CHAPTER 1

INTRODUCTION TO
OPERATIONS &
COMPETITIVENESS

© 2006 Prentice Hall, Inc. 1–1

 Learning Objectives
When you complete this chapter,
you should be able to:
Define:

 Production and productivity

 Operations management (OM)
 What operations managers do
 Services

© 2006 Prentice Hall, Inc. 1–2

 Learning Objectives
When you complete this chapter,
you should be able to:
Describe:
 Career opportunities in operations
management
 The future of the discipline
 Measuring productivity

© 2006 Prentice Hall, Inc. 1–3

 The Hard Rock Cafe
 First opened in 1971
 Now – 110 restaurants in over 40 countries
 Rock music memorabilia
 Creates value in the form of good food
and entertainment
 3,500+ custom meals per day in Orlando
 How does an item get on the menu?
 Role of the Operations Manager

© 2006 Prentice Hall, Inc. 1–4

 What Is Operations
Management?

Production is the creation of

goods and services
Operations management (OM) is
the set of activities that creates
value in the form of goods and
services by transforming inputs
into outputs

© 2006 Prentice Hall, Inc. 1–5

 Organizing to Produce
Goods and Services
 Essential functions:
 Marketing – generates demand
 Production/operations – creates
the product
 Finance/accounting – tracks how
well the organization is doing, pays
bills, collects the money

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 Organizational Charts
Commercial Bank

Operations Finance Marketing

Teller Investments Loans
Scheduling Security Commercial
Check Clearing Real estate Industrial
Collection Financial
Transaction Accounting Personal
processing
Facilities Mortgage
design/layout
Auditing
Vault operations
Trust Department
Maintenance
Security
Figure 1.1(A)
© 2006 Prentice Hall, Inc. 1–7
 Organizational Charts
Airline

Operations Finance/ Marketing

Ground support accounting Traffic
equipment Accounting administration
Maintenance Payables Reservations
Ground Operations Receivables Schedules
General Ledger Tariffs (pricing)
Facility
maintenance Finance Sales
Catering Cash control Advertising
Flight Operations International
exchange
Crew scheduling
Flying
Communications
Dispatching
Management science Figure 1.1(B)
© 2006 Prentice Hall, Inc. 1–8
 Organizational
Manufacturing
Charts

Operations Finance/ Marketing

Facilities accounting Sales
Construction; maintenance Disbursements/ promotion
Production and inventory control credits Advertising
Scheduling; materials control Receivables Sales
Quality assurance and control Payables
General ledger Market
Supply-chain management research
Manufacturing Funds Management
Tooling; fabrication; assembly Money market
Design International
Product development and design exchange
Detailed product specifications Capital requirements
Industrial engineering Stock issue
Efficient use of machines, space, Bond issue
and personnel
and recall
Process analysis
Development and installation of
production tools and equipment Figure 1.1(C)
© 2006 Prentice Hall, Inc. 1–9
 Why Study OM?
 OM is one of three major functions
(marketing, finance, and operations)
of any organization
 We want (and need) to know how
goods and services are produced
 We want to understand what
operations managers do
 OM is such a costly part of an
organization
© 2006 Prentice Hall, Inc. 1 – 10
 What Operations
Managers Do
Basic Management Functions
 Planning
 Organizing
 Staffing
 Leading
 Controlling
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 Where are the OM Jobs?

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Figure 1.2 1 – 12
 Where are the OM Jobs?
 Technology/methods
 Facilities/space utilization
 Strategic issues
 Response time
 People/team development
 Customer service
 Quality
 Cost reduction
 Inventory reduction
 Productivity improvement
© 2006 Prentice Hall, Inc. 1 – 13
 Significant Events in OM

Figure 1.3

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 New Challenges in OM
From To
 Local or national focus  Global focus
 Batch shipments  Just-in-time
 Low bid purchasing  Supply chain
partnering
 Lengthy product  Rapid product
development development,
alliances
 Standard products  Mass
customization
 Job specialization  Empowered
employees, teams
© 2006 Prentice Hall, Inc. 1 – 15
 Current challenges in
operations management
1. Globalization
•Capital, materials, labour.
•Decline in the cost of communication
and transportation.
•economic growth,creative designs,
efficient production and high quality
goods.

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 Cont…
2. Supply-chain partnering
•in line with the needs of end users.
•Shorter life cycles, demanding customer
and fast changes in technology, materials
and processes.
•outsourcing
•long term partnership because supplier
may be can contribute unique expertise.

© 2006 Prentice Hall, Inc. 1 – 17

 Cont…
3. Sustainability
•improve productivity with designing
products and process.
•Ecologically sustainable.
•Designing green products.
•the use of resources, recycled or
reused and environmental friendly.

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 Cont…
4. Rapid product development
•communication of news.
•Entertainment and lifestyles is cutting down
the life span of products.
•more responsive and effective with new
management structure.
•Collaboration, digital technology and creative
technology.

© 2006 Prentice Hall, Inc. 1 – 19

 Cont…
5. Mass customization
•Respond in a creative way.
•Respond with product designs.
•Flexible production process to the
individuals whims of consumer.
•Produce customized products
whenever and wherever needed.

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 Cont…
6. Lean operations
•The standard which operations managers must
compete.
•driving forces in operations where customer is
satisfied, employees are respected and no
wastage.
•more efficient, creates enriched jobs to helps
employees engage in continuous improvement
•Goods and services are produced and delivered
when customer desires

© 2006 Prentice Hall, Inc. 1 – 21

 Characteristics of Goods
 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction

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 Characteristics of Service
 Intangible product
 Produced and
consumed at same time
 Often unique
 High customer
interaction
 Inconsistent product
definition
 Often knowledge-based
 Frequently dispersed
© 2006 Prentice Hall, Inc. 1 – 23
 Goods Versus Services
Attributes of Goods Attributes of Services
(Tangible Product) (Intangible Product)
Can be resold Reselling unusual
Can be inventoried Difficult to inventory
Some aspects of quality Quality difficult to measure
measurable
Selling is distinct from Selling is part of service
production
Product is transportable Provider, not product, is
often transportable
Site of facility important for cost Site of facility important for
customer contact
Often easy to automate Often difficult to automate
Revenue generated primarily Revenue generated primarily
from tangible product from the intangible service

© 2006 Prentice Hall, Inc.

Table 1.3 1 – 24
 Goods and Services
Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

Percent of Product that is a Good Percent of Product that is a Service

Figure 1.4
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 Productivity Challenge

Productivity is the ratio of outputs (goods

and services) divided by the inputs
(resources such as labor and capital)

The objective is to improve this

measure of efficiency

Important Note!
Production is a measure of output
only and not a measure of efficiency

© 2006 Prentice Hall, Inc. 1 – 26

 The Economic System
Inputs Processes Outputs

Labor, The U.S. economic system Goods

capital, transforms inputs to outputs and
management at about an annual 2.5% services
increase in productivity per
year. The productivity
increase is the result of a
mix of capital (38% of 2.5%),
labor (10% of 2.5%), and
management (52% of 2.5%).

Feedback loop

Figure 1.7

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 Productivity

Units produced
Productivity =
Input used

 Measure of process improvement

 Represents output relative to input
 Only through productivity increases
can our standard of living improve

© 2006 Prentice Hall, Inc. 1 – 28

 Productivity Calculations

Labor Productivity

Units produced
Productivity =
Labor-hours used

1,000
= = 4 units/labor-hour
250

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 Productivity Variables

 Labor - contributes about 10% of

the annual increase
 Capital - contributes about 32%
of the annual increase
 Management - contributes about
52% of the annual increase

© 2006 Prentice Hall, Inc. 1 – 30

 Key Variables for Improved
Labor Productivity

 Basic education appropriate for the

labor force
 Diet of the labor force
 Social overhead that makes labor
available
 Maintaining and enhancing skills in the
midst of rapidly changing technology
and knowledge

© 2006 Prentice Hall, Inc. 1 – 31