Operations Management

Module
Session 3
Semester 5
OPERATIONS MANAGEMENT AND
DECISION MAKING
• The chief role of an operations manager is that of planner and decision
maker.

• In this capacity, the operations manager exerts considerable influence over the
degree to which the goals and objectives of the organization are realized.

• Most decisions involve many possible alternatives that can have quite different
impacts on costs or profits. Consequently, it is important to make informed
decisions.

• An operations manager’s daily concerns include costs (budget), quality, and

schedules (time)
• Operations management professionals make a number of key decisions
that affect the entire organization. These include the following:

What: What resources will be needed, and in what amounts?

When: When will each resource be needed?

When should the work be scheduled?
When should materials and other supplies be ordered?
When is corrective action needed?

Where: Where will the work be done?

How: How will the product or service be designed?

How will the work be done (organization, methods, equipment)?
How will resources be allocated?

Who: Who will do the work?

Models
• Models are often a key tool used by all decision makers.
• A model is an abstraction of reality, a simplified representation of
something.
• Examples of models include automobile test tracks and crash
tests; formulas, graphs and charts; balance sheets and income
statements; and financial ratios.
• Common statistical models include descriptive statistics such as
the mean, median, mode, range, and standard deviation, as well as
random sampling, the normal distribution, and regression
equations.
• Models are sometimes classified as physical, schematic, or
mathematical.:

• Physical models look like their real-life counterparts.

• Examples include miniature cars, trucks, airplanes, toy animals and
trains, and scale-model buildings.
• The advantage of these models is their visual correspondence with
reality.
• Schematic models are more abstract than their physical
counterparts; that is, they have less resemblance to the
physical reality.
• Examples include graphs and charts, blueprints, pictures, and
drawings.
• The advantage of schematic models is that they are often relatively
simple to construct and change.
• Moreover, they have some degree of visual correspondence.

• Mathematical models are the most abstract: They do not look

at all like their real-life counterparts.
• Examples include numbers, formulas, and symbols.
• These models are usually the easiest to manipulate, and they are
important forms of inputs for computers and calculators.
• Because models play a significant role in operations management
decision making, they are heavily integrated into the material of
this text.

• For each model, try to learn

(1) its purpose,
(2) how it is used to generate results,
(3) how these results are interpreted and used, and
(4) what assumptions and limitations apply.
• Managers use models in a variety of ways and for a variety of reasons.
• Models are beneficial because they :

1. Are generally easy to use and less expensive than dealing directly with the
actual situation.
2. Require users to organize and sometimes quantify information and, in the
process, often indicate areas where additional information is needed.
3. Increase understanding of the problem.
4. Enable managers to analyze what-if questions.
5. Serve as a consistent tool for evaluation and provide a standardized format
for analyzing a problem.
6. Enable users to bring the power of mathematics to bear on a problem
• This impressive list of benefits notwithstanding, models have certain
limitations of which you should be aware.

• The following are three of the more important limitations:

1. Quantitative information may be emphasized at the expense of qualitative

information

2. Models may be incorrectly applied and the results misinterpreted. The

widespread use of computerized models adds to this risk because highly
sophisticated models may be placed in the hands of users who are not
sufficiently knowledgeable to appreciate the subtleties of a particular model;
thus, they are unable to fully comprehend the circumstances under which the
model can be successfully employed.

3. The use of models does not guarantee good decisions.

Quantitative Approaches
• Quantitative approaches to problem solving often embody an attempt to
obtain mathematically optimal solutions to managerial problems.

• Quantitative approaches to decision making in operations management (and

in other functional business areas) have been accepted because of calculators
and computers capable of handling the required calculations.

• Computers have had a major impact on operations management. Moreover,

the growing availability of software packages for quantitative techniques has
greatly increased management’s use of those techniques.

• Although quantitative approaches are widely used in operations management

decision making, it is important to note that managers typically use a
combination of qualitative and quantitative approaches, and many important
decisions are based on qualitative approaches.
Performance Metrics
• Managers use metrics to manage and control operations.

• There are many metrics in use, including those related to profits,

costs, quality, productivity, flexibility, assets, inventories,
schedules, and forecast accuracy.
Analysis of Trade-Offs
• Operations personnel frequently encounter decisions that can be described as
trade-off decisions.

• For example, in deciding on the amount of inventory to stock, the decision

maker must take into account the trade-off between the increased level of
customer service that the additional inventory would yield and the increased
costs required to stock that inventory.

• Decision makers sometimes deal with these decisions by listing the advantages
and disadvantages—the pros and cons—of a course of action to better
understand the consequences of the decisions they must make.

• In some instances, decision makers add weights to the items on their list that
reflect the relative importance of various factors. This can help them “net out”
the potential impacts of the trade-offs on their decision.
Degree of Customization
• A major influence on the entire organization is the degree of
customization of products or services being offered to its customers.

• Providing highly customized products or services such as home

remodeling, plastic surgery, and legal counseling tends to be more labor
intensive than providing standardized products such as those you would
buy “off the shelf ” at a mall store or a supermarket or standardized
services such as public utilities and Internet services.

• Furthermore, production of customized products or provision of

customized services is generally more time consuming, requires more
highly skilled people, and involves more flexible equipment than what is
needed for standardized products or services.
• Customized processes tend to have a much lower volume of output
than standardized processes, and customized output carries a
higher price tag.

• The degree of customization has important implications for

process selection and job requirements.

• The impact goes beyond operations and supply chains.

• It affects marketing, sales, accounting, finance, and information

systems
A Systems Approach
• A systems viewpoint is almost always beneficial in decision making.

• Think of it as a “big picture” view. A system can be defined as a set of

interrelated parts that must work together.

• In a business organization, the organization can be thought of as a system

composed of subsystems (e.g., marketing subsystem, operations subsystem,
finance subsystem), which in turn are composed of lower subsystems.

• The systems approach emphasizes interrelationships among subsystems, but

its main theme is that the whole is greater than the sum of its individual parts.

• Hence, from a systems viewpoint, the output and objectives of the

organization as a whole take precedence over those of any one subsystem.
• A systems approach is essential whenever something is being designed,
redesigned, implemented, improved, or otherwise changed.

• It is important to take into account the impact on all parts of the system.

• For example, if the upcoming model of an automobile will add antilock

brakes, a designer must take into account how customers will view the
change, instructions for using the brakes, chances for misuse, the cost of
producing the new brakes, installation procedures, recycling worn-out
brakes, and repair procedures.

• In addition, workers will need training to make and/or assemble the

brakes, production scheduling may change, inventory procedures may have
to change, quality standards will have to be established, advertising must
be informed of the new features, and parts suppliers must be selected.
Establishing Priorities
• In virtually every situation, managers discover that certain issues or items are more
important than others.

• Recognizing this enables the managers to direct their efforts to where they will do
the most good.

• Typically, a relatively few issues or items are very important, so that dealing with
those factors will generally have a disproportionately large impact on the results
achieved.

• This well-known effect is referred to as the Pareto phenomenon.

• This is one of the most important and pervasive concepts in operations
management.

• In fact, this concept can be applied at all levels of management and to

every aspect of decision making, both professional and personal.

• Operations management is primarily concerned with three kinds of

technology: product and service technology, process technology, and
information technology (IT).

• All three can have a major impact on costs, productivity, and

competitiveness.
• Product and service technology refers to the discovery and
development of new products and services.

This is done mainly by researchers and engineers, who use the

scientific approach to develop new knowledge and translate that into
commercial applications.

• Process technology refers to methods, procedures, and equipment

used to produce goods and provide services.

They include not only processes within an organization but also

supply chain processes.
• Information technology (IT) refers to the science and use of
computers and other electronic equipment to store, process, and
send information.

Information technology is heavily ingrained in today’s business

operations.

This includes electronic data processing, the use of bar codes to

identify and track goods, obtaining point-of-sale information,
data transmission, the Internet, e-commerce, e-mail, and more.
KEY ISSUES FOR TODAY’S BUSINESS
OPERATIONS
• Economic conditions.
• The lingering recession and slow recovery in various sectors of the
economy has made managers cautious about investment and rehiring
workers who had been laid off during the recession.

• Innovating.
• Finding new or improved products or services are only two of the many
possibilities that can provide value to an organization.
• Innovations can be made in processes, the use of the Internet, or the
supply chain that reduce costs, increase productivity, expand markets, or
improve customer service.
• Quality problems.
• The numerous operations failures mentioned at the beginning of the
chapter underscore the need to improve the way operations are
managed.
• That relates to product design and testing, oversight of suppliers,
risk assessment, and timely response to potential problems.

• Risk management.
• The need for managing risk is underscored by recent events that
include financial crises, product recalls, accidents, natural and man-
made disasters, and economic ups and downs.
• Managing risks starts with identifying risks, assessing vulnerability
and potential damage (liability costs, reputation, demand), and
taking steps to reduce or share risks.
• Cyber-security.
• The need to guard against intrusions from hackers whose goal is
to steal personal information of employees and customers is
becoming increasingly necessary.
• Moreover, interconnected systems increase intrusion risks in the
form of industrial espionage.

• Competing in a global economy.

• Low labor costs in third-world countries have increased pressure to
reduce labor costs.
• Companies must carefully weigh their options, which include
outsourcing some or all of their operations to low-wage areas,
reducing costs internally, changing designs, and working to
improve productivity.
Thank You
Environmental Concerns
• Concern about global warming and pollution has had an
increasing effect on how businesses operate.

• Stricter environmental regulations, particularly in developed

nations, are being imposed.

• Furthermore, business organizations are coming under increasing

pressure to reduce their carbon footprint (the amount of carbon
dioxide generated by their operations and their supply chains) and
to generally operate sustainable processes.
• Sustainability refers to service and production processes that use
resources in ways that do not harm ecological systems that support
both current and future human existence.

• Sustainability measures often go beyond traditional environmental

and economic measures to include measures that incorporate
social criteria in decision making

• All areas of business will be affected by this. Areas that will be

most affected include product and service design, consumer
education programs, disaster preparation and response, supply
chain waste management, and outsourcing decisions.
• Note that outsourcing of goods production increases not only
transportation costs, but also fuel consumption and carbon released into
the atmosphere.

• Consequently, sustainability thinking may have implications for

outsourcing decisions.

• Because they all fall within the realm of operations, operations

management is central to dealing with these issues.

• Sometimes referred to as “green initiatives,” the possibilities include

reducing packaging, materials, water and energy use, and the
environmental impact of the supply chain, including buying locally.

• Other possibilities include reconditioning used equipment (e.g.,

printers and copiers) for resale, and recycling.
Ethical Conduct
• The need for ethical conduct in business is becoming increasingly obvious,
given numerous examples of questionable actions in recent history.

• In making decisions, managers must consider how their decisions will affect
shareholders, management, employees, customers, the community at large,
and the environment.

• Finding solutions that will be in the best interests of all of these stakeholders
is not always easy, but it is a goal that all managers should strive to achieve.

• Furthermore, even managers with the best intentions will sometimes make
mistakes.

• If mistakes do occur, managers should act responsibly to correct those

mistakes as quickly as possible, and to address any negative consequences.
• Operations managers, like all managers, have the responsibility to make
ethical decisions.

• Ethical issues arise in many aspects of operations management, including:

• Financial statements: accurately representing the organization’s financial
condition.

• 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.

• The environment: not doing things that will harm the environment.

• The community: being a good neighbor.

• Hiring and firing workers: avoiding 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.

• Workers’ rights: respecting workers’ rights, dealing with workers’ problems quickly and
fairly.
The Need to Manage the Supply Chain
• Supply chain management is being given increasing attention as
business organizations face mounting pressure to improve
management of their supply chains. In the past, most organizations
did little to manage their supply chains. Instead, they tended to
concentrate on their own operations and on their immediate
suppliers. Moreover, the planning, marketing, production and
inventory management functions in organizations in supply chains
have often operated independently of each other. As a result, supply
chains experienced a range of problems that were seemingly beyond
the control of individual organizations. The problems included large
oscillations of inventories, inventory stockouts, late deliveries, and
quality problems.
• These and other issues now make it clear that management of supply
chains is essential to business success. The other issues include the
following:
• The need to improve operations
• Increasing levels of outsourcing.
• Increasing transportation costs.
• Competitive pressures.
• Increasing globalization.
• Increasing importance of e-business.
• The complexity of supply chains.
• . The need to manage inventories