Operations Management

Operations Management (OM) is the set of activities that create value through goods and services by transforming inputs into outputs.
Production is the creation of goods and services.

Goods & Services

Manufacturing firms produce tangible goods (e.g., Sony TV, motorcycle).
Services can be less visible (e.g., fund transfer, hotel check-in).

Organizing to Produce Goods and Services

All organizations perform three essential functions:
- Marketing: Generates demand/promotion.
- Production/Operations: Creates the product.
- Finance/Accounting: Tracks financial performance.

Organizational Charts Examples

Commercial Bank
- Operations: Teller scheduling, check clearing, transaction processing.
- Finance: Investments, securities, real estate.
- Marketing: Loans (commercial, industrial, personal, mortgage).
- Accounting: Trust department, auditing.
Airline
- Operations: Ground support equipment, maintenance, flight operations, crew scheduling.
- Finance/Accounting: Accounting, cash control, international exchange.
- Marketing: Traffic administration, reservations, schedules, sales, advertising.
Manufacturing
- Operations: Facilities, production and inventory control, quality assurance, supply-chain management.
- Design: Product development, industrial engineering, process analysis.
- Finance/Accounting: Disbursements/credits, accounts receivable/payable, funds management.
- Marketing: Sales promotion, advertising, market research.

The Supply Chain

Companies rely on suppliers for raw materials and services.
The supply chain is a global network of organizations and activities.
Members collaborate to achieve customer satisfaction, efficiency, and competitive advantage.

Why Study OM?

OM is a core function in any organization.
Understanding how goods/services are produced is essential.
Understanding operations managers' roles helps improve performance.
OM is a significant cost center for organizations.

Options for Increasing Contribution

*Table 1.1 shows the impact of different strategies on contribution. An example is:

	Current	Increase Sales Revenue 50%	Reduce Finance Costs 50%	Reduce Production Costs 20%
Sales	$100,000$	$150,000$	$100,000$	$100,000$
Cost of goods	$–80,000$	$–120,000$	$–80,000$	$–64,000$
Gross margin	$20,000$	$30,000$	$20,000$	$36,000$
Finance costs	$–6,000$	$–6,000$	$–3,000$	$–6,000$
Subtotal	$14,000$	$24,000$	$17,000$	$30,000$
Taxes at 25%	$–3,500$	$–6,000$	$–4,200$	$–7,500$
Contribution	$10,500$	$18,000$	$12,750$	$22,500$

What Operations Managers Do

Good managers perform basic management functions:
- Planning
- Organizing
- Staffing
- Leading
- Controlling
Operations managers apply these functions to OM decisions.

Ten Strategic Decisions

Operations managers address ten key decisions:

Decision	Chapters
1. Design of goods and services	5, Supplement 5
2. Managing quality	6, Supplement 6
3. Process and capacity strategy	7, Supplement 7
4. Location strategy	8
5. Layout strategy	9
6. Human resources and job design	10
7. Supply-chain management	11, Supplement 11
8. Inventory management	12, 14, 16
9. Scheduling	13, 15
10. Maintenance	17

The Strategic Decisions (Expanded)

Design of goods and services
- Defines operational requirements.
- Determines cost, quality, sustainability, and human resource needs.
Managing Quality
- Determines customer quality expectations, establishes policies and procedures to achieve it.
Process and capacity design
- Determines how goods/services are produced, commits to specific technology, resources and investment.
Location strategy
- Considers nearness to customers, suppliers, and talent, as well as costs, infrastructure, and government.
Layout strategy
- Integrates capacity needs, personnel levels, technology, and inventory, determining efficient flow of resources.
Human resources and job design
- Focuses on recruiting, motivating, and retaining skilled personnel.
Supply chain management
- Integrates the supply chain into the firm’s strategy (what to purchase, from whom, under what conditions).
Inventory management
- Deals with inventory ordering and holding decisions considering customer satisfaction, supplier capabilities and production schedules.
Scheduling
- Involves intermediate- and short-term schedules to meet customer demands while utilizing personnel and facilities effectively.
Maintenance
- Considers facility capacity, production demands, and personnel to maintain a reliable and stable process.

Significant Events in OM Timeline

Early Concepts (1776-1880)
- Labor Specialization (Smith, Babbage).
- Standardized Parts (Whitney).
Scientific Management Era (1880-1910)
- Gantt Charts (Gantt).
- Motion & Time Studies (Gilbreth).
- Process Analysis (Taylor).
Mass Production Era (1910-1980)
- Moving Assembly Line (Ford/Sorensen).
- Statistical Sampling (Shewhart).
- Economic Order Quantity (Harris).
- Linear Programming.
- PERT/CPM (DuPont).
- Material Requirements Planning (MRP).
Lean Production Era (1980-1995)
- Just-in-Time (JIT).
- Computer-Aided Design (CAD).
- Electronic Data Interchange (EDI).
- Total Quality Management (TQM).
- Baldrige Award, Empowerment, Kanbans, Finite Scheduling.
Mass Customization Era (1995-2005)
- Internet/E-Commerce.
- Enterprise Resource Planning.
- International Quality Standards (ISO).
- Supply Chain Management, Mass Customization, Build-to-Order.
Globalization Era (2005-2020)
- Global Supply Chains.
- Growth of Transnational Organizations.
- Radio Frequency Identification (RFID).
- Instant Communications.
- Sustainability, Ethics in a Global Workforce, Logistics.

Operations for Goods and Services

Services: Intangible economic activities (e.g., education, entertainment).
Services account for nearly 80% of jobs.
Manufacturers produce tangible products; service products are often intangible.
Operational activities are similar: quality standards, designed to meet demand, produced in facilities with employees.

Differences Between Goods and Services

Characteristics of Goods	Characteristics of Services
Tangible: The seat itself	Intangible: Ride in an airline seat
Product can usually be kept in inventory (beauty products)	Produced and consumed simultaneously: Beauty salon produces a haircut as it is consumed
Similar products produced (iPods)	Unique: Your investments and medical care are unique
Limited customer involvement in production	High customer interaction: Often what the customer is paying for (consulting, education)
Product standardized (iPhone)	Inconsistent product definition: Auto Insurance changes with age and type of car
Standard tangible product tends to make automation feasible	Often knowledge-based: Legal, education, and medical services are hard to automate
Product typically produced at a fixed facility	Services dispersed: Service may occur at retail store, local office, house call, or via the internet
Many aspects of quality for tangible products are easy to evaluate	Quality may be hard to evaluate: Consulting, education, and medical services

Productivity Challenge

Efficiency in transforming resources into goods and services.
Improved efficiency increases productivity and added value.
Production is a measure of output, not efficiency.

Productivity

Productivity is the ratio of outputs to inputs.
Objective: To improve productivity.
Enhancement can be achieved by:
- Reducing inputs while keeping output constant.
- Increasing output while keeping inputs constant.
The U.S. economic system increases productivity by about 2.5% per year.
- Capital (38% of 2.5%).
- Labor (10% of 2.5%).
- Management (52% of 2.5%).
  *Starbucks improved productivity by:
  *Stop requiring signatures on credit card purchases under $25$ , saved 8 seconds.
  *Change the size of the ice scoop, saved 14 seconds.
  *New espresso machines, saved 12 seconds.
  *Operations improvements have helped Starbucks increase yearly revenue per outlet by $250,000$ to $1,000,000$ . Productivity has improved by 27%, or about 4.5% per year.

Productivity Measurement

Single-factor productivity:
- $Productivity = {Units produced } / {Input used }$
Example of Labor Productivity:
*Labor Productivity
* $Productivity = {Units produced } / {Labor-hours used } = {1,000} / {250} = 4 units/labor-hour$

Multi-Factor Productivity

$Multifactor = {Output } / {Labor + Material + Energy + Capital + Miscellaneous }$
Also known as total factor productivity
Output and inputs are often expressed in dollars.

Measurement Problems

Quality changes.
External elements impact productivity.
Precise units of measure may be lacking.

Productivity Variables

Labor (contributes about 10% of the annual increase).
Capital (contributes about 38% of the annual increase).
Management (contributes about 52% of the annual increase).

Key Variables for Improved Labor Productivity

Basic education for the labor force.
Adequate diet.
Social overhead (transportation, sanitation).

Capital

Trade-off between capital and labor.
Managers adjust investment plans based on capital costs and risks.

Management

Ensures effective use of labor and capital.
Application of technologies and knowledge.
Shift from manual labor to technical and information-processing tasks.

Productivity in the Service Sector

Productivity improvement is difficult because services are:
1. Labor intensive.
2. Focused on unique attributes/desires.
3. Often intellectual tasks.
4. Difficult to automate.
5. Difficult to evaluate for quality.