Chapter 1

INTRODUCTION PRODUCTION &

OPERATIONS MANAGEMENT
Operations Management = OM

Management of ANY activities/process that

create goods and provide services Profit 5%
◦ Exemplary Activities: Forecasting, Scheduling, Quality
OM Cost 21%
management

Why to study OM
◦ At a typical manufacturing company Marketing
Cost 26%

Manufacturing
Cost 48%
Operations Management = OM
The management of systems or processes that create goods
and/or provide services

Organization

Finance Operations Marketing

Working Definition of P/OM

The study of Production and Operations Management (P/OM) is the

study of operations and processes leading to the creation of goods and
services.

Operations management consists of tactics such as scheduling work,

assigning resources including people and equipment, managing
inventories, assuring quality standards, process-type decisions that
include capacity decisions, maintenance policies, equipment selection,
worker-training options, and the sequence for making individual items in
a product-mix set.

4
Operations example in Manufacturing:
Food Processing

INPUTS PROCESS OUTPUTS

Raw vegetables Cleaning Clean vegetables

Metal sheets Cutting/Rolling/Welding Cans

Energy, Vegetables Cutting Cut vegetables

Energy, Water, Cooking Boiled vegetables

Vegetables
Energy, Cans, Boiled Placing Can food
vegetables
What Operations and Supply Chain
Managers Do
 What is Operations Management?
 design, operation, and improvement of productive systems
 What is Operations?
 a function or system that transforms inputs into outputs
of greater value
 What is a Transformation Process?

a series of activities along a value chain extending from
supplier to customer
 activities that do not add value are superfluous and should be
eliminated
Transformation Process
 Physical: as in manufacturing operations
 Locational: as in transportation or warehouse
operations
 Exchange: as in retail operations
 Physiological: as in health care
 Psychological: as in entertainment
 Informational: as in communication
Operations as a
Transformation Process

INPUT
• Material
• Machines TRANSFORMATION OUTPUT
• Goods
• Labor PROCESS
• Services
• Management
• Capital

Feedback & Requirements

Operations Function

 Operations
 Marketing
 Finance and
Accounting
 Human
Resources
 Outside
Suppliers
Evolution of Operations and Supply
Chain Management

 Craft production

process of handcrafting products or services for
individual customers
 Division of labor

dividing a job into a series of small tasks each
performed by a different worker
 Interchangeable parts

standardization of parts initially as replacement
parts; enabled mass production
Evolution of Operations and Supply
Chain Management (cont.)

 Scientific management

systematic analysis of work methods
 Mass production

high-volume production of a
standardized product for a mass market
 Lean production

adaptation of mass production that
prizes quality and flexibility
Historical Events in Operations
Management

Era Events/Concepts Dates Originator

Steam engine 1769 James Watt
Industrial
Revolution Division of labor 1776 Adam Smith

Interchangeable parts 1790 Eli Whitney

Principles of scientific 1911 Frederick W. Taylor

management
Scientific
Time and motion studies 1911 Frank and
Management
Lillian Gilbreth
Activity scheduling chart 1912 Henry Gantt

Moving assembly line 1913 Henry Ford

Historical Events in Operations
Management (cont.)

Era Events/Concepts Dates Originator

Hawthorne studies 1930 Elton Mayo
Human
Relation 1940s Abraham Maslow
s Motivation theories 1950s Frederick Herzberg
1960s Douglas McGregor
Linear programming 1947 George Dantzig
Digital computer 1951 Remington Rand
Simulation, waiting
Operations
line theory, 1950s
Operation research groups
s decision theory,
Research PERT/CPM

1960s, Joseph Orlicky, IBM

MRP, EDI, EFT, CIM
1970s
and others
 Historical Events in Operations
Management (cont.)

Era Events/Concepts Dates Originator

JIT (just-in-time) 1970s Taiichi Ohno (Toyota)
TQM (total quality 1980s W. Edwards Deming,
management) Joseph Juran
Quality Strategy and 1980s Wickham Skinner,

Revolution operations Robert Hayes

Business Michael Hammer,
1990s
process
reengineering James Champy
Six Sigma 1990s GE, Motorola
Historical Events in Operations
Management (cont.)
Era Events/Concepts Dates Originator
Internet Internet, WWW, ERP, 1990s ARPANET, Tim
Revolution supply chain management Berners-Lee SAP,
i2 Technologies,
ORACLE

E-commerce 2000s Amazon, Yahoo,

eBay, Google, and
others
Globalization WTO, European Union, 1990s Numerous countries
and other trade 2000s and companies
agreements, global supply
chains, outsourcing, BPO,
Services Science
Evolution of Operations and Supply
Chain Management
 Supply chain management

management of the flow of information, products, and services across
a network of customers, enterprises, and supply chain partners
Globalization and Competitiveness

 Why “go global”?


favorable cost

access to international markets

response to changes in demand

reliable sources of supply

latest trends and technologies
 Increased globalization

results from the Internet and falling trade
barriers
Types of Operations
Operation Examples

Goods producing Farming, mining, construction

Storage/transportation Warehousing, trucking, mail, taxis,

buses, hotels, location
Exchange Trade, retailing, wholesaling, renting,
leasing, loans
Entertainment Radio, movies, TV, concerts, recording

Communication Newspapers, journals, magazines, radio,

TV, telephones, satellite
Why OM?

Core of all business organizations

Many areas interrelated with OM activities
Management of operations is critical to create and maintain competitive advantages
Organization of Businesses

Three basic functions

◦ Operations/Production
◦ Goods oriented (manufacturing and assembly)
◦ Service oriented (health care, transportation and retailing)
◦ Value-added (the essence of the operations functions)
◦ Finance-Accounting
◦ Budgets (plan financial requirements)
◦ Economic analysis of investment proposals
◦ Provision of funds (the necessary funding of the operations)
Organization of Businesses
(Cont.)

◦ Marketing
◦ Selling
◦ Promoting
◦ Assessing customer wants and needs
◦ Communicating those needs to operations
The need for working closely
Operations

Marketing Finance
Operations Interfaces

Industrial
Engineering Maintenance

Distribution
Operations Public Relations

Purchasing Personnel
Accounting
Systems (Holistic) Approach

Emphasizes interrelations among subsystems.

A systems approach is essential whenever something is being
designed, redesigned, implemented, or improved. It is important
to take into account the impact on all parts of the system.

Example: A new feature is added to a product.

Designer must take into account how customers will view the
change, instruction for using new feature, the cost, training of
workers, production schedule, quality standard, advertising must
be informed about the new feature.
 Systems Approach
“The whole is greater than
the sum of the parts.”

Suboptimization
 Value Added
Value added: The difference between cost of inputs and price
(??) of outputs.

Is this definition right? Should value added include profit?

Value added: The difference between the cost of inputs

and the (market or fair) value or price of outputs.
 Value-Added

Value added
Inputs
Transformation/ Outputs
Land
Conversion Goods
Labor
process Services
Capital
Feedback

Control
Feedback Feedback
Degree of Standardization !

Standardized output
◦ Take advantage of standardized methods, less skilled
workers, materials…
◦ Example: Iron, Wheat, most of commodities

Customized output
◦ Each job is different
◦ Workers must be skilled
◦ Example: Hair cut
Manufacturing (Goods) VS Service
operations

Production of goods (goods oriented)

◦ Tangible products
◦ Automobile
◦ Refrigerator

Services (TV and auto repair, lawn care)

◦ Government
◦ Regulatory bodies, FAA, FDA
◦ Wholesale/retail
◦ Financial services
◦ Education
Goods vs. Service Operations (Cont)

Differences
1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of productivity
6. Production and delivery
7. Quality assurance
8. Amount of inventory
Manufacturing vs. Service !
Characteristic Manufacturing Service

Output Tangible Intangible

Customer contact Low High

Uniformity of output High Low

Labor content Low High

Uniformity of input High Low

Measurement of productivity Easy Difficult

Opportunity to correct quality Easy Difficult

problems
 Goods-service Continuum

Steel production Home remodeling Auto Repair Maid Service Teaching

Automobile fabrication Retail sales Appliance repair Manual car wash Lawn mowing

High percentage goods Low percentage goods

Low percentage service High percentage service
Responsibilities of Operations Management

Planning
◦ Capacity, utilization
◦ Location
◦ Choosing products or services
◦ Make or buy
◦ Layout
◦ Projects
◦ Scheduling
◦ Market share
◦ Plan for risk reduction, plan B?
◦ Forecasting
Operations Managers

Controlling
◦ Inventory
◦ Quality
◦ Costs
Organization
◦ Degree of standardization
◦ Subcontracting
◦ Process selection
Staffing
◦ Hiring/lay off
◦ Use of overtime
◦ Incentive plans
◦ Job assignments
 Scope of Operations Management

Operations Management includes:

◦ Forecasting
◦ Capacity planning
◦ Scheduling
◦ Managing inventories
◦ Assuring quality
◦ Motivating employees
◦ Deciding where to locate facilities
◦ And more . ..
 Simple Product Supply Chain

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
 A Supply Chain for Bread

Stage of Production Value Added Value of

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

Summary
Definition of OM
OM’s relationship with Marketing, Finance and Accounting
Goods vs. service industries
OM issues, trends and models
Manufacturing systems