Chapter 1

Introduction to Operations Management

 What is Operations Management?

Production is the creation of goods and services

Operations Management
The systematic design, direction, and control of
processes that transform inputs into services and
products for internal, as well as external, customers.
 Operations Management

Process
 Any
activity or group of activities that takes one or
more inputs, transforms them, and provides one or
more outputs for its customers

Operation
Agroup of resources performing all or part of one or
more processes
 Operations Management

 process is a set of operation for example in a sugar

mill the processing involve
1. bringing out juice from sugarcane.
2. heat them.
3.refine them. etc.
here process is the combination of all of the above
stated tasks (1,2,3,).

 Each of the task 1,2 & 3 is an Operation.

Role of Operations in an Organization

Integration
between
Different
Functional
Areas of a
Business
Typical Organization Chart
Organizational Charts
Organizational Charts
How Processes Work
 How Processes Work
Every process and every person in the
organization has customers
 External customers
 Internal customers

Every process and every person in the

organization relies on suppliers
 External suppliers
 Internal suppliers

* Nested Process
The concept of a process within a process
 What is Role of OM?

OM Transforms inputs to outputs

 Inputs are resources such as

 People, Material, and Money

 Outputs are goods and services

 OM’s Transformation Role

 To add value

 Increase product value at each stage

 Value added is the net increase between output

product value and input material value

 Provide an efficient transformation

 Efficiency – means performing activities well for

least possible cost
 Value-Added Process
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
 Value-Added Process
 Input- Materials, labour, information, technology,
equipment, legal constraints, government regulations
etc....
 What type of skill do the employees need?
 What type of materials does the firm need?
 Value-Added Activities- Performed with tools machines,
techniques, human skills etc....i.e. Processing.
 How will the firm use its resources to produce its
products/ how can the firm improve its operations?
 Output- Good and services.
 what are their needs/what sort of products will be
produced?
Example of the transformation for Hospital Process

Inputs Processing Outputs

Doctors, nurses Examination Healthy

Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy
Example of the transformation for Food Processor

Inputs Processing Outputs

Raw Vegetables Cleaning Canned
Metal Sheets Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment
Service and Manufacturing Processes

Differ Across Nature of Output and Degree of

Customer Contact

More like a More like a

manufacturing service
process process

• Physical, durable output • Intangible, perishable output

• Output can be inventoried • Output cannot be inventoried
• Low customer contact • High customer contact
• Long response time • Short response time
• Capital intensive • Labor intensive
• Quality easily measured • Quality not easily measured
 On the other hand…
Both use technology
Both have quality, productivity, & response
issues
Both must forecast demand
Both will have capacity, layout, and location
issues
Both have customers, suppliers, scheduling
and staffing issues
Manufacturing often provides services
Services often provides tangible goods
Goods Contain Services / Services
Contain Goods
Automobile
Computer
Installed Carpeting
Fast-food Meal
Restaurant Meal
Auto Repair
Hospital Care
Advertising Agency
Investment Management
Consulting Service
Counseling

100 75 50 25 0 25 50 75 100
Percent of Product that is a Good Percent of Product that is a Service
What is Supply Chain Management?

Supply Chain Management

The synchronization of a firm’s processes with

those of its suppliers and customers to match
the flow of materials, services, and information
with customer demand
 The Supply Chain

▶ An interrelated series of processes within and

across firms that produces a service or product
to the satisfaction of customers
▶ Members of the supply chain collaborate to
achieve high levels of customer satisfaction,
efficiency and competitive advantage .
Figure 1.2

Farmer Syrup Bottler Distributor Retailer

producer
 A Supply Chain View

Each activity in a process should add value to the

preceding activities; waste and unnecessary cost
should be eliminated.
 The Supply Chain View

Supplier relationship process – A process that selects the

suppliers of services, materials, and information and facilitates
the timely and efficient flow of these items into the firm
 The Supply Chain View
New service/product development – A process that designs and
develops new services or products from inputs from external
customer specifications or from the market
 The Supply Chain View
Order fulfillment process – A process that includes the activities
required to produce and deliver the service or product to the
external customer
 The Supply Chain View

Customer relationship process – A process that identifies,

attracts and builds relationships with external customers and
facilitates the placement of orders by customers
(customer relationship management)
 The Supply Chain View
Support Processes - Processes like Accounting, Finance,
Human Resources, Management Information Systems and
Marketing that provide vital resources and inputs to the core
processes
 Operations Strategy

 The means by which operations implements the firm’s

corporate strategy and helps to build a customer-
driven firm
- firms internal processes are building blocks ,they need to be organized
to be effective in competitive environment.
 Operations Strategy
Corporate Strategy
• Environmental scanning Market Analysis
• Core competencies • Market segmentation
• Core processes • Needs assessment
• Global strategies
Competitive Priorities
• Cost
• Quality
• Time
• Flexibility

New Service/
Product Development
• Design
• Analysis No
• Development
• Full launch
Performance
Yes Gap?
Operations Strategy

Competitive Capabilities
Decisions
• Current
• Managing processes
• Needed
• Managing supply chains
• Planned
 Corporate Strategy
 Corporate strategy provides an overall direction that serves
as the framework for carrying out all the organization's
functions
 Environmental scanning
Managers monitor trends in environment(eg. Industry, market place and society) for potential opportunities and threats
- new entrants

 Developing core competencies

1. Workforce- trained and flexible work force
2. Facilities- offices, stores and plants
3. Market and financial know-how-sales and attract capital from
stocks

4. Systems and technologies- new technology

 Developing core processes

 Global strategies-locating operations in a foreign country

 Market Analysis
- Understand what the customers want and how to provide it.
Market segmentation
The Gap ,Inc. - major provider of casual clothes, targets teenagers
and young adults.
Gap Kids store –infants through 12 years
Needs assessment
Service or product needs- price , quality
Delivery system needs -safety, delivery speed
Volume needs – high or low
Other needs- after sale technical support
Competitive Priorities and Capabilities

Competitive Competitive
Priorities Capabilities
The critical dimensions The cost, quality, time, and
that a process or supply flexibility dimensions that a
chain must possess to process or supply chain
satisfy its internal or actually possesses and is
external customers, both able to deliver.
now and in the future.
 Order Winners and Qualifiers

Order Winners Order Qualifiers

A criterion customers Minimum level required
use to differentiate the from a set of criteria for a
services or products firm to do business in a
of one firm from those particular market
of another. segment.
 Order Winners and Qualifiers

COST Definition Process Considerations Example

1.Low-cost Delivering a service Processes must be Costco
operations or a product at the designed and operated to
lowest possible cost make them efficient

QUALITY

2.Top quality Delivering an May require a high level of Rolex

outstanding service customer contact and may
or product require superior product
features
3.Consistent Producing services Processes designed and McDonald’s
quality or products that monitored to reduce errors
meet design and prevent defects
specifications on a
consistent basis
 Order Winners and Qualifiers

TIME Definition Process Considerations Example

4.Delivery speed Quickly filling a Design processes to reduce Netflix

customer’s order lead time

5.On-time Meeting delivery- Planning processes used to Parcel Service

delivery time promises increase percent of (PS)
customer orders shipped
when promised

6.Development Quickly Cross-functional integration Zara

speed introducing a new and involvement of critical
service or a external suppliers
product
 Order Winners and Qualifiers
Process
FLEXIBILITY Definition Example
Considerations
7.Customization Satisfying the Low volume, close Ritz Carlton
unique needs of customer contact,
each customer by and easily
changing service reconfigured
or product designs
8.Variety Handling a wide Capable of larger Amazon.co
assortment of volumes than m
services or processes
products efficiently supporting
customization
9.Volume Accelerating or Processes must be Postal
flexibility decelerating the designed for excess Service (PS)
rate of production capacity and excess
of services or inventory
products quickly to
handle large
fluctuations in
demand
 Order Winners and Qualifiers
 Order winner is a criterion that customers use to
differentiate the services or products of one firm
from those of another, such as cost, quality, time,
and flexibility.

 Order qualifier is the minimal requirement for

doing business in a particular market segment.
 Order Winners and Qualifiers

Order Winner
Sales ($)

Order Qualifier

Sales ($)
Low High

Achievement of competitive priority

Low Threshold High

Achievement of competitive priority
 Trends in Operations Management

Productivity improvement
 The value of outputs produced is divided by the value of input
resources.
 Productivity = Output/Input
 Productivity measures – two approaches
 Single factor
In example 1, the single (input) factor is employee hours
 Multifactor
In example 1, the multiple (input) factors are labor cost,
materials cost, and overhead costs.
Trends in Operations Management
Global competition
 Firms can increase their market penetration by locating their
production facilities in foreign countries because it gives
them a local presence that reduces customer aversion to
buying imports.

 Five developments have stimulated the need for sound global

strategies.
 Improved transportation and communication
technology
 Loosened regulations on financial institutions
 Increased demand for imported services and goods
 Reduced international trade barriers
 Comparative cost advantages
 Global competition
 Comparative cost advantages
China’s factories produce a variety products that are sold
overseas in Belize and other parts of world.
Motorola, Nokia , Foot wear and clothing
Indian Software Companies have grown sophisticated in their
applications and offer a big advantage in cost.
Many firms are using Indian companies for book keeping and
accounting , preparing tax returns and processing insurance
claims.
 Disadvantages of globalization
 Relinquish proprietary technology
 Political risks( Nationalization-govt. may take over firms assets
without paying compensation.)
 Employee skills may be lower in foreign countries, requiring
additional training time.
Ethical, workforce, and environmental issues

 Some countries are more sensitive than others about conflict

of interest, Bribery , discrimination against minorities and
women, minimum wage levels and unsafe workplace.

 Most people viewed environmental problems ,such as toxic

waste, poisoned drinking water, poor air quality, climate
change , as quality-of–life issues; now many people and
business see them as survival issues.
 Productivity Improvement
EXAMPLE 1
Calculate the productivity for the following operations:

a. Three employees process 600 insurance policies in a week.

They work 8 hours per day, 5 days per week.

SOLUTION
Policies processed
a. Labor productivity =
Employee hours

600 policies
= = 5 policies/hour
(3 employees)(40 hours/employee)
 Productivity Improvement
EXAMPLE 1
Calculate the productivity for the following operations:

b. A team of workers makes 400 units of a product, which is

sold in the market for $10 each. The accounting department
reports that for this job the actual costs are $400 for labor,
$1,000 for materials, and $300 for overhead.

SOLUTION
Value of output
a. Multifactor productivity =
Labor cost + Materials cost
+ Overhead cost

(400 units)($10/unit) $4,000

= = = 2.35
$400 + $1,000 + $300 $1,700
 Application 1.1
This Year Last Year Year Before Last
Factory unit sales 2,762,103 2,475,738 2,175,447
Employment (hrs) 112,000 113,000 115,000
Sales of manufactured $49,363 $40,831 —
products ($)
Total manufacturing $39,000 $33,000 —
cost of sales ($)

 Calculate the year-to-date labor productivity:

This Year Last Year Year Before Last
factory unit 2,762,103 = 2,475,738 2,175,447
sales = 21.91/hr = $18.91/hr
112,000 24.66/hr 113,000 115,000
employment
 Calculate the multifactor productivity:
This Year Last Year
sales of mfg products $49,363 $40,831
= 1.27 = 1.24
total mfg cost $39,000 $33,000
 Solved Problems

1.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,
material 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?
 Solved Problem
SOLUTION

a. Multifactor productivity is the ratio of the value of output to

the value of input resources.
$150 tuition +
50 student 3 credit hours $100 state support
of output =
class student credit hour

= $37,500/class

of inputs = Labor + Materials + Overhead

= $4,000 + ($20/student  50 students/class) + $25,000
= $30,000/class

Output $37,500/class
Multifactor productivity = = = 1.25
Input $30,000/class
 Solved Problem
SOLUTION

b. Labor productivity is the ratio of the value of output to

labor hours. The value of output is the same as in part (a),
or $37,500, so

14 hours 16 weeks
of input =
week class

= 224 hours/class

Output $37,500/class
ductivity = =
Input 224 hours/class

= $167.41/hour
 Solved Problems

2. Natalie Attire makes fashionable garments. During a

particular week employees worked 360 hours to produce a
batch of 132 garments, of which 52 were “seconds” (meaning
that they were flawed). Seconds are sold for $90 each at Attire’s
Factory Outlet Store. The remaining 80 garments are sold to
retail distribution at $200 each. What is the labor productivity
ratio of this manufacturing process?
 Solved Problem

SOLUTION

Value of output = (52 defective  90/defective)

+ (80 garments  200/garment)

= $20,680

ours of input = 360 hours

Output $20,680
or productivity = =
Input 360 hours

= $57.44 in sales per hour