CHAPTER

Introduction to
Operations Management

1
McGraw-Hill/Irwin
 Learning Objectives
• Understanding the term operations management
• Identify the three major functional areas of
organizations and describe how they interrelate
• Compare and contrast service and manufacturing
operations
• Briefly describe the historical evolution of operations
management
• Identify current trends that impact operations
management

1-2
 Learning Objectives
• Understanding Supply Chain & Supply Chain
Management
• Briefly describe major decisions in SCM
• Analyzing the process views of SCM
• Discussing alternative competitive strategies
of OSCM and choosing right strategy

1-3
 Operations Management
• An operation
– is a function or system that transforms inputs into outputs of
greater value.
• Definition of Operation Management:
– 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

4
 Value Addition System

• The transformation process (operations) is a series of activities

along a value chain extending from supplier to customer.

Value Added
is the difference between the cost
of inputs and the value or price of outputs
Inputs
Transformation/ Outputs
Land
Conversion Goods
Labor
Process Services
Capital
Feedback
Feedback Feedback
Control

5
Inputs-Transformation- Outputs
(Series of activities)

6
 Self Exercise
Operation Inputs Processing Outputs
Hospital Doctors, Nurses Examination Healthy
Hospital Surgery Patients
Medical supplies Monitoring
Equipment Medication
Laboratories Therapy
Restaurant Cooks and Staffs Cutting Parcel food
Room & Furniture Cleaning Served Customer
Utilities Cooking Garbage
Equipments Serving
Supplies Packing
Customers

7
 Why do we study OM?
1. OM activities are at the core of
all business organizations,
regardless of what business Industrial
Engineering
they are in. Maintenance
Distribution

2. 50% or more of all jobs are in

operations management Purchasing Public
Operations
related areas Relations

Legal
3. A business education is Personnel
incomplete without an
Accounting MIS
understanding of modern
approaches to managing Operations interfaces with supporting functions
operations.

8
 Production of Goods(Manufacturing)
vs.
Delivery of Services
• Production of goods  tangible output ( Book, Pen, Mobile etc.)
• Delivery of services  an act
– Examples of Service
• Government
Tangible Act
• Financial services
• Healthcare
• Education

9
 Manufacturing vs. Service
Key Difference Manufacturing Service
Output Tangible Intangible
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Measurement of Easy Difficult
productivity
Opportunity to correct High Low
quality problems
Production and delivery Differentiated Simultaneous
Inventory RW, WIP, FG, Tools Tools
Patentable Usually Not usually
10
 Goods-Service Continuum
• Product packages are a combination of goods and services.
• Product packages can make a company more competitive.

Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff,

Management of Service Operations (Boston: Allyn Bacon, 1978), p.11.
11
 The Twin Objectives of Operations
Management
• The customer service objective.
– To provide agreed/adequate levels of customer service
(and hence customer satisfaction) by providing goods or
services with the right specification, at the right cost and at
the right time.
• The resource utilization objective.
– To achieve adequate levels of resource utilization (or
productivity) e.g., to achieve agreed levels of utilization of
materials, machines and labor.

12
 Scope/Functions of
Operations and Supply Chain Mgmt.
• Operations Management includes:
– Forecasting
– Location of facilities
– Plant layouts and material handling
– Product design
– Process design
– Production and planning control
• Planning, routing, scheduling,
– Quality control
– Materials management
– Maintenance management
– Supply Chain Management
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Evolution of Operations Management

1. Craft production
 process of handcrafting products or
services for individual customers
2. Division of labor
 dividing a job into a series of small tasks
each performed by a different worker
3. Interchangeable parts
 standardization of parts initially as
replacement parts; enabled mass production

1-14
Evolution of Operations Management
(cont.)
4. Scientific management
 systematic analysis of work methods
5. Mass production
 high-volume production of a standardized product for
a mass market
6. Lean production
 adaptation of mass production that prizes quality and
flexibility
7. Agile production
 Build the capability to act swiftly with flexibility
1-15
 Ethical Issues in Operations
• Worker safety: providing adequate training,
maintaining equipment in good working condition,
maintaining a safe working environment.
• Product safety: providing products that minimize the
risk of injury to users or damage to property or the
environment.
• Quality: honoring warranties, avoiding hidden defects.
• Environment: not doing things that will harm the
environment.

16
 Ethical Issues in Operations
• Community: being a good neighbor.
• Hiring and firing workers: don’t hire under false
pretenses (e.g. promising a long term job when
that is not what is intended).
• Closing facilities: taking into account the impact
on a community and honoring commitments that
have been made.
• Worker’s right: respecting workers’ rights, dealing
with workers problems quickly and fairly.

17
 Introduction to
Supply Chain Management

18
 What is a Supply Chain?
• The sequence of processes involved in movement of products,
information, and funds from suppliers to customers in both
directions
– Probably more accurate to use the term “supply network” or “supply
web”.
– Customer is an integral part of the supply chain.
– Typical supply chain stages: customers, retailers, distributors,
manufacturers, suppliers.
– All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell).

19
 What is Supply Chain
Information

Upstream Product & Service Flow Downstream

Fund

End- Distributor/ Retailer End

Supplier’s Suppliers
supplier product Wholesaler Customer
Producer

Third Party Companies

• Information Systems Firms
•Transportation Firms
• Warehousing Firms
• Clearing Agents etc.

20
 Supply Chain Management

• Supply chain management (SCM) is the structuring and coordination of

relationships and activities across firms to deliver value in an information
and technology intensive global environment.
• Supply chain management is the management of flows between and
among supply chain stages to maximize total supply chain profitability-
Chopra & Meindl.
• Supply chain management is a set of approaches used to efficiently
integrate suppliers, manufacturers, warehouses, and customers so that
merchandise is produced and distributed at the right quantities, to the
right locations, and at the right time in order to minimize system wide
costs while satisfying service-level requirements – Simchi-Levi et al.

21
A Supply Chain for Bread

22
 Why Supply Chain Management

Share of logistics cost in the manufacturing firm

• Profit 4%
• Logistics Cost 21%
• Marketing Cost 27%
• Manufacturing Cost 48%

23
 Why Supply Chain Management
• Customer is the true source of income.
• More customer more competition.
• No firm can be best in all the Value added Activities
• Focus on Core Capabilities to survive.
• Create alliance or strategic partnerships with other
winning chain members.

24
 Decision Phases of a Supply Chain
1. Supply chain strategy or design
2. Supply chain planning
3. Supply chain operation

25
 Supply Chain Strategy or Design
• Decisions about the structure of the supply chain and
what processes each stage will perform
• Strategic supply chain decisions
– Locations and capacities of facilities
– Products to be made or stored at various locations
– Modes of transportation
– Information systems
• Supply chain design must support strategic objectives
• Supply chain design decisions are long-term and
expensive to reverse – must take into account market
uncertainty

26
 Supply Chain Planning
• Planning decisions:
– Forecasting of demand
– Which markets will be supplied from which locations
– Planned buildup of inventories
– Subcontracting, backup locations
– Inventory policies
– Timing and size of market promotions
• Must consider in planning decisions demand
uncertainty, exchange rates, competition over the
time horizon

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 Supply Chain Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating
policies are determined. Here the goal is to implement
the operating policies as effectively as possible
– Allocate orders to inventory or production,
– set order due dates,
– generate pick lists at a warehouse,
– allocate an order to a particular shipment,
– set delivery schedules,
– place replenishment orders
• Much less uncertainty (short time horizon)
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 Process Views of a Supply Chain
• Cycle view:
– processes in a supply chain are divided into a series of
cycles, each performed at the interfaces between two
successive supply chain stages
• Push/pull view:
– processes in a supply chain are divided into two categories
depending on whether they are executed in response to a
customer order (pull) or in anticipation of a customer
order (push)

29
 Cycle View of Supply Chains
Customer

Customer Order Cycle

Uncertainty of Order
Retailer

Scale of Order
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer

Procurement Cycle
Supplier

• As we move from customer to supplier, the uncertainty of order size

• As we move from customer to supplier, the number of individual order
reduce but size of order increase.
30
 Cycle View of Supply Chains
• Each cycle consists of six sub-
process
• One stage can be a member of
two cycle
– Consumer  Dell.com= Customer
order cycle
– Dell.com  Intel = Procurement
cycle

31
 Push/Pull View of Supply Chains

Procurement, Manufacturing Replenishment Customer Order

cycles
Cycle

PUSH PROCESSES PULL PROCESSES

: execution is initiated in anticipation of execution is initiated in response t
customer orders (speculative) a customer order (reactive)

Customer Order Arrives

The relative proportion of push and pull processes can have an impact on supply
chain
32 performance
 Evolution of Supply Chain Management
Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Demand forecasting

Purchasing

Requirements planning
Purchasing/
Production planning Materials
Management
Manufacturing inventory

Warehousing
Logistics
Material handling

Packaging

Finished goods inventory Supply Chain

Physical Supply Chain
Management
Distribution Management
Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance
33
 Future of SCM
• Expanding the supply chain to second and third tier
suppliers and customers.
• Utilization of ICT & Web for further integration.
• Increasing supply chain responsiveness (quick
response, mass customization, JIT, TQM).
• Greening of Supply Chain (environment friendliness,
recycling and reverse supply chain).
• Innovating Supply Chain (blue ocean strategy).

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Competitiveness &
Strategic Fit
 Competitive Advantage
Customer
Needs seeking
benefits at
acceptable prices

“….A firm gains competitive advantage

Va
e
lu

lu
by performing these strategically

Va

e
important activities more cheaply or
better than its competitors.”------- Competitor
Company
Porter, M.E., Competitive Advantage, Assets & Cost Assets &
Free Press, 1985 utilization differentials utilization

Source: Ohmae, K, The Mind of the Strategist,

Penguin Books, 1983

36
 The Two Vectors of Strategic
Direction
High

Value Advantage
To gain competitive advantage
over its rivals, a firm must deliver
value to its customers through
performing those activities more
efficiently than its competitors or by
performing the activities in a unique
way that create greater differentiation.
Low

High Cost Advantage Low

The most profitable competitor in any industry sector tends to be the

lowest cost producer or the supplier providing a product with the
greatest perceived differentiated values.

37
Porter’s Value Chain

38
 Business organizations compete with one
another in a variety of ways
 Price: Price is the amount a customer must pay for the product
or service.
 Quality: a buyer’s perceptions of how well the product or
service will serve its intended purpose.
 Product or service differentiation: any special features (i.e.
design, cost, quality, ease of use, convenient location, warranty)
that cause a product or service to be perceived by the buyer as
more suitable than a competitor’s product or service.
 Managers and workers: if the worker are competent and
motivated they can provide a distinct competitive edge by their
skills and the ideas they create.

39
 Business organizations compete with one
another in a variety of ways
 Flexibility: ability to respond to changes. The changes might relate
to increases or decreases in volume demanded or to changes in
the design of goods or services.
 Time: a number of different aspects of an organization’s
operations.
 how quickly a product or service is delivered to a customer.
 how quickly new products or services are developed and brought to the
market.
 Service: Service might involve after sale activities that are
perceived by customers as value added.

40
 Achieving Strategic Fit in Supply Chain
• Strategy:
– A plan for achieving organizational goal.

• Strategic fit:
– Consistency between customer priorities and organizational
capabilities specified by OSCM strategies.
– Competitive and OSCM strategies must have the same goals.

• A company may fail because of a lack of strategic fit or

because its processes and resources do not provide
the capabilities to execute the desired strategy.
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How is Strategic Fit Achieved?

• Step 1: Understanding the customer

and uncertainty
• Step 2: Understanding the OSCM
• Step 3: Achieving strategic fit

42
Step 1: Understanding the Customer

• Identify the needs/Characteristics of the customer

segment being served.
– Quantity of product needed in each lot.
– Response time customers will tolerate.
– Variety of products needed.
– Service level required.
– Price of the product.
– Desired rate of innovation in the product.
• Implied uncertainty of customer demand for a
product due to above reasons.
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Step 1: Understanding the Customer

• Understanding the Customer

– Lot size
– Response time Implied
– Service level Demand
– Product variety Uncertainty
– Price
– Innovation

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 Impact of Customer Needs on Implied
Demand Uncertainty
Customer Need Causes implied demand uncertainty to
increase because …
Range of quantity increases Wider range of quantity implies greater
variance in demand
Lead time decreases Less time to react to orders

Variety of products required increases Demand per product becomes more

disaggregated
Number of channels increases Total customer demand is now
disaggregated over more channels
Rate of innovation increases New products tend to have more
uncertain demand
Required service level increases Firm now has to handle unusual surges in
demand

First step to strategic fit is to understand customers by mapping their

demand on the implied uncertainty spectrum
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 Supply Source Capability and Its
impact on Implied Supply Uncertainty
Supply Source Capability Causes Supply Uncertainty to...
Frequent breakdowns Increase
Unpredictable and low yields Increase
Poor quality Increase
Limited supply capacity Increase
Inflexible supply capacity Increase
Evolving production process Increase

Table 2-3
Implied uncertainty spectrum (example)

Predictable supply and uncertain demand Highly

or
Predictable uncertain
Uncertain supply and predictable demand
supply and or supply and
demand Some what uncertain supply and demand demand

Salt at a A new
An existing automobile
super communication
model
market device

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 Step 2: Understanding SCM

• Network design : Number and location of facilities

• System capacity : Capacity and layout
• Production plan : Mass, lean, JIT etc.
• Inventory policy : EOQ, Safety stock, ROP
• Quality standards: ISO, TQM,
• Transportation and delivery systems: mode and
route
• Supplier relationship: Contracts, alliances
• Buyer relationships
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Example of efficient and responsive OSCM
strategic fit
Efficient Responsive
Primary goal Lowest cost Quick response
Product design strategy Min product cost Modularity to allow
postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense Aggressively reduce even if
of greater cost costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality
Transportation strategy Greater reliance on low cost Greater reliance on
modes responsive (fast) modes

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 Step 2: Understanding the Supply Chain

• There is a cost to achieving responsiveness

• Supply chain efficiency: cost of making and delivering
the product to the customer
• Increasing responsiveness results in higher costs that
lower efficiency
Second step to achieving strategic fit is to map the
supply chain on the responsiveness spectrum

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 Responsive spectrum (example)

Highly Somewhat Somewhat Highly

efficient efficient responsive responsive

Integrated Hanes Most Seven

steel mill apparel automotive Eleven
production

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 Step 3: Achieving Strategic Fit
• Step 3 test whether the supply chain is well consistent with
target customer’s needs
• All functions in the value chain must also support the
competitive strategy to achieve strategic fit.
• Two extremes:
– Efficient supply chains (Barilla) and responsive supply chains (Dell).
– Certain demand (functional product) and Uncertain demand
(innovative product)
• Two key points
– there is no right OSCM strategy independent of competitive strategy.
– there is a right OSCM strategy for a given competitive strategy.

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 Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map
Responsive
OSCM
Dell

o f t
Responsivene n e
c Fi
ss spectrum Zo tegi
t ra
S

Efficient Barilla
OSCM

Certain Implied Uncertain

demand uncertainty demand
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spectrum
Mechanism for Ensuring Strategic Fit
(Drivers)
• Logistics drivers
– Facility decisions
– Inventory decisions
– Transportation decisions
• Cross functional drivers
– Information
– Sourcing decisions
– Pricing decisions

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 Facilities
• Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)
• Role in the competitive strategy
– Central production _economies of scale (efficiency priority)
– larger number of smaller facilities (responsiveness priority)
– Proximity to customers/ suppliers (Location)
– Capacity Utilization
– Flexible vs. Dedicated
– Cross-dock vs. warehousing
• Overall trade-off: Responsiveness versus efficiency
3-55
 Inventory
• Role in the Supply Chain
– Inventory exists because of a mismatch between supply and demand
– Source of cost and influence on responsiveness
• Role in Competitive Strategy
– If responsiveness is a strategic competitive priority, a firm can locate
larger amounts of inventory closer to customers
– If cost is more important, inventory can be reduced to make the firm
more efficient
– Inventory location and Inventory policies (EOQ, Reorder point, safety
stock, 80/20 policy, ABC etc.)
• Overall trade-off: Responsiveness versus efficiency
– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness
3-56
 Transportation
• Role in the Supply Chain
– Moves the product between stages in the supply chain
– Impact on responsiveness and efficiency
– Also affects inventory and facilities decisions
• Role in Competitive Strategy
– Faster transportation allows greater responsiveness but
lower efficiency
– Can also consider both inventory and transportation to
find the right balance

3-57
 Components of Transportation Decisions
• Mode of transportation:
– air, truck, rail, ship, pipeline, electronic transportation
– vary in cost, speed, size of shipment, flexibility
• Route and network selection
– route: path along which a product is shipped
– network: collection of locations and routes
• In-house or outsource (2PL, 3PL, 4PL)
• Mode selection
• Overall trade-off: Responsiveness versus efficiency

3-58
 Information
• Role in the supply chain
– The connection between the various stages in the supply
chain – allows coordination between stages
– Crucial to daily operation of each stage in a supply chain –
e.g., production scheduling, inventory levels
• Role in the competitive strategy
– Allows supply chain to become more efficient and more
responsive at the same time (reduces the need for a trade-
off)
– Information technology cost vs. responsiveness

3-59
 Sourcing
• Role in the supply chain
– Set of business processes required to purchase goods and
services in a supply chain
– Supplier selection, single vs. multiple suppliers, contract
negotiation
• Role in the competitive strategy
– Sourcing decisions are crucial because they affect the level
of efficiency and responsiveness in a supply chain
– In-house vs. outsource decisions- improving efficiency and
responsiveness

3-60
 Pricing
• Role in the supply chain
– Pricing determines the amount to charge
customers in a supply chain
– Pricing strategies can be used to match demand
and supply
• Role in the competitive strategy
– Firms can utilize optimal pricing strategies to
improve efficiency and responsiveness
– Low price and low product availability; vary prices
by response times
3-61
Productivity

62
 Productivity
• Productivity
– A measure of the effective use of resources usually
expressed as the ratio of output to input.
• Productivity ratios are used for
– Planning workforce requirements
– Scheduling equipment
– Financial analysis

63
 Productivity
• Partial measures
– output/(single input) Productivity = output / Inputs
• Multi-factor measures
– output/(multiple inputs)
• Total measure
– output/(total inputs)

Productivity Growth
Current Period Productivity – Previous Period Productivity
Productivity Growth= Previous Period Productivity

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 Measures of Productivity
Table 2.4

Partial Output Output Output Output

measures Labor Machine Capital Energy

Multifactor Output Output

measures Labor + Machine Labor + Capital + Energy

Total Goods or Services Produced

measure All inputs used to produce them

65
Examples of Partial Productivity Measures

Labor Units of output per labor hour

Units of output per shift
Productivity Value-added per labor hour
Dollar value of output per labor hours
Machine Units of output per machine hour
machine hour
Productivity Dollar value of output per machine hour

Capital Units of output per dollar input

Dollar value of output per dollar input
Productivity

Energy Units of output per kilowatt-hour

Dollar value of output per kilowatt-hour
Productivity

66
 Example 1

7040 Units Produced

Sold for $1.10/unit

Cost of labor of $1,000 What is the

multifactor
Cost of materials: $520 productivity?

Cost of overhead: $2000

67
 Example 1 Solution

MFP = Output
Labor + Materials + Overhead

MFP = (7040 units)*($1.10)

$1000 + $520 + $2000

MFP = 2.20 dollar/dollar inputs

68
Factors Affecting Productivity

Other Factors Affecting Productivity

69
 Improving Productivity
• Develop productivity measures
• Determine critical (bottleneck) operations
• Develop methods for productivity improvements
• Establish reasonable goals
• Get management support
• Measure and publicize improvements
• Don’t confuse productivity with efficiency

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 Class work
1. The manager of a crew that installs carpeting has tracked the
crew’s output over the past several weeks, obtain these
figures:
Week Crew Size Yards Installed
1 4 960
2 3 702
3 4 968
4 2 500
5 3 696
6 2 500
Compute the labor productivity for each of the weeks. On the
basis of your calculations, what can you conclude about crew
size and productivity?
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 Class work
2. Compute the multifactor productivity measure for each of
the weeks shown. What do the productivity figures suggests?
Assume 40-hour weeks and an hourly wage of $12.
Overhead is 1.5times weekly labor cost. Material cost is $6
per pound. Standard price is $140 per unit.

Week Output Workers Material

(units) (lbs)
1 300 6 45
2 338 7 46
3 322 7 46
4 354 8 48

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 Home Work
1. A company that makes shopping carts for supermarkets and other stores recently
purchased some new equipment that reduces the labor content of the jobs needed
to produce the shopping carts. Prior to buying the new equipment, the company
used five workers, who produced an average of 80 carts per hour. Workers receive
$10 per hour and machine cost was $40 per hour. With the new equipment, it was
possible to transfer one of the workers to another department, and equipment cost
increased by $10 per hour while output increased by four carts per hour.
a) Compute labor productivity under each system. Use carts per worker per hour as the
measure of labor productivity.
b) Compute the multifactor productivity under each system. Use carts per dollar cost
(labor plus equipment) as the measure.
c) Comment on the changes in productivity according to the two measures, and on which
one you believe is the more pertinent for this situation.
2. A manager checked production records and found that a worker produced 160
units while working 40 hours. In the previous week, the same worker produced 138
units while working 36 hours. Did the worker’s productivity increase? Explain.

73
 Practice Math
1. Posey Ceramics makes ceramic vases for a chain of department stores. The output
and cost figures over the past four weeks are shown here. Labor costs $10 an
hour, and materials are $4 a pound. Calculate the (a) labor productivity (in hrs), (b)
material productivity (in lbs), and (c) multifactor productivity for each week.
Comment on the results.

2. A company produces small motors at a processing cost of $30 per unit.

The company produces 100 motors per day and averages 80% good
quality motors, resulting 20% motors are defective, 50% of which can be
reworked prior to shipping at a extra cost of $12 for each motor rework.
a. What is it current productivity?
b. If processing cost reduced to $26 and rework cost is reduced to $10 what is
the impact on productivity?
c. If good quality motors is increased to 90%, and original cost and conditions
prevails, what is the productivity?
d. What is the productivity when good quality motors is increased to 90% and
processing cost reduced to $26 and rework cost is reduced to $10. 74
 More to practice
• Student tuition at Boehring University is $150 per semester
credit hour. The state supplements school revenue by $100
per semester credit hour. Average class size for a typical 3-
credit course is 50 students. Labor costs are $4,000 per class,
materials costs are $20 per student per class, and overhead
costs are $25,000 per class.
a) What is the multifactor productivity ratio for this course process?
b) If instructors work an average of 14 hours per week for 16 weeks for each 3-
credit class of 50 students, what is the labor productivity ratio?

75
APPENDIX

76
Elaborative Value Chain

77