Chapter 1:

Introduction to Operations
Management

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 Learning Objectives
 Define the term operations management
 Identify the three major functional areas of
organizations and describe how they
interrelate
 Compare and contrast service and
manufacturing operations
 Describe the operations function and the
nature of the operations manager’s job

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 Learning Objectives
 Differentiate between design and operation
of production systems
 Describe the key aspects of operations
management decision making
 Briefly describe the historicalevolution of
operations management
 Identify current trends that impact operations
management

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 Operations Management
 Operations Management is:
The management of systems or processes
that create goods and/or provide services

 Operations Management affects:

 Companies’ ability to compete
 Nation’s ability to compete internationally

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 The Organization
Figure 1.1

The Three Basic Functions

Organization

Finance Operations Marketing

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 Value-Added Process
Figure 1.2
The operations function involves the conversion of
inputs into outputs
Value added
Inputs
Transformation/ Outputs
Land
Conversion Goods
Labor
process Services
Capital
Feedback

Control
Feedback Feedback

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 Value-Added & Product
Packages
 Value-added is the difference between the
cost of inputs and the value or price of
outputs.
 Product packages are a combination of
goods and services.
 Product packages can make a company
more competitive.

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 Goods-service Continuum
Figure 1.3

Goods Service

Surgery, teaching

Song writing, software development

Computer repair, restaurant meal

Automobile Repair, fast food

Home remodeling, retail sales

Automobile assembly, steel making

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 Food Processor
Table 1.2

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

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Manufacturing or Service?

Tangible Act

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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

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 Key Differences

1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of productivity

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 Key Differences

6. Production and delivery

7. Quality assurance
8. Amount of inventory
9. Evaluation of work
10. Ability to patent design

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 Goods vs Service
Characteristic Goods Service
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Output Tangible Intangible
Measurement of productivity Easy Difficult
Opportunity to correct problems High Low
Inventory Much Little
Evaluation Easier Difficult
Patentable Usually Not usual1-15
Scope of Operations Management
 Operations Management includes:
 Forecasting
 Capacity planning
 Scheduling
 Managing inventories
 Assuring quality
 Motivating employees
 Deciding where to locate facilities
 Supply chain management
 And more . . .
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 Types of Operations
Table 1.4
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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Figure 1.4

U.S. Manufacturing vs. Service Employment

Year Mfg. Service
45
90 79 21
50 72 28 Mfg.
80
55 72 28 Service
70
60
60 68 32
Percent

65
50 64 36
70
40 64 36
75
30 58 42
80 44 46
20
85 43 57
10
90 35 65
0
95 25 75
45 50 55 60 65 70 75 80 85 90 95 00 02 05
00 30 70
02 25 75 Year

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 Decline in Manufacturing Jobs
 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

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 Why Manufacturing Matters
 Over 18 million workers in manufacturing
jobs
 Accounts for over 70% of value of U.S.
exports
 Average full-time compensation about 20%
higher than average of all workers
 Manufacturing workers more likely to have
benefits
 Productivity growth in manufacturing in the
last 5 years is more than double U.S.
economy
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 Why Manufacturing Matters
 More than half of the total R&D performed is
in the manufacturing industries
 Manufacturing workers in California earn an
average of about $25,000 more a year than
service workers
 When a California manufacturing job is lost,
an average of 2.5 service jobs are lost

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 Challenges of Managing
Services
 Service jobs are often less structured than
manufacturing jobs
 Customer contact is higher
 Worker skill levels are lower
 Services hire many low-skill, entry-level workers
 Employee turnover is higher
 Input variability is higher
 Service performance can be affected by worker’s
personal factors

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 Operations Management
Decision Making
 Models
 Quantitative approaches
 Analysis of trade-offs
 Systems approach
 Establishing priorities
 Ethics

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 Key Decisions of Operations
Managers
 What
What resources/what amounts
 When
Needed/scheduled/ordered
 Where
Work to be done
 How
Designed
 Who
To do the work
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 Ethical Issues
 Financial statements
 Worker safety
 Product safety
 Quality
 Environment
 Community
 Hiring/firing workers
 Closing facilities
 Worker’s rights

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 Business Operations Overlap
Figure 1.5

Operations

Marketing Finance

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 Operations Interfaces
Industrial
Engineering
Maintenance
Distribution

Purchasing Public
Operations Relations

Legal
Personnel

Accounting MIS

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 Historical Evolution of Operations
Management
Table 1.7

 Industrial revolution (1770’s)

 Scientific management (1911)
 Mass production
 Interchangeable parts
 Division of labor
 Human relations movement (1920-60)
 Decision models (1915, 1960-70’s)
 Influence of Japanese manufacturers

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 Trends in Business
 Major trends
 The Internet, e-commerce, e-business
 Management technology
 Globalization
 Management of supply chains
 Outsourcing
 Agility
 Ethical behavior

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 Management Technology
 Technology: The application of scientific
discoveries to the development and
improvement of goods and services
 Product and service technology
 Process technology
 Information technology

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 Simple Product Supply Chain
Figure 1.7

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

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 A Supply Chain for Bread

Stage of Production Value Value of

Added Product
Farmer produces and harvests wheat $0.15 $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

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 Other Important Trends
 Ethical behavior
 Operations strategy
 Working with fewer resources
 Revenue management
 Process analysis and improvement
 Increased regulation and product liability
 Lean production

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 Mission/Strategy/Tactics

Mission Strategy Tactics

How does mission, strategies and tactics relate to

decision making and distinctive competencies?

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 Strategy
 Mission
 The reason for existence for an organization
 Mission Statement
 States the purpose of an organization
 Goals
 Provide detail and scope of mission
 Strategies
 Plans for achieving organizational goals
 Tactics
 The methods and actions taken to accomplish strategies

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 Planning and Decision Making
Figure 2.1

Mission

Goals

Organizational Strategies

Functional Goals

Finance Marketing Operations

Strategies Strategies Strategies

Tactics Tactics Tactics

Operating Operating Operating

procedures procedures procedures

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 Strategy Example
Example 1

Rita is a high school student. She would like to have

a career in business, have a good job, and earn
enough income to live comfortably
Mission: Live a good life
 Goal: Successful career, good income
 Strategy: Obtain a college education
 Tactics: Select a college and a major
 Operations: Register, buy books, take
courses, study, graduate, get
job

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 Examples of Strategies
 Low cost
 Scale-based strategies
 Specialization
 Flexible operations
 High quality
 Service

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 Strategy and Tactics
 Distinctive Competencies
The special attributes or abilities that give an
organization a competitive edge.
 Strategy Factors
 Price
 Quality
 Time
 Flexibility
 Service
 Location

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 Examples of Operations Strategies
Table 2.2
Price Low Cost U.S. first-class postage
Motel-6, Red Roof Inns

Quality High-performance design Sony TV

or high quality Consistent Lexus, Cadillac
quality Pepsi, Kodak, Motorola

Time Rapid delivery Express Mail, Fedex,

On-time delivery One-hour photo, UPS

Flexibility Variety Burger King

Volume Supermarkets

Service Superior customer Disneyland

service Nordstroms

Location Convenience Banks, ATMs

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 Global Strategy
 Strategic decisions must be made with
respect to globalization
 What works in one country may not work in
another
 Strategies must be changed to account for
these differences
 Other issues
 Political, social, cultural, and economic
differences

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 Strategy Formulation
 Distinctive competencies
 Environmental scanning
 SWOT
 Order qualifiers
 Order winners

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 Strategy Formulation

 Order qualifiers
 Characteristics that customers perceive as
minimum standards of acceptability to be
considered as a potential purchase
 Order winners
 Characteristics of an organization’s goods or
services that cause it to be perceived as
better than the competition

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 Key External Factors

 Economic conditions
 Political conditions
 Legal environment
 Technology
 Competition
 Markets

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 Key Internal Factors

 Human Resources
 Facilities and equipment
 Financial resources
 Customers
 Products and services
 Technology
 Suppliers

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 Operations Strategy
 Operations strategy – The approach,
consistent with organization strategy,
that is used to guide the operations
function.

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 Strategic OM Decisions
Table 2.4
Decision Area Affects
Product and service design Costs, quality liability and environmental
Capacity Cost structure, flexibility
Process selection and layout Costs, flexibility, skill level, capacity

Work design Quality of work life, employee safety, productivity

Location Costs, visibility

Quality Ability to meet or exceed customer expectations
Inventory Costs, shortages
Maintenance Costs, equipment reliability, productivity
Scheduling Flexibility, efficiency
Supply chains Costs, quality, agility, shortages, vendor relations

Projects Costs, new products, services, or operating systems

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 Quality and Time Strategies

 Quality-based
strategies
 Focuses on maintaining or
improving the quality of an
organization’s products or
services
 Quality at the source
 Time-based strategies
 Focuses on reduction of
time needed to accomplish
tasks
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 Time-based Strategies
JAN FEB MAR APR MAY JUN

Planning

Designing

Processing

Changeover On time!

Delivery

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