Operations Management

The business function responsible for planning, coordinating, and controlling the resources needed
to produce products and services for a company

Typical Organization Chart

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 Process

Historical Development of OM

• Industrial revolution Late 1700s

 • Scientific management Early 1900s

• Human relations movement 1930s-60s

• Management science 1940s-60s

• Computer age 1960s

• Environmental Issues 1970s

• JIT & TQM* 1980s

*JIT= Just in Time, TQM= Total Quality Manage

Historical Development

• Reengineering 1990s

• Global competition 1980s

• Flexibility 1990s

• Time-Based Competition 1990s

• Supply chain Management 1990s

• Electronic Commerce 2000s

• Outsourcing & flattening of world 2000s

For long-run success, companies must place much importance on their operations

Significant Events in Operations Management

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

Operations Manager in Practice

• OM has the most diverse organizational function

• Manages the transformation process

• OM has many faces and names such as;

– V. P. operations, Director of supply chains, Manufacturing manager

– Plant manger, Quality specialists, etc.

• All business functions need information from OM in order to perform their tasks

Scope of Operations Management

Operations Management includes:

– Forecasting

– Capacity planning

– Scheduling

– Managing inventories

– Assuring quality

– Motivating employees

– Deciding where to locate facilities

– Supply chain management

Types of Operations
Client’s View of the Business World

Supply-products or services a business offers to its customers.

Demand- set of products and services customer wants

Utility- measure of the strength of customer preferences for a given product or service. Customer
buy the product / service that maximizes their utility

Consumption Utility- measure of how much you like a product or service, ignoring the effects of
price and of the inconvenience of obtaining the product service. (attributes of the

Subcomponents of Consumption Utility:

(1) Performance- captures how much an average consumer desires a product or service

(2) Fit- captures how well the product or service matches with unique characteristics of a
given consumer

Client’s View of the Business World

Heterogenous Preferences– not all consumers have the same utility function

Inconvenience- reduction in the utility that results from the efforts of obtaining the product and
service.

Transaction Costs- another term used for the inconvenience of obtaining a product service

Location- the place where a consumer can obtain a product or service.

Timing- amount of time that passes between the consumer ordering a product or service and the
consumer obtaining the product or service.

Activity: Products and Services

A. Food and Hospitality

1. Jollibee
 2. Subway

3. Starbucks

B. Bags and Apparels

1. MSE

2. Parisian Bags

3. Gucci

Strategic Trade Offs

Capabilities- dimensions of customers utility function a firm is able to satisfy.

Trade Offs- the need to sacrifice one capability in order to increase another one.

Market Segments- a set of customers who have similar utility functions.

Pareto Dominated- a firm’s product or service is inferior to one or multiple competitors on all
dimensions of the customer utility function.

Efficient Frontier- set of firms that are not Pareto dominated.

Inefficiency- the gap between a firm and the efficient frontier

Overcoming Inefficiencies

Three System Inhibitors:

Waste - consumption of inputs and resources that do not add value to the customer ( costly)

e.g. Triple wraps of sandwich during take out

Variability- predictable and unpredictable changes in the demand or the supply process

(Demand variability- customer arrivals, requests, behavior)

(Variability in Supply-time to serve, disruptions, defects)

Inflexibility- the inability to adjust to either changes in the supply process or changes in customer
demand

MATCHING SUPPLY WITH DEMAND

1. Design the operations that match the demand of the market segment with the supply of
products and services appropriate for the segment- “strategic trade off”

2. Utilize inputs and resources to their fullest potential -(identify inefficiencies)

Under Performing Operations

Demand Supply Mismatch

OM Across the Organization

❖ Marketing is not fully able to meet customer needs if they do not understand what
operations can produce

❖ Finance cannot judge the need for capital investments if they do not understand operations
concepts and needs

❖ Information systems enables the information flow throughout the organization

❖ Human resources must understand job requirements and worker skills

❖ Accounting needs to consider inventory management, capacity information, and labor

standards

Difference Between Manufacturing & Service Organization

Manufacturing- tangible

✓ Conformance/performance

✓ Reliability

✓ Feature

✓ Durability

✓ Serviceability

✓ Perceived Quality

Service – intangible

✓ Courtesy/friendliness of staff
 ✓ Promptness/Timeliness

✓ Atmosphere

✓ Time

✓ Consistency

Similarities for Service/Manufacturers

• Both use technology

• Both have quality, productivity, & response issues

• Both must forecast demand

• Both can have capacity, layout, and location issues

• Both have customers, suppliers, scheduling and staffing issues

Challenges of Managing Services

Comparison
What is Quality?

The definition of quality depends on the role of the people defining it.

Difficult to define one’s quality standards in precise terms.

• More common definition of quality:

• Conformance to specification
• Fitness for use
• Value for price paid
• Support services
• Psychological criteria

Quality in Products

Manufactured products have several quality dimensions that includes:

1. Performance – a product’s primary operating characteristics.

 2. Features – the “ bells and whistles” of a product.

3. Reliability – the probability of a product’s surviving over a specified period of time under
stated conditions of use.

4. Conformance - the degree to which physical and performance characteristics of a product

match pre –established standards.

5. Durability – the amount of use that one gets from a product before it physically deteriorates
or until replacement is preferable.

6. Serviceability – the ability to repair a product quickly and easily.

7. Aesthetics – how a product looks, feels, sounds, tastes or smells.

8. Perceived Quality – subjective assessment resulting from image, advertising or brand

names.

Quality control in manufacturing is usually based on conformance, specifically, conformance to

specifications.

Quality in Products

Specifications are targets and tolerances determined by designers of products and services.

Targets are the ideal values for which production strives.

Tolerances are acceptable deviations from these ideal values.

Quality in Services

Service can be defined as “ any primary or complementary activity that does not directly produce a
physical product – that is the non goods part of the transaction between buyer ( customer ) and
seller ( provider ).

Hotel and restaurant, health, legal, engineering and other professional services; educational
institutions; financial services ; retailers; transportation and public utilities.

The most important dimensions of service quality include the following:

◼ Time : how much time must a customer wait ?

◼ Timeliness : Will a service be performed when promised ?

◼ Completeness : Are all items in the order included ?

◼ Courtesy : Do frontline employees greet each customer cheerfully ?

◼ Consistency : Are services delivered in the same passion for every customer and every time
for the same customer ?

◼ Accessibility and convenience : Is the service easy to obtain ?

◼ Accuracy : Is the service performed right the first time ?

◼ Responsiveness : Can service personnel react quickly and resolve

 unexpected problems ?

Growth of the Service Sector

•
• Service sector growing to 50-80% of non-farm jobs

• Global competitiveness

• Demands for higher quality

• Huge technology changes

• Time based competition

• Work force diversity

OM Decisions

All organizations make decisions and follow a similar path

– First decisions very broad – Strategic decisions

• Strategic Decisions – set the direction for the entire company; they are
broad in scope and long-term in nature

– Following decisions focus on specifics - Tactical decision

– Tactical decisions: focus on specific day-to-day issues like resource needs,

schedules, & quantities to produce are frequent
Note: Tactical and Strategic decisions must align

Understand about Process

Three key process Metrics: Inventory, Flow Rate anf Flow Time

PROCESS METRIC: a scale of measure of process performance and capability

INVENTORY: The number of flow units within the process (ex. dollars in process, People in process)

FLOW RATE: The Rate at which flow units travel through a process

ex. dollars per week, people per month

* always remember the per unit of time

FLOW TIME: The time a flow unit spends in a processm from strat to finish

ex. hours, minutes, days, months

Flow rate

Little’s Law- Linking Process Metrics Together

Little Law = the Law that describes the relationship beween three key process metrics: inventory,
flow rate and flow time

Inventory= Flow Rate x Flow Time

I= R X T

Formula

Inventory = Rate x Time

Flow Rate (R) = I (inventory)

T (Flow Time)

Flow Time (T)= I (inventory)

R (Flow Rate)

Operations Management Decision Making

Keys in decision making

• What - What resources/what amounts

• When- Needed/scheduled/ordered

• Where- Work to be done

• How - Designed

• Who - To do the work

Decision Making

System Design

• Capacity
• location
• arrangement of departments
• product and service planning
 • acquisition and placement of equipment

System operation

• personnel
• inventory
• scheduling
• project management
• quality assurance

Decision Making

• Models

• Quantitative approaches

• Analysis of trade-offs

• Systems approach

Models - A model is an abstraction of reality.

• Physical
• Schematic
• Mathematical

What are the pros and cons of models?

Models Are Beneficial

• Easy to use, less expensive

• Require users to organize

• Increase understanding of the problem

• Enable “what if” questions

• Consistent tool for evaluation and standardized format

• Power of mathematics

Limitations of Models
Quantitative Approaches

• Linear programming

• Queuing Techniques

• Inventory models

• Project models

• Statistical models

Analysis of Trade-Offs

Decision on the amount of inventory to stock

Increased cost of holding inventory

vs

Level of customer service

Systems Approach

The whole is greater than the sum of the parts.” – Suboptimization

Pareto Phenomenon

• A few factors account for a high percentage of the occurrence of some event(s).

• 80/20 Rule - 80% of problems are caused by 20% of the activities.

How do we identify the vital few?

Ethical Issues
 • Financial statements

• Worker safety

• Product safety

• Quality

• Environment

• Community

• Hiring/firing workers

• Closing facilities

• Worker’s rights

TQM - It is an integrated organizational effort designed to improve quality at every level.

TQM is comprehensive and integrated way of managing any organization in order to:

1. meet the needs of the customer consistently

2. achieve continuous improvement in every aspect of the organization’s activities

Concepts of TQM Philosophy

The Three (3) Paradigms of TQM

Total - involves the entire organization, supply chain or product life cycle.

Quality - a dynamic state associated with products, services, people, processes and environment
that meets or exceeds expectations.

Management – the system of managing with steps like planning, organizing, controlling,
leading and staffing.

Achieving TQM
Quality Gurus and Their Contributions

CONTINOUS IMPROVEMENT
EMPLOYEE EMPOWERMENT

BENCHMARKING
JUST IN TIME (JIT)

JIT EXAMPLE
CAUSE AND EFFECT DIAGRAM EXAMPLE
SHEWART’s PDCA MODEL