Operations Management - An Introduction


Learning Objectives

1.      understand the role of operations in business

2.      introduction to the methods used to control products, processes, quality and output

3.      understand basic operations problems and approaches for solving those problems

4.      improve modeling skills with spreadsheets and simulations


What is Operations Management?

"... the systematic direction and control of the processes that transform inputs into finished goods and services. The inputs are transformed at operations into outputs."

In other words Operations Management deals with all activities involved with designing, producing and delivering a product.


Operations as a Transformation Process


Inputs Transformation Output



Where does it fit in an organization?

Operations is one functional area, supporting corporate strategy and exchanging information with the marketing, finance and human resources areas.


Porter's Value Chain model



Operations handles inbound logistics, operations, outbound logistics and service as well as procurement and aspects of technology development


Operations Management is all about providing customers with products and services.

You survive by giving customers with what they want

   Every Product or Service is really a bundle of different attributes.

   Product, place, price, performance, quality, timing, service, etc.




-         Customers are looking for a bundle of characteristics

-         Total bundle provides the level of value customers deem appropriate

-         Buying products with the attributes they want at the lowest price possible

-         Attributes

-         Price

-         Quality

-         Image

-         Performance

-         Safety

-         Place distribution

-         Time delivery, availability



l    How do you decide which product to produce?


l    How do you find out what attributes your product should have?


l    How do you get those attributes into your product?

    What process?

    What resources do you need?

    Where do you get those resources?


Customer Satisfaction - the key to organizational success

To be successful an organization

1. give its customers what they want or more

   meet or exceed customer expectations

2. must also do this at a price which will provide profit for shareholders and continued investment


Examples of Operations Decisions

Operations managers must make decisions on three levels





- Longer term decisions

- Usually made at the senior management level


    Product and service strategy

    Competitive priorities

    Positioning strategy

    Location, capacity

    Long term partnerships

    Quality system and overall approach to quality


- Medium term decisions

- Tactical in nature

- Made by middle and senior managers


    Process design

    Technology management

    Job design and workforce management

    Capacity management

    Facility location

    Facility layout



- Shorter term decisions

- Made at middle and lower management levels



    Materials management

    Inventory management

    Aggregate planning

    Master production scheduling

    Production control


Example of Operations Management Decisions -

A global sports shoe manufacturer has just decided to enter the market in a new country.

What decisions does the operations manager in charge have to make?

- 1 year before market launch?

- 6 months before launch?

- 1 month before and after launch?

Who does he or she have to work with and where and when will she have input?


A Brief History of Operations

OM - Early Developments


Textile Industry in England

    replaced people with machines

    water and mule power instead of human power

    nature of production changed from cottage to factory


James Watt

    steam engine - in use by 1785

Eli Whitney

1794 - built first cotton gin to separate cotton seeds from cotton fibers.

1799 - began mass production of muskets

    introduced concept of standard interchangeable parts to allow the use of less skilled labour to produce muskets.

    Development of the machine tool industry - metal tools and machines now possible (late 1700's).

Developments this Century


Frederick Winslow Taylor

    Principles of scientific management - 1911

1. Scientific laws govern work so scientific methods can be used to analyze work

2. Workers are different so match workers to their job and then train them thoroughly

3. Use employee self-interest to motivate

4. Separate the responsibilities of workers and managers.


Taylor - Systems approach to manufacturing

   all equipment, workers and tasks are part of a manufacturing system whose performance should be maximized


Henry Ford

   Early 1900s - introduced assembly line manufacturing to produce Model T cars

   durable, inexpensive automobile

   extensive vertical integration

   coordinated supply and production was really the first Just In Time production

Ford Model T


Alfred P. Sloan., Jr.

   CEO of General Motors - 1923-1946

   Competed with Ford through innovation

   Developed strategy of marketing different cars with different features and prices
Installment selling (GMAC), used car trade-ins, automotive styling, annual design changes

Human Resources Movement

- Examined psychological factors in manufacturing

Hawthorne Studies - 1927 to examine the effect of light on work

   Considered the role of treatment of employees in production


WWII - Operations research development

- Many management science techniques were developed in the war as a means of controlling and allocating the resources required to fight the war.

- The most difficult problems ever to challenge managers

- Problems ranged from resource allocation and logistics to rapid calculation of artillery trajectories


Computers and Operations

- Computational capacity increased dramatically

- Computers are now involved in design and production

- Development of models for solving operations problems

- Communication improvements increased capability



- Combination of computer and communication advances are reshaping the way we do business and service activities

- AOL/Time Warner Merger


Advances in Computing 1981 - 2001

- Speed

   272 time faster

- Memory

   62,500 times more

- Cost

   28.8% of 1981 cost


Computers and Communication - examples

- Operating by remote control

- Not your usual book store



Recent Trends in Operations


- What has been happening that affects the way products and services are produced?

- How has the food you eat changed from the food you ate five years ago?

- What about your clothes?

- Financial/insurance services?

- The things you buy and the way you buy them?


I. Market Focus

- Awareness that market controls production

- Old view

    a market exists to get rid of products produced

    products are commodities

- New view

    products are produced to meet market needs

    products should be differentiated and targeted at distinct niches to capture maximum value from products


II. Globalization

        Reduction in trade barriers

        Globalization of major companies

        Global sourcing

        Improved transportation capabilities

        Increased interest in products from around the world - new opportunities for variety


Changing business models example

Retailers Are Becoming Global


For Many the Scope is Increasing

        Companies are expanding in both directions

        Vertically to control supply chains and also horizontally to extend business capabilities or the ability to meet customer needs


        Blurring of traditional lines distinguishing businesses

        Retail in particular is branching out

        May mean that competition will come from unexpected sources


III. Japanese Production System


- Many aspects introduced by the U.S. after the war

- Three Principles:
1. Quality comes first.
2. Continual Improvement of product and process.
3. Elimination of waste.

- Just-In-Time


IV. Quality Management Systems

   Importance of quality management has finally been recognized

   Internal versus external quality systems

l   Total Quality Management

l   ISO 9000/QS 9000


l   ISO 14000

l   Government regulations


V. Business Process Analysis, Improvement or Reengineering

   Hammer and Champy

   Business processes can be optimized by ignoring the way things were done in the past

   Focus on what has to be done

   Often used to disguise downsizing


VI. Supply Chain Management

   The importance of considering entire supply chains rather than single firms

   Closer relationships with suppliers

   Coordination and decision making spread through the chain

l   Electronic Data Exchange - EDI

l   Efficient Consumer Response - ECR


VII. Service Operations Management

        rise in service employment since 1960's.

        service jobs outnumber manufacturing jobs.

        measuring performance is much more difficult

        productivity increases much more difficult to achieve.

        By 2005 only 20% of the population will be involved in industrial production

Example - Service Operations at IBM

        Does everything from Web design and e-commerce to installing networks

        Manage AT&Ts IT dept.

        37% of total revenue - $ 32.3 B for 1999

        45% of profits - $3.5B

        IBM generates $4 in revenue for every $1 in hardware sold


VIII. Environmental and Social

        Consumer awareness social issues

        impact on global organizations

        Cultural differences

        Environmental concern

        Government regulation

        ISO 14000


Ethical Production

- Outsourcing production to 3rd world plants

- Wal-Mart/Kathie Lee Gifford case

   Products like purses produced in sweatshops

- Minimizing the environmental impact of products EU has regulations that force product design to include consideration of the ultimate disposal of the product.


IX. New Technologies


        Computer controlled manufacturing


        Global positioning systems


The New Information Age

The power of information, communication and analysis technologies are transforming

   The way we work

   The way companies interact

   The values in the economy


Impact of Information Technologies on Productivity

Productivity Outputs/Inputs

   Output per worker ($ or units)

   Output per machine


Measures how efficient a process is by what resources are needed to produce the output.


Annual Rate of Increase in Productivity (U.S.)

1975 1995 1.4%

1995 1999 2.5%


Impact of Information Technologies on Productivity During the late 1990s

Source: Business Week, Nov. 5, 2001


Ideas The Currency of the Future

        The true value in corporations in the future will be knowledge

        At one point in the technology bubble Yahoo was worth as much as the entire US steel industry.

        U.S. Patents in 1999 170,000


The Web is revolutionizing the way we do business, seek knowledge and entertain ourselves