
the design of the system, and other effect the operation of
the system
System Design
– capacity
– location
– arrangement of departments
– product and service planning
– acquisition and placement of
equipment
1-35 Introduction to Operations Management

Decision Making
System operation
– personnel
– inventory
– scheduling
– project management
– quality assurance
1-36 Introduction to Operations Management

Decision Making
 Models
 Quantitative approaches

 Analysis of trade-offs

 Systems approach
1-37 Introduction to Operations Management

Quantitative Approaches

• Linear programming
• Queuing Techniques
• Inventory models
• Project models
• Statistical models
1-38 Introduction to Operations Management

Systems Approach

“The whole is greater than

the sum of the parts.”

Suboptimization
1-39 Introduction to Operations Management

A Systems Approach
A systems viewpoint is almost always beneficial in decision making. A
system can be defined as a set of interrelated parts that must work
together. In a business organization, the organization can be thought of
as a system composed of subsystems (e.g., marketing subsystem,
operations subsystem, finance subsystem), which in turn are composed
of lower subsystems.
The systems approach emphasizes interrelationships among subsystems,
but its main theme is that the whole is greater than the sum of its
individual parts. Hence, from a systems viewpoint, the output and
objectives of the organization as a whole take precedence over those of
any one subsystem. An alternative approach is to concentrate on efficiency
within subsystems and thereby achieve overall efficiency. But that
approach overlooks the facts that organizations must operate in an
environment of scarce resources and that subsystems are often in direct
competition for those scarce resources, so that an orderly approach to the
allocation of resources is called for.
1-40 Introduction to Operations Management

A Systems Approach
A systems approach is essential whenever something isbeing
designed, redesigned, implemented, improved, or other wise
changed. It is important to take into account the impact on all parts
of the system. For example, if the upcoming model of an
automobile will add antilock brakes, a designer must take into
account how customers will view the change, instruc tions for
using the brakes, chances for misuse, the cost of producing the
new brakes, installation procedures, recycling worn-out brakes,
and repair procedures. In addition, workers will need training to
make and/or assemble the brakes, produc tion scheduling may
change, inventory procedures may have to change, quality
standards will have to be established, advertis ing must be
informed of the new features, and parts suppliers must be
selected. Global competition and outsourcing are increasing the
length of companies’ supply chains, making it more important than
ever for companies to use a systems approach to take the “big
picture” into account in their decision making.
1-41 Introduction to Operations Management

Pareto Phenomenon (Establishing Priorities )

• 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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 1-43 Introduction to Operations Management

Historical Evolution of Operations Management

 Industrial revolution (1770’s) The subject Operations management has its own
connection with the age-old Industrial Revolution, which has started during the late 17th century in
England and later spread to the rest of Europe and to the United States during the 19th century. Prior
to that time, goods were manufactured in small quantities in smaller shops / factories by the local
craftsmen and their apprentices, who were mostly their family members. Under that system, it was
common for one person to be responsible for making a product, such as a horse-drawn wagon or a
piece of furniture, from start to finish. Only simple tools were available; the machines that we use
today had not been invented. From the late 17th century (1770) to the early years of the 18th
century, series of events took place in England which together is called the Industrial Revolution.
Later, in the 18th century , many scientific inventions came into existence and changed the
face of production / operations by substituting huge machines, which are operated by steam power and
electric power. Perhaps the most significant of these inventions, was the steam engine; it had the ability
to provide power to operate huge machineries in the factories. For example, the spinning jenny and the
power looms revolutionized the textile industry. Ample supplies of coal and iron ore provided materials
for generating power and making machinery. The new machines, made of iron, were much stronger and
more durable than the simple wooden machines they replaced.
1-44 Introduction to Operations Management

Historical Evolution of Operations Management

 Industrial Revolution resulted in two major developments: widespread
substitution of machine power for human power and establishment of the
organized production system known as factory system.
The events that took place from 1770 to the 1800s are characterized by great
inventions. The great inventions were eight in number ,with six of them having
been conceived in England, one in France and one in the United States .The
eight inventions are—Hargreaves Spinning Jenny, Arkwright’s Water Frame,
Crompton’s Mule, Cartwright’s Power Loom, Watt’s steam engine, Berthollet’s
Chlorine Bleaching Discovery, Mandslay’s Screw-Cutting Lathe and Eli
Whitney’s Interchangeable Manufacture.
 . The Industrial Revolution advanced further with the development of the
gasoline engine and electricity in the 1800s. Other industries emerged and along
with them new factories came into being. By the middle of 18th century, the old
cottage system of production had been replaced by the large scale factory
system.
1-45 Introduction to Operations Management

Historical Evolution of Operations Management

 Scientific management (1911)
 Mass production

 Interchangeable parts

 Division of labor
 As days went by, production capacities expanded, demand for
capital grew and labor became highly dependent on jobs and
urbanized. At the commencement of the 20th century, the one
element that was missing was a management –the ability to develop
and use the existing facilities to produce on a large scale to meet
massive markets of today.
1-46 Introduction to Operations Management

Historical Evolution of Operations Management

 Human relations movement (1920-60)
 Decision models (1915, 1960-70’s)
 Influence of Japanese manufacturers
 Later, the Scientific Management Era has brought widespread changes
to the practices and management of factories. The movement was
spearheaded by the efficiency engineer and inventor Frederick
Winslow Taylor, who is often referred to as the Father of Scientific
Management. Taylor believed in a “science of management” based on
observation, measurement, analysis and improvement of work
methods, and economic incentives. He studied work methods in great
detail to identify the best method for doing each job. Taylor also
believed that management should be responsible for planning, carefully
selecting and training workers, finding the best way to perform each
job, achieving cooperation between management and workers, and
separating management activities from work activities.
1-47 Introduction to Operations Management

Trends in Business
 Major trends
 The Internet, e-commerce, e-business
 Management technology

 Globalization

 Management of supply chains

 Agility
1-48 Introduction to Operations Management

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.
1-49 Introduction to Operations Management

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.
1-50 Introduction to Operations Management

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
1-51 Introduction to Operations Management

Other Important Trends

 Reengineering
Some companies are taking drastic measures to improve
their performance. They are conceptually starting from
scratch in redesigning their processes. Engineering focuses
on significantly improving business processes, such as the
steps required to fill a customer’s 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.)
1-52 Introduction to Operations Management

Other Important Trends

 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

Farm Trucking

Mill
Trucking

Suppliers
:
Fuel Bakery
Repairs Supermarket
Tires
Drivers
Trucks
Trucking
1-53 Introduction to Operations Management

Simple Product Supply Chain

Suppliers’ Direct Final

Producer Distributor
Suppliers Suppliers Consumer

Supply Chain: A sequence of activities

And organizations involved in producing
And delivering a good or service
1-54 Introduction to Operations Management

Other Important Trends

 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
flexibility, time reduction, and teamwork. This
has led to a flattening of the organizational
structure, with fewer levels of management.