Chapter 1 INTRODUCTION TO OPERATIONS MANAGEMENT 1 Operations

Chapter 1 INTRODUCTION TO OPERATIONS MANAGEMENT 1

Operations Management = OM u Management of ANY activities/process that create goods and provide services » Exemplary Activities: Forecasting, Scheduling, Quality management u Why to study OM » At a typical manufacturing company Profit 5% OM Cost 21% Marketing Cost 26% Manufacturing Cost 48% 2

Operations Management = OM The management of systems or processes that create goods and/or provide services Organization Finance Operations The distinct –active- role of operations: Inputs become Outputs after some Transformation Marketing 3

Operations example in Manufacturing: Food Processing INPUTS PROCESS OUTPUTS Raw vegetables Cleaning Metal sheets Cutting/Rolling/Welding Cans Energy, Vegetables Cutting Energy, Water, Cooking Vegetables Energy, Cans, Boiled Placing vegetables Clean vegetables Cut vegetables Boiled vegetables Can food 4

Operations example in service: Health care Inputs Doctors, nurses Hospital Medical Supplies Equipment Laboratories Processing Outputs Examination Surgery Monitoring Medication Therapy Healthy patients 5

Types of Operations Operation Examples Goods producing Farming, mining, construction Storage/transportation Warehousing, trucking, mail, taxis, buses, hotels, location Exchange Trade, retailing, wholesaling, renting, leasing, loans Entertainment Radio, movies, TV, concerts, recording Communication Newspapers, journals, magazines, radio, TV, telephones, satellite 6

Why OM? u Core of all business organizations u Many areas interrelated with OM activities u Management of operations is critical to create and maintain competitive advantages 7

Organization of Businesses u Three basic functions – Operations/Production » Goods oriented (manufacturing and assembly) » Service oriented (health care, transportation and retailing) » Value-added (the essence of the operations functions) – Finance-Accounting » Budgets (plan financial requirements) » Economic analysis of investment proposals » Provision of funds (the necessary funding of the operations) 8

Organization of Businesses (Cont. ) – Marketing » » u The Selling Promoting Assessing customer wants and needs Communicating those needs to operations need for working closely Operations Marketing Finance 9

Operations Interfaces 10

Systems (Holistic) Approach u u Emphasizes interrelations among subsystems. A systems approach is essential whenever something is being designed, redesigned, implemented, or improved. It is important to take into account the impact on all parts of the system. Example: A new feature is added to a product. Designer must take into account how customers will view the change, instruction for using new feature, the cost, training of workers, production schedule, quality standard, advertising must be informed about the new feature. 11

Systems Approach “The whole is greater than the sum of the parts. ” Suboptimization 12

Value Added Value added: The difference between cost of inputs and price (? ? ) of outputs. Is this definition right? Should value added include profit? Value added: The difference between the cost of inputs and the (market or fair) value or price of outputs. 13

Value-Added Value added Inputs Land Labor Capital Transformation/ Conversion process Outputs Goods Services Feedback Control Feedback 14

Degree of Standardization ! u Standardized output – Take advantage of standardized methods, less skilled workers, materials… » Example: Iron, Wheat, most of commodities u Customized output – Each job is different – Workers must be skilled » Example: Hair cut 15

Manufacturing (=Goods) vs. Service operations u Production of goods (goods oriented) – Tangible products » Automobile » Refrigerator u Services (TV and auto repair, » Government » Regulatory bodies, FAA, FDA » Wholesale/retail » Financial services » Education lawn care) 16

Goods vs. Service Operations (Cont) u Differences 1. 2. 3. 4. 5. 6. 7. 8. Customer contact Uniformity of input Labor content of jobs Uniformity of output Measurement of productivity Production and delivery Quality assurance Amount of inventory 17

Manufacturing vs. Service ! Characteristic Manufacturing Service Output Tangible Intangible Customer contact Low High Uniformity of output High Low Labor content Low High Uniformity of input High Low Measurement of productivity Easy Difficult Opportunity to correct quality problems Easy Difficult 18

Goods-service Continuum 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 service Low percentage goods High percentage service 19

Manufacturing vs. Service Industries in US 20

Responsibilities of Operations Management u Planning – – – – – Capacity, utilization Location Choosing products or services Make or buy Layout Projects Scheduling Market share Plan for risk reduction, plan B? Forecasting 21

Operations Managers u Controlling – Inventory – Quality – Costs u Organization – Degree of standardization – Subcontracting – Process selection u Staffing – – Hiring/lay off Use of overtime Incentive plans Job assignments 22

Scope of Operations Management u. Operations Management includes: – Forecasting – Capacity planning – Scheduling – Managing inventories – Assuring quality – Motivating employees – Deciding where to locate facilities – And more. . . 23

Help comes from Models u. A structure which has been built purposefully to exhibit features and characteristics of some other object. Do not use “thing” or “something” in a definition. u For – Improved understanding and communication – Experimentation – Standardization for analysis u Abstraction vs. computability 24

Modeling ! u Use models – Physical models (prototypes) – Schematic models (Graphs, charts, pictures) – Mathematical models, » » » Statistical models Inventory models Linear programming Queuing techniques Project management models 25

What type of models u Simulation models : to test a proposed idea – Monte Carlo Simulation u Optimization models : to create an optimal idea – Linear programming u Pattern recognition models : to recognize a pattern – Statistics, Forecasting, data mining Other classes to learn the rest. 26

Decision Making u. Models u. Quantitative approaches u. Analysis of trade-offs u. Systems approach 27

Models Are Beneficial u. Easy to use, less expensive u. Require users to organize – Increase understanding of the problem – Consistent tool – Standardized format – Specific objectives u. Systematic approach to problem solving – Analysis of tradeoffs – Enable “what if” questions u. Power of mathematics 28

Pareto Phenomenon • 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? 29

Historical Evolution of Operations Management u. Industrial revolution (1770’s) u. Scientific management (1911) – Mass production – Interchangeable parts – Division of labor u. Human relations movement (1920 -60) – Unemployment insurance – Pension plans u. Decision models (1915, 1960 -70’s) u. Influence of Japanese manufacturers (1970 -1990) 30

Trends in Business u. Major trends – The Internet, e-commerce, e-business – Management technology – Globalization – Management of supply chains – Agility 31

Recent Trends ! u Worker involvement u Environmental issues, emission reductions are popular after Central European floods u Service economy in US, foreign production u E-business – information technology u Supply chain management u Total Quality Management u Globalization, emerging markets, NAFTA u Lean Production – see the next page 32

Production systems classified u Craft Production : System in which highly skilled workers use simple, flexible tools to produce small quantities of customized goods. – Carpenter u Lean production : System that uses minimal amounts of resources to produce a high volume of high-quality goods with some variety. – Dell u Mass production: System in which lower-skilled workers use specialized machinery to produce high volumes of standardized goods. – Ford 33

Production systems classified Agile=Lean manufacturing u u u It provides flexibility to switch quickly and economically from one product design to another with little disruption. This characteristic, in turn enables faster response to changes in customer demand. A sophisticated computerized inventory control system allows the plant to keep track of large number of parts. Keys to being an agile manufacturer are : – – Reduction in inventories, Reduction in turnaround times, Availability of automated flexible machinery, Rapid collection and processing of information 34

Simple Product Supply Chain Suppliers’ Suppliers Direct Suppliers Producer Distributor Final Consumer Supply Chain: A sequence of activities and organizations involved in producing and delivering a good or service 35

A Supply Chain for Bread Value Added Value of Product Farmer produces and harvests wheat $0. 15 Wheat transported to mill $0. 08 $0. 23 Mill produces flour $0. 15 $0. 38 Flour transported to baker $0. 08 $0. 46 Baker produces bread $0. 54 $1. 00 Bread transported to grocery store $0. 08 $1. 08 Grocery store displays and sells bread $0. 21 $1. 29 Total Value-Added $1. 29 Stage of Production 36

Other Important Trends u. Ethical behavior u. Operations strategy u. Working with fewer resources u. Cost control and productivity u. Quality and process improvement u. Increased regulation and product liability u. Lean production 37

Summary u Definition of OM u OM’s relationship with Marketing, Finance and Accounting u Goods vs. service industries u OM issues, trends and models u Manufacturing systems 38