INTRODUCTION TO OPERATIONS MANAGEMENT 1 OPERATIONS MANAGEMENT What

INTRODUCTION TO OPERATIONS MANAGEMENT 1

OPERATIONS MANAGEMENT § What is operations? The part of a business organization that is responsible for producing goods or services § How can we define operations management? The design, operation and improvement of the systems or processes that create goods and/or provide services

SUPPLY & DEMAND Operations & Supply Chains Supply Sales & Marketing > Demand Supply < Demand Supply = Demand Wasteful Costly Opportunity Loss Customer Dissatisfaction Ideal 3

THE OPERATIONS FUNCTION ü Operations as a transformation process ü Operations as a basic function ü Operations as the technical core 4

THE TRANSFORMATION PROCESS Value-Added Inputs • Land • Materials • Labor • Management • Capital • Information Transformation/ Conversion Process Outputs • Goods • Services Feedback Control Feedback = measurements taken at various points in the transformation process Control = The comparison of feedback against previously established standards to determine if corrective action is needed. 5

WHAT IS VALUE ADDED? The essence of operations function is to add value during the transformation process Value added is the difference between the cost of intputs and the value or price of outputs. 6

FIRMS USE THE MONEY GENERATED BY VALUE ADDED FOR: ØR&D ØInvestment in new facilities and equipment ØPaying workers ØPaying for materials ØPaying for general expenses ØProfits

TRANSFORMATION PROCESS OF A CANNED FOOD PROCESSOR Inputs Metal sheets Raw vegetables Water Energy Labor Building Equipment Processing Outputs Canned • Cleaning • Making cans vegetables • Cutting • Cooking • Packing • Labeling 8

TRANSFORMATION PROCESS OF A HOSPITAL Inputs Doctors, nurses Hospital Medical Supplies Equipment Laboratories Processing Examination Surgery Monitoring Medication Therapy Outputs Healthy patients 9

EXAMPLES OF VARIOUS OPERATIONS Operations Goods Producing Storage/ Transportation Exchange Entertainment Communication Examples Farming, mining, construction , manufacturing, power generation Warehousing, trucking, mail service, moving, taxis, buses, hotels, airlines Retailing, wholesaling, banking, renting, leasing, library, loans Films, radio and television, concerts, recording Newspapers, radio and television 10 newscasts, telephone, satellites

TYPES OF TRANSFORMATION PROCESSES Ø Physical- manufacturing Ø Locational- transportation Ø Exchange- retailing Ø Storage- warehousing Ø Physiological- health care Ø Informational- telecommunications Ø Psychological- entertainment 11

OPERATIONS AS A BASIC FUNCTION Ø Marketing Ø Generates demand gets customers Ø Operations Ø creates product or service Ø Finance/Accounting Ø Obtains funds Ø Tracks organizational performance 12

BASIC FUNCTIONS OF THE BUSINESS ORGANIZATION Organization Marketing Operations Finance 13

SUPPLY CHAIN Supply Chain – a sequence of activities and organizations involved in producing and delivering a good or service Suppliers’ suppliers Direct suppliers Producer Distributor Final Customers 14

IMPORTANCE OF OM (WHY STUDY OM? ) (1 of 2) Ø Operations is one of the three major functions of an organization ØOffers a major opportunity for an organization to improve its productivity and profitability ØOM affects 1) the companies’ ability to compete and 2) the nation’s ability to compete internationally ØNearly half of the employed people over the world have jobs in operations 15

IMPORTANCE OF OM (WHY STUDY OM? ) (2 of 2) Ø The OM function is responsible for a major portion of the assets of most organizations ØOM is a costly part of an organization ØThe concepts, tools and techniques of OM are widely used in managing other functions. ØPresents career opportunities 16

OPTIONS FOR INCREASING CONTRIBUTION 17

TYPES OF PRODUCTION PROCESSES (PROCESS FLOW STRUCTURES) ü INTERMITTENT üJob shop üBatch production ü CONTINOUS üMass production üContinuous flow production ü PROJECT 18

EMERGENCY ROOM E. R. Triage room Patient A broken leg Su rg e ry E. R. Admissions Patient B erratic pacemaker Hallway Ra di ol og y E. R. beds Pharmacy Billing/exit 19

AUTOMOBILE PLANT sequential Raw materials or customer Material and/or labor Station 1 Material and/or labor Station 2 Material and/or labor Station 3 Station 4 FG Material and/or labor Used for Repetitive or Continuous Processing 20

PRODUCTION OF GOODS VS. DELIVERY OF SERVICES

MANUFACTURING vs. SERVICE Manufacturing and Service Organizations differ chiefly because manufacturing is goods-oriented and service is act-oriented. Goods Services Tangible Act-Oriented 22

GOODS-SERVICE CONTINUUM Products are typically neither purely service- or purely goods-based. Goods Services Surgery, Teaching Songwriting, Software Development Computer Repair, Restaurant Meal Home Remodeling, Retail Sales Automobile Assembly, Steelmaking 23

GOODS VS. SERVICES (1 of 3) CHARACTERISTICS GOODS SERVICE Customer contact Low High Uniformity of inputs and outputs High Low Labor content Low High Automation Easy Generally difficult Output Tangible Intangible, often unique Measurement of productivity Easy Difficult Opportunity to correct problems High Low Inventory Much Little Quality evaluation Easier Difficult Production activities Obvious Not so obvious 24

GOODS VS. SERVICES (2 of 3) CHARACTERISTICS GOODS SERVICE Production and consumption Separate Location Centralized Locational factors to be considered Cost-oriented Generally take place at the same time Generally dispersed Revenue-oriented Reselling Possible Not possible Patentability Usually Not usually Activities Smooth and efficient Slower and awkward Inventoriability and. Transportability Inventoriable Non inventoriable & and so Transportable nontransportable 25

GOODS VS. SERVICES (3 of 3) CHARACTERISTICS GOODS SERVICE Job structure More structured Less structured Worker skill levels Generally higher Generally lower Employee turnover Generally lower Generally higher 26

MANAGING SERVICES IS CHALLENGING Ø Ø Ø Ø Jobs in services are often less structured than in manufacturing Customer contact is generally much higher in services compared to manufacturing In many services, worker skill levels are low compared to those of manufacturing employees Services are adding many new workers in low-skill, entry-level positions Employee turnover is high in services, especially in low-skill jobs Input variability tends to be higher in many service environments than in manufacturing Service performance can be adversely affected by many factors outside of the manager’s control (e. g. , employee and customer attitudes) 27

SERVICE JOB CATEGORIES (1 of 2) Ø Governmental services Ø Municipal services Ø Trade services (wholesale/retail) Ø Finance, insurance, real estate Ø Medical (healthcare) Ø Personal services 28

SERVICE JOB CATEGORIES (2 of 2) Ø Business services Ø Education Ø Food, lodging and entertainment Ø Utilities and transportation Ø Legal, consulting Ø Repair 29

SERVICES IN MANUFACTURING In manufacturing, services can be divided into two groups: ØCore Services ØValue-added Services 30

CORE SERVICES Core services are basic things that customers want from products they purchase 31

CORE SERVICES PERFORMANCE OBJECTIVES Quality Flexibility Operations Management Speed Price (or cost Reduction) 32

VALUE-ADDED SERVICES Value-added services differentiate the organization from competitors and build relationships that bind customers to the firm in a positive way 33

VALUE-ADDED SERVICE CATEGORIES Problem Solving Information Operations Management Sales Support Field Support 34

PROCESS MANAGEMENT Process - one or more actions that transform inputs into outputs Three Categories of Business Processes: Upper-management These govern the operation of processes the entire organization. Operational These are core processes that processes make up the value stream. Supporting processes These support the core processes. 35

PROCESS VARIATION Four Sources of Variation: Variety of goods or services being offered The greater the variety of goods and services offered, the greater the variation in production or service requirements. Structural variation in demand These are generally predictable. They are important for capacity planning. Random variation Natural variation that is present in all processes. Generally, it cannot be influenced by managers. Assignable variation Variation that has identifiable sources. This type of variation can be reduced, or eliminated, by analysis and corrective action. Variations can be disruptive to operations and supply chain processes. They may result in additional costs, delays and shortages, poor quality, and inefficient work systems. 36

The Scope of OM: What Do Operations Managers Do? Plan - Organize - Staff - Lead - Control 37

SCOPE OF OPERATIONS MANAGEMENT The scope of operations management ranges across the organization. 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. . . 38

ROLE OF THE OPERATIONS MANAGER The Operations Function consists of all activities directly related to producing goods or providing services. A primary function of the operations manager is to guide the system by decision making. – System Design Decisions – System Operation Decisions 39

SYSTEM DESIGN DECISIONS System Design Decisions – Capacity – Facility location – Facility layout – Product and service planning – Process planning – Technology planning – Acquisition and placement of equipment These are typically strategic decisions that require • long-term commitment of resources • Determine parameters of system operation 40

SYSTEM OPERATION DECISIONS System Operation Decisions – Management of personnel – Inventory management and control – Scheduling – Project management – Quality assurance Operations managers spend more time on system operation decision than any other decision area but they still have a vital stake in system design 41

U. S. MANUFACTURING vs. SERVICE EMPLOYMENT § Insert Figure 1. 7 42

THE DECLINE IN MANUFACTURING EMPLOYMENT Productivity – Increasing productivity allows companies to maintain or increase their output using fewer workers Outsourcing – Some manufacturing work has been outsourced to more productive companies A Statistical Artifact – Manufacturers are increasingly using contract and temporary labor which no longer show up in the statistics as manufacturing employment 43

OPERATIONS MANAGEMENT AND DECISION MAKING Most operations decisions involve many alternatives that can have quite different impacts on costs or profits Typical operations decisions include: What resources are 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? Where: Where will the work be done? How: How will he product or service be designed? How will the work be done? How will resources be allocated? Who: Who will do the work?

OPERATIONS MANAGEMENT AND DECISION MAKING Ø Models Ø Ø Quantitative approaches Analysis of tradeoffs Systems approach Establishing priorities 45

GENERAL APPROACH TO DECISION MAKING Modeling is a key tool used by all decision makers – Model - an abstraction of reality; a simplification of something. – Common features of models: Ø They are simplifications of real-life phenomena Ø They omit unimportant details of the reallife systems they mimic so that attention can be focused on the most important 46 aspects of the real-life system

MODELS Types of Models: – Physical Models Look like their real-life counterparts – Schematic Models Look less like their real-life counterparts than physical models – Mathematical Models Do not look at all like their real-life counterparts 47

UNDERSTANDING MODELS Keys to successfully using a model in decision making – What is its purpose? – How is it used to generate results? – How are the results interpreted and used? – What are the model’s assumptions and limitations? 48

BENEFITS OF MODELS ØModels are generally easier to use and less expensive than dealing with the real system ØRequire users to organize and sometimes quantify information ØProvide a systematic approach to problem solving ØIncrease understanding of the problem ØEnable managers to analyze “What if? ” questions ØEnable managers to specify objectives ØServe as a consistent tool for evaluation and provide a standardized format for analyzing a problem ØEnable users to bring the power of mathematics to bear 49 on a problem.

MODEL LIMITATIONS Ø Quantitative information may be emphasized at the expense of qualitative information Ø Models may be incorrectly applied and the results misinterpreted Ø This is a real risk with the widespread availability of sophisticated, computerized models are placed in the hands of uninformed users. ØThe use of models does not guarantee good decisions. 50

QUANTITATIVE APPROACHES (ANALYTICAL TOOLS USED IN OM) A decision making approach that frequently seeks to obtain a mathematically optimal solution Ø Linear programming Ø Queuing techniques Ø Forecasting techniques Ø Inventory models Ø Project models Ø Statistical models Ø Simulation Ø Decision analysis 51

METRICS AND TRADE-OFFS § Performance Metrics § Analysis of Trade-Offs – All managers use – A trade-off is giving metrics to manage up one thing in return and control operations for something else § Profits § Carrying more inventory (an § Costs expense) in order to § Productivity achieve a greater § Forecast accuracy level of customer service Tradeoffs 52

ESTABLISHING PRIORITIES ØIn nearly all cases, certain issues or items are more important than others ØRecognizing this allows managers to focus their attention to those efforts that will do the most good 53

ESTABLISHING PRIORITIES: PARETO PHENOMENON Pareto Phenomenon - a few factors account for a high percentage of occurrence of some event(s) The critical few factors should receive the highest priority 80/20 Rule- 80% of the problems are caused by 20% of the activities This is a concept that is appropriately applied to all areas and levels of management How do we identify the vital few? 54

SYSTEMS APPROACH ØSystem - a set of interrelated parts that must work together ØThe business organization is a system composed of subsystems Ømarketing subsystem Øoperations subsystem Øfinance subsystem ØThe systems approach ØEmphasizes interrelationships among subsystems ØMain theme is that the whole is greater than the sum of its parts ØThe output and objectives of the organization take precedence over those of any one subsystem 55

DEGREE OF CUSTOMIZATION Relative to other standardized products and services customized products: ØTend to be more labor intensive ØTend to be more time consuming ØTend to require more highly-skilled people ØTend to require more flexible equipment ØHave much lower volume of output ØHave higher price tags Degree of customization has a significant influence on the entire organization ØProcess selection ØJob design ØAffects marketing, sales, accounting, finance, and 56 information systems

ETHICAL ISSUES IN OPERATIONS ØEthical issues arise in many aspects of operations management: ØFinancial statements ØWorker safety ØProduct safety ØQuality ØThe environment ØThe community ØHiring and firing workers ØClosing facilities ØWorkers rights 57

THE HISTORICAL EVOLUTION OF OPERATIONS MANAGEMENT

HISTORICAL EVENTS IN OM Ø Industrial Revolution (1770 s) Ø Scientific Management (1911) Ø Human Relations Movement (1920 -1960) Ø Decision Models – Management Science (1915, 1940 -70 s) Ø Influence of Japanese Manufacturers-Quality Revolution & JIT (1970 s-1990 s ) Ø Globalization (1970 s- ) Ø Information Age/Internet Revolution (1990 s-) 59

INDUSTRIAL REVOLUTION § Pre-Industrial Revolution – Craft production - System in which highly skilled workers use simple, flexible tools to produce small quantities of customized goods § Some key elements of the industrial revolution – Began in England in the 1770 s – Division of labor - Adam Smith, 1776 – Application of the “rotative” steam engine, 1780 s – Cotton Gin and Interchangeable Parts - Eli Whitney, 1792 § Management theory and practice did not advance appreciably during this period 60

SCIENTIFIC MANAGEMENT § Movement was led by efficiency engineer, Frederick Winslow Taylor – Believed in a “ Science of Management” based on observation, measurement, analysis and improvement of work methods, and economic incentives – Management is responsible for planning, carefully selecting and training workers, finding the best way to perform each job, achieving cooperate between management and workers, and separating management activities from work activities – Emphasis was on maximizing output 61

SCIENTIFIC MANAGEMENTCONTRIBUTORS § Frank Gilbreth - father of motion studies § Henry Gantt - developed the Gantt chart scheduling system and recognized the value of non-monetary rewards for motivating employees § Harrington Emerson - applied Taylor’s ideas to organization structure § Henry Ford - employed scientific management techniques to his factories § Moving assembly line § Mass production 62

HUMAN RELATIONS MOVEMENT § The human relations movement emphasized the importance of the human element in job design – Lillian Gilbreth – Elton Mayo – Hawthorne studies on worker motivation, 1930 – Abraham Maslow – Motivation theory, 1940 s; Hierarchy of Needs, 1954 – Frederick Hertzberg – Two Factor Theory, 1959 – Douglas Mc. Gregor – Theory X and Theory Y, 1960 s – William Ouchi – Theory Z, 1981 63

DECISION MODELS AND MANAGEMENT SCIENCE § F. W. Harris – Mathematical Model for Inventory Management, 1915 § Dodge, Romig, and Shewart – Statistical Procedures for Sampling and Quality Control, 1930 s § Tippett – Statistical Sampling Theory, 1935 § Operations Research (OR) Groups – OR applications in Warfare § George Dantzig – Linear Programming, 1947 64

INFLUENCE OF JAPANESE MANUFACTURERS § Refined and developed management practices that increased productivity – Credited with fueling the “quality revolution” – Just-in-Time production 65

EXCITING NEW CHALLENGES IN OPERATIONS MANAGEMENT 66

NEW TRENDS AND ISSUES IN OM Ø Mass Customization Ø Supply Chain Management Ø Outsourcing Ø Lean manufacturing Ø Agility Ø E-Business and E-Commerce Ø Management of Technology Ø Globalization Ø Ethical Behavior 67

NEW CONCEPTS AND TRENDS: MASS CUSTOMIZATION The rapid, low cost production of goods and services that fulfill constantly changing and increasingly unique customer desires. 68

NEW CONCEPTS AND TRENDS: SUPPLY CHAIN MANAGEMENT Ø The management of the sequence of organizations- their facilities, functions and activities- that are involved in producing and delivering a product or service Ø SCM requires the application of a systems approach to managing the flow of information, materials and services from raw material suppliers through factories and warehoses to the 69 end user (customer)

THE NEED FOR MANAGING THE SUPPLY CHAIN In the past, organizations did little to manage the supply chain beyond their own operations and immediate suppliers which led to numerous problems such as: ØOscillating inventory levels ØInventory stockouts ØLate deliveries ØQuality problems 70

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 71

ELEMENTS OF SUPPLY CHAIN MANAGEMENT (1 of 2) § Customers – what products/services do customers want § Forecasting – predicting timing and volume of customer demand § Design – incorporating customer wants, manufacturability, and time to market § Capacity planning – matching supply and demand § Processing – controlling quality, scheduling work 72

ELEMENTS OF SUPPLY CHAIN MANAGEMENT (2 of 2) § Inventory – meeting demand requirements while managing costs § Purchasing – evaluating potential suppliers, supporting the needs of operations on purchased goods and services § Suppliers – monitoring supplier quality, on-time delivery, and flexibility; maintaining supplier relations § Location – determining the location of facilities § Logistics – deciding how to best move information and materials$ 73

NEW CONCEPTS AND TRENDS: OUTSOURCING Buying goods or services rather than producing goods or performing services within the organization

NEW CONCEPTS AND TRENDS: LEAN MANUFACTURING Ø Systems that use minimal amounts of resources less space, less inventory, fewer workers, fewer levels of management- to produce a high volume of high-quality goods with some variety Ø An adaptation of mass production that prizes quality and flexibility Ø Incorporates advantages of mass production (high volume, low unit cost) and craft production (variety and flexibility) 75

NEW CONCEPTS AND TRENDS: AGILITY Ø The ability of an organization to respond quickly to demands or opportunities. Ø Involves maintaining a flexible system that can quickly respond to changes in either the volume of demand or changes in product/service offerings 76

NEW CONCEPTS AND TRENDS: ELECTRONIC COMMERCE The use of computer networks, primarily the internet, to buy and sell products, services, and information. 77

OTHER TRENDS (1 of 2) Ø Enhancing Value-Added Services Ø Management of Technology Ø Emphasis on Operations Strategy Ø Increasing Emphasis on Cost Control and Productivity Improvement Ø Quality and Process Improvements Ø Increasing emphasis on business and social responsibility 78

OTHER TRENDS (2 of 2) Ø Developing flexible supply chains to enable mass customization of products and services Ø Achieving the Service Factory 79

GLOBALIZATION 80

GLOBALIZATION CAN TAKE THE FORM OF: Ø Selling in foreign markets Ø Producing in foreign lands Ø Purchasing from foreign suppliers Ø Partnering with foreign firms

REASONS TO GLOBALIZE OPERATIONS (1 of 2) Ø To take advantage of favorable costs Ø To gain access to and attract international markets Ø To build reliable sources of supply Ø To improve the supply chain Ø To be more responsive to changes in demand 82

REASONS TO GLOBALIZE OPERATIONS (2 of 2) Ø To provide better goods and services Ø To learn to improve operations Ø To attract and retain global talent Ø To keep abreast of the latest trends and technologies 83

EXAMPLES OF GLOBAL STRATEGIES Ø Boeing – both sales and production are worldwide. Ø Benetton – moves inventory to stores around the world faster than its competitor by building flexibility into design, production, and distribution Ø Sony – purchases components from suppliers in Thailand, Malaysia, and around the world Ø GM is building four similar plants in Argentina, Poland, China, and Thailand 84

SOME MULTINATIONAL CORPORATIONS (1 of 3) Company Nestlé Nokia Philips Bayer ABB SAP Exxon Mobil Royal Dutch/Shell IBM Mc. Donald’s Country of Origin Switzerland Finland Netherlands Germany United States Netherlands United States Foreign Sales as % of Total 98. 2 97. 6 94. 0 89. 8 87. 2 80. 0 79. 6 73. 3 62. 7 61. 5 85

SOME MULTINATIONAL CORPORATIONS (2 of 3) Company Home Country % Sales % Assets Outside Home Country % Foreign Workforce Citicorp USA 34 46 NA Colgate. Palmolive USA 72 63 NA Dow Chemical Gillette USA 60 50 NA USA 62 53 NA Honda Japan 63 36 NA IBM USA 57 47 51 86

SOME MULTINATIONAL CORPORATIONS (3 of 3) Company Home Country % Sales Outside Home Country % Assets % Foreign Outside Workforce Home Country ICI Britain 78 50 NA Nestlé Switzerland 98 95 97 Philips Netherlands 94 Electronics Siemens Germany 51 85 82 NA 38 Unilever 70 64 Britain & Netherlands 95 87

BOEING SUPPLIERS Firm Alenia Country Italy Parts Aero. Space Technologies CASA Fuji Australia Rudder Spain Japan Ailerons Landing gear doors, wing section Wing flaps GEC Avionics United Kingdom Korean Air Korea Menasco. Aerospace Canada Flight computers Flap supports Landing gears Short Brothers Ireland Landing gear doors Singapore Aerospace Singapore Landing gear doors 88

AN INTERNATIONAL COMPARISON OF HOURLY WAGE RATES $ 35 – $ 30 – $ 25 – Germa Japan United EU $ 20 – $ 15 – $ 10 – $5– $0– | 1975 | 1980 | 1985 | 1990 | 1995 Asian Mexic | 2000 89

COMPETITIVENESS 90

COMPETITIVENESS 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. 91

COMPETITIVENESS OF SELECTED COUNTRIES 100 80 60 40 20 0 US Singapore Finland Ireland Germany UK Japan Mexico Russia 92