Introduction to Operations Management

for
Competitiveness
Presented
By
Dr. Kevin Michael Fleary
Course Deliverables
Assignment Weighting Date due
 

     
Case Study (Group)   Session 1 Assignment:
  15 Marks (25%) 30th September @ 12
Midnight

     
Short Answer (Individual)   Session 2 Assignment:
  25 Marks (35%) 25th October @ 12
Midnight

Operations Audit (Group)    

  40% Session 3 Assignment:
  12th November @ 12
N.B. Each Masters will be asked to have one Midnight
presentation to discuss findings
What is Operations Management?
• Every organization has an operations function, whether or not it is called
‘operations’.
• The goal or purpose of most organizations involves the production of
goods and/or services. To do this, they have to procure resources,
convert them into outputs and distribute them to their intended users.
• The term operations embraces all the activities required to create and
deliver an organization's goods or services to its customers or clients.
• Within large and complex organizations operations is usually a major
functional area, with people specifically designated to take responsibility
for managing all or part of the organization's operations processes.
What is Operations Management?
Technical understanding

• Operations management is an area of management concerned with

designing and controlling the process of production and redesigning
business operations in the production of goods or services.
• It involves the responsibility of ensuring that business operations are
efficient in terms of using as few resources as needed and effective in
terms of meeting customer requirements.
• It is concerned with managing an entire production system which is
the process that converts inputs (in the forms of raw materials, labor,
and energy, etc) into outputs (in the form of goods and/or services),
as added value.
Organizational Charts
Organizational Charts
Organizational Charts
Origins of Operations Management
A conversion process for production yields a tangible output, a product. A
conversion process for operations yields an intangible output, service.

The traditional view of POM began in the 18th century when economist
Adam Smith recognized the economic benefits of specialization. F.W.
Taylor implemented Smith’s idea to develop scientific management in the
1930’s.

1930’s to 1950’s the field was known as production management as

techniques developed focused on economic efficiency in manufacturing.
The objective which is still applicable today is, how to produce goods at
the right quantity and quality at the right time and at the right
manufacturing cost. Era of T Model cars for example.

1970’s operations management emerged as service sectors began to

utilize scientific management, while analyzing worker environment and
human behavior techniques.

The name Production and Operations Management was formed to

indicate a widening of the field in both manufacturing and service
organizations signally the beginning of an era of synthesis rather than just
analysis.
Significant Events in OM
Evolution of Production & Operations Management

• Changes in Industrial Structure resulted

in Changes Operations Management
Approaches:

• Production and Operations

Management
• Manufacturing Operations
Management
• Service Operations Management
• Operations Management
• Process Operations Management
• Behavioral Operations
Management
Why Study OM?
1. OM is one of three major functions of any
organization; we want to study how people
organize themselves for productive enterprise
2. We want (and need) to know how goods and
services are produced
3. We want to understand what operations
managers do
4. OM is such a costly part of an organization
5. View Organization at 3 levels of granularity:
Macro – Financial Analysis, Micro – operation
Analysis: Quantitative and Qualitative
 Options for Increasing
Contribution
TABLE 1.1
FINANCE/
MARKETING ACCOUNTING
OPTION OPTION OM OPTION
INCREASE REDUCE REDUCE
SALES FINANCE PRODUCTION
CURRENT REVENUE 50% COSTS 50% COSTS 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of goods –80,000 –120,000 –80,000 –64,000
Gross margin 20,000 30,000 20,000 36,000
Finance costs –6,000 –6,000 –3,000 –6,000
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% –3,500 –6,000 –4,200 –7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

Copyright © 2017 Pearson Education Ltd 1 - 12

Strategic Operations Management Decisions
• Cost of goods sold, often abbreviated COGS, is a managerial
calculation that measures the direct costs incurred in producing
products that were sold during a period. In other words, this is the
amount of money the company spent on labor, materials, and
overhead to manufacture or purchase products that were sold to
customers during the year.
• COGS has a direct relationship with the transformation process,
attempts to manipulate COGS is one example of using strategic
operations management decisions. Example: Turn to any Financial
Statement Profit and Loss, example: Angostura Holdings Limited.
 Productivity Challenge
• Operations aren’t about doing one thing right. They are about doing a
lot of things right at the same time. This means using resources and
materials efficiently, producing high quality goods, and maintaining a
reliable supply chain while managing risk.

• Production: Volume of output irrespective of input, increase output by

increasing input (negative cost of production/negative supply side
effects)

• Productivity: ratio of output to input; output value/input value. It is a

measure of efficiency. Efficiency can be defined as doing things right-
output for each unit of time, while effectiveness can be defined as
outputs that satisfy customers, doing the right thing.

• Output: Value created that is greater than the some of its parts, in the
form of goods and services.
OM manager job is to improve the ratio of
output to input. More output per unit of input. • Input: Factors of production: labor hours, investment in equipment,
material usage, management, etc.
Productivity

Units produced
Productivity =
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
Units produced
Productivity =
Labor-hours used

1,000
= = 4 units/labor-hour
250

One resource input  single-factor productivity

Multi-Factor Productivity
Output
Multifactor =
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

 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr
 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old labor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr

New labor 14 titles/day

productivity = 32 labor-hrs = .4375 titles/labor-hr
 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = = .0077 titles/dollar
$640 + 400
 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = = .0077 titles/dollar
$640 + 400

New multifactor 14 titles/day

productivity = = .0097 titles/dollar
$640 + 800
Productivity in the Service Sector
• Productivity improvement in services is difficult
because:

1. Typically labor intensive

2. Frequently focused on unique individual
attributes or desires
3. Often an intellectual task performed by
professionals
4. Often difficult to mechanize and automate
5. Often difficult to evaluate for quality
 Principles of POM: Process Design

High Process-focused Mass Customization

JOB SHOPS Customization at high
(Print shop, emergency Volume
room, machine shop, fine- (Dell Computer’s PC,
dining Repetitive (modular) cafeteria)
Variety of Products

restaurant) focus
Moderate ASSEMBLY LINE
(Cars, appliances,
TVs, fast-food
restaurants) Product focused
CONTINUOUS
(steel, beer, paper,
Low bread, institutional
kitchen)

Low Moderate High

Volume
 Transformation Process. OM Ecosystem
• Traditionally, organizations have kept the operations
function separate from both its customers and its
suppliers, in order to protect it from environmental
disturbances.
• This can lead to a ‘closed system’ mentality, in which
the operations function loses contact with external
customers and suppliers, and focuses only on the
10 Strategic Operations Management Decisions: transformation process that it controls. A closed
1. Design of Goods and Services system tends to limit flexibility and result in a loss of
2. Managing Quality competitiveness.
3. Process and Capacity Strategy • An ‘open system’ mentality, in which communication
4. Location Strategy with customers and suppliers is encouraged, seeks to
5. Layout Strategy reduce the barriers between the operations function
6. Human Resources and Job Design and its environment, in order to enhance the
7. Supply Chain Management and Job Design organization's competitiveness.
8. Inventory Management
9. Scheduling
10. Maintenance
Operations Strategy in a Global Environment

Reasons to internationalize operations?

• Improve the supply chain
• Reduce Cost and exchange rate risk
• Improve Operations
• Understand Markets
• Improve Products
• Attract an retain global talent
• Increase innovation
• Gain market share
• Government Policy
• And…

Value Chains can be disaggregated and spread across the world

A General Model for Operations
Management • Planning: activities that
establishes a course of
action and guides future
decision making

• Organizing: activities that

establish a structure of
task and authority.

• Controlling: activities that

assure the actual
performance with planned
performance.

• Behavior: activities that

seek to find out how
efforts to plan, organize
and control affect human
behavior.

• Models: POM models are

used to aid management
decision making.
An example of the scope of operations management task
along the transformation/throughput process. Its about control..
Capacity
► The throughput, or the number of units a
facility can hold, receive, store, or produce
in a period of time
► Determines
fixed costs
► Determines if
demand will
be satisfied
► Three time horizons
 Planning Over a Time Horizon
Options for Adjusting Capacity
Time Horizon
Design new production processes
Long-range
planning Add (or sell existing)
long-lead-time equipment *
Acquire or sell facilities
Acquire competitors
Intermediate-
range planning Subcontract Build or use inventory
(aggregate Add or sell equipment More or improved training
planning) Add or reduce shifts Add or reduce personnel

Schedule jobs

*
Short-range Schedule personnel
planning Allocate machinery
(scheduling)
Modify capacity Use capacity
* Difficult to adjust capacity as limited options exist
Design and Effective Capacity
► Design capacity is the maximum theoretical
output of a system
► Normally expressed as a rate
► Effective capacity is the capacity a firm
expects to achieve given current operating
constraints
► Often lower than design capacity
 Design and Effective Capacity
TABLE S7.1 Capacity Measurements
MEASURE DEFINITION EXAMPLE
Design capacity Ideal conditions exist Machines at Frito-Lay are designed to
during the time that produce 1,000 bags of chips/hr., and the
the system is plant operates 16 hrs./day.
available Design Capacity = 1,000 bags/hr. × 16 hrs.
= 16,000 bags/day
 Design and Effective Capacity
TABLE S7.1 Capacity Measurements
MEASURE DEFINITION EXAMPLE
Effective capacity Design capacity Frito-Lay loses 3 hours of output per day
minus lost output (= 0.5 hrs./day on preventive maintenance,
because of planned 1 hr./day on employee breaks, and 1.5
resource hrs./day setting up machines for different
unavailability (e.g., products).
preventive Effective Capacity = 16,000 bags/day
maintenance, – (1,000 bags/hr.)
machine (3 hrs./day)
setups/changeovers, = 16,000 bags/day
changes in product – 3,000 bags/day
mix, scheduled = 13,000 bags/day
breaks)
 Design and Effective Capacity
TABLE S7.1 Capacity Measurements
MEASURE DEFINITION EXAMPLE
Actual output Effective capacity On average, machines at Frito-Lay are not
minus lost output running 1 hr./day due to late parts and
during unplanned machine breakdowns.
resource idleness Actual Output = 13,000 bags/day
(e.g., absenteeism, – (1,000 bags/hr.)
machine breakdowns, (1 hr./day)
unavailable parts, = 13,000 bags/day
quality problems) – 1,000 bags/day
= 12,000 bags/day
Utilization and Efficiency
Utilization is the percent of design capacity
actually achieved
Utilization = Actual output/Design capacity

Efficiency is the percent of effective capacity

actually achieved
Efficiency = Actual output/Effective capacity
 Design
Bakery Example Capacity
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Bakery Example Utilization

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Bakery Example Efficiency

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

 Design
Bakery Example Capacity
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 201,600 rolls per line
Efficiency = 84.6%
Expected output of new line = 130,000 rolls

Design capacity = 201,600 x 2 = 403,200 rolls

 Effective
Bakery Example Capacity
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 201,600 rolls per line
Efficiency = 84.6%
Expected output of new line = 130,000 rolls

Design capacity = 201,600 x 2 = 403,200 rolls

Effective capacity = 175,000 x 2 = 350,000 rolls
 Actual
Bakery Example Output
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 201,600 rolls per line
Efficiency = 84.6%
Expected output of new line = 130,000 rolls

Design capacity = 201,600 x 2 = 403,200 rolls

Effective capacity = 175,000 x 2 = 350,000 rolls
Actual output = 148,000 + 130,000 = 278,000 rolls
 Utilization
Bakery Example Efficiency
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 201,600 rolls per line
Efficiency = 84.6%
Expected output of new line = 130,000 rolls

Design capacity = 201,600 x 2 = 403,200 rolls

Effective capacity = 175,000 x 2 = 350,000 rolls
Actual output = 148,000 + 130,000 = 278,000 rolls
Utilization = 278,000/403,200 = 68.95%
Efficiency = 278,000/350,000 = 79.43%
Capacity and Strategy
► Capacity decisions impact all 10 decisions
of operations management as well as
other functional areas of the organization
► Capacity decisions must be integrated
into the organization’s mission and
strategy
Examples: https://trackingtime.co/productivity/productivity-vs-efficiency.html
Example #1:
As an example of efficiency, consider two people who teach courses online. The first teacher produces a course in
two weeks but has many mistakes in the videos they recorded.  The other teacher produces 10/12 lessons in two
weeks, but his work doesn’t require the hours of editing that his counterpart’s work does. Although the first
teacher may be considered to be more productive, the second teacher is clearly the most efficient between the two
because it’ll take him less time to launch their course because he has less mistakes in the video recording process.  

Example #2:
To give you an example of how efficiency translates to productivity, imagine Anna, a content writer at an agency
who produces 10,000 words per week while another writer, Sandra, only produces 7,000 words. It may look like
Anna is more productive than Sandra. And that may be true if Anna has a low error rate. However, if her writing
requires 20 hours of editing and proofreading, while Sandra’s work is error-free and can be uploaded to the CMS
instantly, Sandra is clearly a lot more efficient than Anna. By doing the right things right, she is not only more
efficient but is ultimately more productive than Anna – a fact that may be easy for some observers to miss.
Capacity Considerations

1. Forecast demand accurately

2. Match technology increments and sales
volume
3. Find the optimum operating size
(volume)
4. Build for change
Managing Demand
► Demand exceeds capacity
► Curtail demand by raising prices, scheduling longer
lead times
► Long-term solution is to increase capacity
► Capacity exceeds demand
► Stimulate market
► Product changes
► Adjusting to seasonal demands
► Produce products with complementary demand
patterns
Tactics for Matching Capacity to
Demand
1. Making staffing changes
2. Adjusting equipment
► Purchasing additional machinery
► Selling or leasing out existing equipment
3. Improving processes to increase throughput
4. Redesigning products to facilitate more throughput
5. Adding process flexibility to meet changing product
preferences
6. Closing facilities
 Developing Missions and
Strategies

Mission statements tell an organization

where it is going

The Strategy tells the organization

how to get there
Your Mission must align with your strategy
 Mission
 Mission - where are
you going?
 Organization’s
purpose for being
 Answers ‘What do
we provide society?’
 Provides boundaries
and focus
Factors Affecting Mission
Philosophy
and Values

Profitability
Environment
and Growth
Mission

Customers Public Image

Benefit to
Society
Sample Missions
Sample Company Mission
To manufacture and service an innovative, growing, and
profitable worldwide microwave communications business
that exceeds our customers’ expectations.

Sample Operations Management Mission

To produce products consistent with the company’s mission

as the worldwide low-cost manufacturer.
Strategy
 Action plan to
achieve mission
 Functional areas
have strategies
 Strategies exploit
opportunities and
strengths, neutralize
threats, and avoid
weaknesses
Strategies for Competitive
Advantage

 Differentiation – better, or at least different

 Cost leadership – cheaper
 Response – rapid response
Adaptability for Competitive Advantage
• https://scholar.google.com/citations?user=t7sawmMAAAAJ&hl=en&oi=sra
• Traditional approaches to strategy assume a relatively stable world. They aim to build
an enduring competitive advantage by achieving dominant scale, occupying an
attractive niche, or exploiting certain capabilities and resources. But globalization, new
technologies, and greater transparency have combined to upend the business
environment.
• Sustainable competitive advantage no longer arises from positioning or resources.
Instead, it stems from the four organizational capabilities that foster rapid adaptation:
• The ability to read and act on signals of change
• The ability to experiment rapidly and frequently—not only with products and services but also
with business models, processes, and strategies
• The ability to manage complex and interconnected systems of multiple stakeholders
• The ability to motivate employees and partners
 OM’s Contribution to Strategy
10 Operations Specific Competitive
Decisions Examples Strategy Used Advantage

Product FLEXIBILITY:
Sony’s constant innovation
Quality of new products………………………………....Design
HP’s ability to lead
Process the printer market………………………………Volume

Location Southwest Airlines No-frills service……..…..LOW COST

DELIVERY:
Layout Pizza Hut’s 5-minute guarantee Differentiation
at lunchtime…………………..…..………………….Speed (Better)
Human Federal Express’s “absolutely,
resource positively on time”………………………..….Dependability
Adaptability
QUALITY: Response
Supply chain (Faster)
Motorola’s HDTV converters….……........Conformance
Motorola’s pagers………………………..….Performance Cost
Inventory leadership
Caterpillar’s after-sale service (Cheaper)
Scheduling on heavy equipment……………....AFTER-SALE SERVICE

Maintenance Fidelity Security’s broad

line of mutual funds………….BROAD PRODUCT LINE
 Operations Strategies for Two Drug
Companies 10 Decision Areas
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive
Advantage Product Differentiation Low Cost

Product Heavy R&D investment; Low R&D investment;

Selection and extensive labs; focus on focus on development
Design development in a broad of generic drugs
range of drug
categories
Quality Major priority, exceed Meets regulatory
regulatory requirements requirements on a
country by country
basis
 Operations Strategies for Two
Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive
Advantage Product Differentiation Low Cost

Process Product and modular Process focused;

process; long general processes; “job
production runs in shop” approach, short-
specialized facilities; run production; focus
build capacity ahead of on high utilization
demand
Location Still located in the city Recently moved to low-
where it was founded tax, low-labor-cost
environment
 Operations Strategies for Two
Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive
Advantage Product Differentiation Low Cost

Scheduling Centralized production Many short-run

planning products complicate
scheduling

Layout Layout supports Layout supports

automated product- process-focused “job
focused production shop” practices
 Operations Strategies for Two
Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive
Advantage Product Differentiation Low Cost

Human Hire the best; Very experienced top

Resources nationwide searches executives; other
personnel paid below
industry average

Supply Chain Long-term supplier Tends to purchase

relationships competitively to find
bargains
 Operations Strategies for Two
Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive
Advantage Product Differentiation Low Cost

Inventory High finished goods Process focus drives up

inventory to ensure all work-in-process
demands are met inventory; finished
goods inventory tends
to be low
Maintenance Highly trained staff; Highly trained staff to
extensive parts meet changing demand
inventory
OM Challenges on Product Life Cycle
Introduction Growth Maturity Decline
Product design and Forecasting critical Standardization Little product
development Product and process Less rapid product differentiation
critical reliability changes – more Cost
Frequent product Competitive product minor changes minimization
OM Strategy/Issues

and process design improvements and Optimum capacity Overcapacity in

changes options the industry
Increasing stability
Short production Increase capacity of process Prune line to
runs eliminate items
Shift toward product Long production
High production focus runs not returning
costs good margin
Enhance distribution Product
Limited models improvement and Reduce capacity
Attention to quality cost cutting
End
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