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Service/Manufacturing
Operations

Ragil Sriharto
FEB UGM
The Nature of Operations
Management
! Operations management
the development and administration of the
activities involved in transforming resources
into goods and services
! Manufacturing/production:
the activities and processes used in making
tangible products
! Operations :
the activities and processes used in making
both tangible and intangible products.
The Transformation Process
Inputs, Outputs, & Transformation Processes in the
Manufacture of Oak Furniture
OM in Service Businesses
" Salons, colleges, airlines
" 70% of all employment in the United
States; fastest growth market for jobs
" Represent over 72% of GDP in U.S.
" Services are actions/performances directed at consumers
# Different than manufacturing that produces tangible products
Services Are...
" Generally intangible
" Perishable
" Demand can be variable
" Cannot be saved, stored, resold, or
packaged
Operations Management in Service
Businesses
! Nature and
Consumption of
Output
! Uniformity of Inputs
! Uniformity of Output
! Labor Required
! Measurement of
Productivity

Manufacturing Service
Tangible Intangible
Uniform inputs Customized inputs
Uniform outputs Customized outputs
Less labor intensive More labor intensive
Easy to measure productivity More difficult to measure productivity
(due to variations in demand, service, requirements
and intangibility)
Manufacturing and Service
Compared
Operations Management and
Competitive Advantage
Concepts
Quality Goods and services that are reliable,
dependable, or psychologically satisfying to
customers.
Efficiency The amount of input needed to produce a given
output. Less input required lowers cost and
waste.
Responsiveness to
customers
Actions taken to respond to customer needs.
Firms can react quickly and correctly to
customer needs as they arise.

Improving Responsiveness to
Customers
! Without customers, organizations would
cease to exist.
" Non-profit and for-profit firms all have
customers.
" Managers need to identify who the
customer is and their needs.
Improving Responsiveness to
Customers
! What do customers want?
" Usually customers prefer:
! A lower price to a higher price.
! High-quality products to low-quality products.
! Quick service to slow service (also prefer good
after-sale support)
! Many features over few features.
! Products that are customized or tailored to their
specific needs.
Quality
Degree to which a good or service
meets
the demands and requirements of
customers

" A critical element of operations management
" Determining quality can be difficult

# Subjective based on consumers expectations and perspectives
Improving Quality
! The concept of quality applies the
products of both manufacturing and
service firms
" A firm that provides higher quality than
others at the same price is more responsive
to customers.
" Higher quality can also lead to better
efficiency through lower waste levels and
operating costs.
Impact of Increased Quality on
Organizational Performance
Figure 18.4
Total Quality Management
! Total Quality Management (TQM)
" A management technique that focuses all
activities on improving the quality of a
firms goods or services.
" TQM is a company-wide management
philosophy developed by Deming, Juran,
and Feigenbaum.
" The TQM philosophy is that the customer
defines quality.
Steps to Successful TQM
Implementation
! Build organizational
commitment to quality
! Focus on the customer
! Find ways to measure
quality
! Set goals and create
incentives
! Solicit input from
employees
! Identify defects and
trace to source.
! Introduce just-in-time
(JIT) inventory systems.
! Work with suppliers.
! Design products for
easy manufacture.
! Break down barriers
between functions.
TQM: Associated Terms
! Quality Circles
" Groups of employees who meet regularly to discuss ways
to increase quality
! Inventory
" The stock of raw materials, inputs, and component parts
that an organization has on hand at a particular time.
! Just-in-Time (JIT) inventory systems
" A system in which parts or supplies arrive at an
organization when they are needed and not before.
Managing Quality
! Quality Control : the processes an
organization uses to maintain its
established quality standards
! Total Quality Management/TQM : a
philosophy that uniform commitment to
quality in all areas of an organization will
promote a culture that meets customers
perceptions of quality

Managing Quality
! Establishing Standards-ISO 9000
a series of quality assurance standards
designed by the International
Organization for Standardization to
ensure consistent product quality under
many conditions
! Inspection
! Sampling

Inspection and Sampling
Inspection
" Reveals whether a product meets quality standards.
Sampling
" How many items should be inspected.
" Depends on potential costs of product flaws in terms of human
lives and safety.
Improving Efficiency
! The fewer the inputs required to produce a given
output, the higher the efficiency of a production
system.
" A common measure of the organizations efficiency of
turning all of the inputs into outputs is called total factor
productivity:
inputs all
outputs
ty productivi factor Total =
A comparison measure of a single input
(such as labor) to total output is called
partial productivity:
labor direct
outputs
ty productivi Labor =
Improving Efficiency
! Calculating labor productivity allows
labor comparisons between
organizations.
! Improved efficiency leads to lower costs
and better performance.
! TQM and Efficiency
" TQM can lead to much higher labor
productivity.
! When quality rises, less is wasted on scrap.
Planning and Designing
Operations Systems
! Planning the Product
! Designing the Operations Processes
! Standardization : the making of identical
interchangeable components or products
! Modular design : the creation of an item in
self-contained units, or modules, that can
be combined or interchanged to create
different products
! Customization : making products to meet
a particular customers needs or wants
Product Life Cycles and
Product Development
! Product Life Cycle
" Changes in product demand from its introduction
through its growth and maturity to its decline.
! Embryonic stage: product is not widely accepted and has
minimal demand.
! Growth stage: many consumers seek out the product and buy
it for the first time.
! Mature stage: demand peaks since most buyers already have
the product and only buy replacements.
! Decline stage: demand falls off as the product becomes
obsolete.
A Product Life Cycle
The Relationship Between Technological
Change and Length of the Product Life Cycle
Product Life Cycles and
Product Development
! The Rate of Technological Change
" The rate of change determines the length
of the product life cycle demand curve.
! In the computer industry, life cycle is about 18
months; in the steel industry, it is many years.
Product Life Cycles and
Product Development
! Fads and fashions also impact the life cycle
duration.
" Style changes can alter the demand for goods.
" Goods subject to fads and fashion changes will
experience shorter life cycles.
" In general, life cycles are getting
shorter, forcing managers
to be more responsive
to customers.
Moores Law: Intels Evolving
Microprocessors
Four Goals of New Product
Development
Goals of New Product Development
! Reducing Development Time
" Advantages of reduced product
development time
! First-to-market products with new features can
command premium prices and will have a longer
life cycle.
! Products can be upgraded quickly to incorporate
new technology as it becomes available.
! Easier to experiment with new products and
replace them if they fail in the market.
Goals of New Product
Development (contd)
! Maximizing the Fit with Customer Needs
" Most products fail because they were not designed to fit
customer needs.
! Ensure that customers actually want the product features
before adding them to the product.
! Maximizing Product Quality
" New products must be of superior quality.
! Poor quality in a new product can doom its acceptance even if
quality problem is fixed later on.
! Quality problems are often result from rushing products to
market.
Goals of New Product
Development (contd)
! Maximizing Manufacturability and Efficiency
" The efficiency with which the product is built
impacts the time it takes to get a product to
market.
! Designing a product from the beginning for ease of
production can shorten development time.
! Designing a product for efficient production also avoids
production problems, reduces product costs, and
improves product quality.
Principles of Product Development
! Principle 1: Use a Stage-Gate
Development Funnel
" Forces managers to make choices among
competing projects to avoid spreading
organizational resources too thin.
! Stage 1 considers all new ideas that are feasible and
meet the strategic goals of the firm.
! Stage 2 focuses on reviewing product development
plans; with the best continuing on.
! Stage 3 issues a contract book and focuses on
responsibilities, budgets, and resources in a symbolic
launch of the formal development.
A Stage-Gate Development Funnel
Principles of Product Development
(contd)
! Principle 2: Establish Cross-Functional
Teams
" Cross functional teams are a crucial part of
effective product development.
! Core members of the team are the people primarily
responsible for the development effort.
! Management must ensure there is coordination and
communications between team members.
! Teams are often located physically together.
! Successful teams will develop a clear sense of their
objectives and share a common mission.
Members of a Cross-
Functional Product
Development Team
Principles of Product Development
(contd)
! Principle 3: Concurrent Engineering
" The traditional engineering approach
follows a sequential flow resulting in long
development times and poor quality if
managers do not communicate between
departments.
! By working concurrently, design and production
issues are considered together.
! Production concerns are addressed while the
product is designed and can still be changed.
Sequential vs.
Parallel
Development
Processes
Principles of Product Development
(contd)
! Principle 4: Involve Both Customers and
Suppliers
" Products fail because their design does not meet
the needs of customers.
! Customer ideas and needs should be included in the
design process.
! Solicit customer input from many sources.
" Suppliers are also critical to the success of a
product.
! Include them during concurrent engineering.
! Seek out their ideas and input early in the process.
Problems with Product
Development
! Successful product development is major
source of competitive advantage.
" While most managers know this, it can be difficult
to actually carry out good development strategies.
" Revolutionizing product development requires a
break with the traditional ways of thinking and
managing.
! Many managers have difficulty in releasing control of their
part of the process and allowing groups and teams to
function in the development process.
Planning and Designing
Operations Systems
! Planning Capacity
Capacity :the maximum load that an
organizational unit can carry or operate
! Planning Facilities
" Facility location
" Facility layout
" Technology
Facilities Layout
Fixed-Position Layout (Project Organization)
" All resources needed for a product are brought
to a central location
Process Layout (Intermittent Organization)
" Layout is organized into departments that group related processes
Product Layout (Continuous Manufacturing Organization)
" Production is broken down into relatively simple tasks assigned to workers
positioned along a line
Facilities Layout, Flexible
Manufacturing, and Efficiency
! Facilities Layout
" The operations management technique
whose goal is to design the machine-
worker interface to increase production
system efficiency.
! Flexible Manufacturing
" Operations management techniques that
attempt to reduce the setup costs
associated with a production system.
Three Facilities
Layouts
Figure 18.5
Facilities Layout
! Product layout
" Machines are organized so that each
operation is performed at work stations
arranged in a fixed sequence.
! Example: mass production systems where workers
are stationary and a belt moves work to them.
! Process Layout
" Self contained work stations not organized in
a fixed sequence.
! Provides flexibility in making a wide variety of
products tailored to customers.
Facilities Layout (contd)
! Fixed-Position Layout
" The product stays in a fixed spot and
components produced at remote stations
are brought the product for to final
assembly.
! Large jet aircraft assembly
uses this type of layout.
Changing a Facilities Layout
Flexible Manufacturing
! Most firms face major expenses when setting up to
produce a product.
" These costs must be paid before production begins.
! The more often products to be built change, the higher setup
costs become.
" Flexible manufacturing reduces setup costs by reducing
the time required to reset the production line for a different
product.
! Using easily replaced manufacturing equipment
! Redesigning the production system itself to be more productive.
[ ]
Supply Chain Management
Connecting and integrating
all parties or members of the
distribution system in order
to satisfy customers
Managing the Supply Chain
Purchasing Management
Inventory Control Management
Routing and Scheduling
Distribution Management
Purchasing
! Procurement
" Buying the right items
" Obtaining desired quality
" Buying the right quantity
" Paying the lowest price
" Obtaining inventory at the right time
Managing Inventory
! Three basic types of inventory:
" Finished-goods inventory
" Work-in-process inventory
" Raw materials inventory
Inventory Control Process
! Determines how many supplies and
goods are needed, and keeps track of:
" Quantities on hand
" Where each item is
" Who is responsible for it
Inventory Management Approaches
! Economic order quantity model (EOQ)
" Identifies the optimum number of items to
order.
! Just in time inventory management
(JIT)
" Uses smaller quantities of materials that
arrive just in time.
! Material-requirements planning (MRP)
" Schedules the precise quantity of materials
needed to make the product.
Just-in-Time Inventory and
Efficiency
! Just-in-Time (JIT) Inventory
" Originally developed for TQM, also adds to
efficient production.
! JIT reduces inventory holding costs for
warehousing, storage, inventory tracking, and
the cost of capital tied up in inventory.
! A drawback to JIT is that a firm does not
maintain have a large buffer stock of parts which
makes the firm vulnerable to strikes or supply
problems that can quickly deplete on-hand
inventories.
Routing and Scheduling
! Routing
" The sequence of operations through which
a product must pass
! Scheduling
" The assignment of required tasks to
departments or specific machines, workers,
or teams
" Program Evaluation and Review Technique
(PERT)
Hypothetical PERT Diagram for Making
a McDonalds Big Mac
Outsourcing
" Increasingly a part of supply chain
management in operations
" Outsource aspects of operations to
companies that provide products more
efficiently, at lower cost, greater
customer satisfaction.
The Worlds Top Five
Outsourcing Providers
Company Services
IBM Customer relationship management: Human
Resources Management: information and
communication technology management
Sodexho
Alliance
Real estate and Capital asset management facility
services
Accenture Human resources management; information and
communication technology management; financial
management
Hewlett-
packard
Information and communication technology
management; financial management; imaging and
printing
Capgemini CRM; information and communication technology
management; financial management