1

Introduction to
Operations
Management

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
 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

1-2
 The Organization
Figure 1.1

The Three Basic Functions

Organization

Finance Operations Marketing &

Sales

1-3
 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

1-4
 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.

1-5
 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

1-6
 Hospital Process
Table 1.2

Inputs Processing Outputs

Doctors, nurses Examination Healthy

Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy

1-7
 Manufacturing or Service?

Tangible Act

1-8
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
1-9
 Key Differences

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

1-10
 Key Differences

6. Production and delivery

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

1-11
 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 usual1-12
 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 . . .
1-13
 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

1-14
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
65 64 36
Percent

50
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

1-15
 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

1-16
 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

1-17
 Operations Management
Decision Making
 Models
 Quantitative approaches
 Analysis of trade-offs
 Systems approach
 Establishing priorities
 Ethics

1-18
 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

1-19
 Decision Making

System Design
– capacity
– location
– arrangement of departments
– product and service planning
– acquisition and placement of
equipment

1-20
 Decision Making

System operation
– personnel
– inventory
– scheduling
– project
management
– quality assurance

1-21
 Decision Making
 Models
 Quantitative approaches
 Analysis of trade-offs
 Systems approach

1-22
 Models

A model is an abstraction of reality.

– Physical
– Schematic (charts)
– Mathematical Tradeoffs

What are the pros and cons of models?

1-23
 Models Are Beneficial
 Easy to use, less expensive
 Require users to organize
 Increase understanding of the problem
 Enable “what if” questions
 Consistent tool for evaluation and
standardized format
 Power of mathematics

1-24
 Limitations of Models
 Quantitative information may be emphasized
over qualitative
 Models may be incorrectly applied and
results misinterpreted
 Nonqualified users may not comprehend the
rules on how to use the model
 Use of models does not guarantee good
decisions

1-25
 Quantitative Approaches

• Linear programming
• Queuing Techniques
• Inventory models
• Project models
• Statistical models

1-26
 Analysis of Trade-Offs
 Decision on the amount of inventory to stock
 Increased cost of holding inventory
Vs.
 Level of customer service

1-27
 Systems Approach

“The whole is greater than

the sum of the parts.”

Suboptimization

1-28
 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?

1-29
 Ethical Issues
 Financial statements
 Worker safety
 Product safety
 Quality
 Environment
 Community
 Hiring/firing workers
 Closing facilities
 Worker’s rights
1-30
 Business Operations Overlap
Figure 1.5

Operations

Marketing Finance

1-31
 Operations Interfaces
Industrial
Engineering
Maintenance
Distribution

Purchasing Public
Operations Relations

Legal
Personnel

Accounting MIS

1-32
 Historical Evolution of Operations
Table 1.7
Management
 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

1-33
 Trends in Business
 Major trends
 The Internet, e-commerce, e-business
 Management technology
 Globalization
 Management of supply chains
 Outsourcing
 Agility – change quickly
 Ethical behavior

1-34
 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

1-35
 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

1-36
 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

1-37
 Other Important Trends
 Ethical behavior
 Operations strategy
 Working with fewer resources
 Revenue management
 Process analysis and improvement
 Increased regulation and product liability
 Lean production

1-38
Problem 1:
Mance Fraily, the Production Manager at Ralts Mills,
can currently expect his operation to produce 1000
square yards of fabric for each ton of raw cotton. Each
ton of raw cotton requires 5 labor hours to process. He
believes that he can buy a better quality raw cotton,
which will enable him to produce 1200 square yards
per ton of raw cotton with the same labor hours.
What will be the impact on productivity (measured in
square yards per labor-hour) if he purchases the higher
quality raw cotton?
1-39
Problem 2:
Joanna French is currently working a total of 12 hours per
day to produce 240 dolls. She thinks that by changing the
paint used for the facial features and fingernails that she
can increase her rate to 360 dolls per day. Total material
cost for each doll is approximately $3.50; she has to invest
$20 in the necessary supplies (expendables) per day;
energy costs are assumed to be only $4.00 per day; and she
thinks she should be making $10 per hour for her time.
Viewing this from a total (multifactor) productivity
perspective, what is her productivity at present and with
the new paint?
1-40
3. A hamburger factory produces 50,000
burgers each week.  The equipment costs
$5,000 and will remain productive for three
years.  The annual labor cost is $8,000.
a) What is the productivity as measured in units
of output per dollar of input over a 3 year
period?
b) Management has the option of $10,000
equipment, with an operating life of five years. 
It would reduce labor costs to $4,000 per year. 
Should management purchase this equipment
(using productivity arguments alone)?

1-41
Solution: 
a) In this case, define
productivity = (total burgers
produced)/($labor+
$equipment)=(50,000*52*3)/(8000*3+5000)
= 269 burgers/$input
b) for new machine project:
productivity=(50,000*52*5)/(4000*5+10,000)
=433 burgers/$input
This is a good project from a productivity
perspective. Although the proposed equipment
is expensive, 5 year life and lower labor costs
make new machine attractive.

1-42