Operations Management

Lecture 1

Operations Management, Productivity, and

Operations Strategy for Advantage

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 Learning Objectives
• Define operations management
• Explain the distinction between goods and services
• Explain the difference between production and
productivity
• Identify the critical variables in enhancing productivity
• Know approaches used to achieve strategic concepts
• Know Factors that give competitive advantage

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 OPERATIONS MANAGEMENT (OM)?

• OM is the set of activities that create value in

the form of goods and services by
transforming inputs into outputs

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 Goods Versus Services

Goods Services
♦ Can be resold ♦ Reselling unusual
♦ Can be inventoried ♦ Difficult to inventory
♦ Some aspects of quality measurable ♦ Quality difficult to measure
♦ Selling is distinct from production ♦ Selling is part of service
♦ Product is transportable ♦ Provider, not product is transportable
♦ Site of facility important for cost ♦ Site of facility important for customer
♦ Often easy to automate contact
♦ Revenue generated primarily ♦ Revenue generated primarily from
from tangible product intangible service.

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Goods Contain Services & Services Contain
Goods
Automobile
Computer
Installed Carpeting
Fast-food Meal
Restaurant Meal
Auto Repair
Hospital Care
Advertising Agency
Investment Management
Consulting Service
Counseling
100 75 50 25 0 25 50 75 100
Percent of Product that is a Good Percent of Product that is a Service

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 Development of the Service Economy

80
U.S. Employment, % Share Services as a Percent of GDP U.S. Exports of Services
United States In Billions of Dollars
%70 250
Canada
60 Services
200
50
France

40 Italy 150
Industry
30 Britain 100
20 Japan
50
10 Farming W Germany
0 0
1970
1850 75 1900 25 50 75 2000 40 50 60 70 1970 75 80 85 90 95 2000
1991
Percent

Year 2000 data is estimated

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Organizing to Produce Goods and Services

• Essential functions:
1. Marketing – generates demand
2. Production/operations – creates the product
3. Finance/accounting – tracks how well the
organization is doing, pays bills, collects the
money

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 Organizational Charts
Commercial Bank

Operations Finance Marketing

Teller Investments Loans
Scheduling Security Commercial
Check Clearing Real estate Industrial
Collection Financial
Transaction Personal
processing Accounting
Mortgage
Facilities
design/layout
Vault operations Auditing
Maintenance Trust Department
Security

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 Organizational Charts
Airline

Operations Finance/ Marketing

Ground support accounting Traffic
equipment Accounting administration
Maintenance Payables Reservations
Ground Operations Receivables Schedules
General Ledger Tariffs (pricing)
Facility
maintenance Finance Sales
Catering Cash control Advertising
Flight Operations International
exchange
Crew scheduling
Flying
Communications
Dispatching
Management science
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 Organizational Charts
Manufacturing

Operations Finance/ accounting Marketing

Facilities Disbursements/ Sales
Construction; maintenance credits promotion
Production and inventory control Receivables Advertising
Scheduling; materials control Payables Sales
General ledger
Quality assurance and control Market research
Funds Management
Supply-chain management
Money market
Manufacturing International
Tooling; fabrication; assembly exchange
Design Capital requirements
Product development and design
Detailed product specifications Stock issue
Bond issue
Industrial engineering and recall
Efficient use of machines, space,
and personnel
Process analysis
Development and installation of
production tools and equipment

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 WHAT OPERATIONS
MANAGERS DO
◆ Planning
◆ Organizing
◆ Staffing
◆ Leading
◆ Controlling

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 Productivity
Productivity is production output per unit of
effort, or
Productivity is the ratio of outputs (goods and
services) divided by the inputs (resources such
as labor and capital)
The objective is to improve productivity!

Units produced
Productivity =
Input used
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 Productivity
Output
Productivity =
Labor + Material + Energy
+ Capital + Miscellaneous

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 Productivity Variables

♦ Labor - contributes about 10% of the annual

increase
♦ Capital - contributes about 32% of the annual
increase
♦ Management - contributes about 52% of the
annual increase

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 Strategy

♦ Action plan to achieve mission

♦ Shows how mission will be
achieved
♦ Company has a business strategy
♦ Functional areas have strategies

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 Strategy Process
Company
Mission

Business
Strategy

FunctionalArea
Functional Area
Strategies

Marketing Operations Fin./Acct.

Decisions Decisions Decisions

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 Tips for Operations Strategies and Tactics

• Take a Global View: See how others worldwide are providing

better goods and services. Learn from them, and see how you
might compete and innovate in a core competency. Also,
improve your supply chain by looking globally, and employ
global talent if remote work is an option.
• Have a Strong Mission Statement: Focus your efforts with a
mission statement that truly defines your goals and guides
your business approach. Tie your overall business strategy
and operations strategy into it

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 Tips for Operations Strategies and Tactics

• Gain Competitive Advantage with Differentiation: Develop a

point of differentiation and a unique value proposition, and
consistently innovate and build strategies around them. Don’t
just use best practices. Exceed them, and leapfrog the
competition.
• Gain Insights from a SWOT Analysis: Analyze your company’s
strengths, weaknesses, opportunities, and threats as a
catalyst to strategy.
• Track Progress: Develop strong analytics and KPI dashboards
to measure and optimize your operational efforts.

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 Operations Strategy Examples

• Amazon: Once known for books, Amazon is now known as the

go-to platform for online shoppers of any product. Its distribution
network is widely touted and even includes experiments with
drone delivery.
• Apple Computers: Apple is long recognized in operations circles
for its operational excellence and supply chain management.
• Walmart: This retailing giant managed to undercut many
competitors on the price and variety of a wide range of products.
• FedEx: FedEx made speed of delivery its calling card, achieving it
with excellent operations.
• IKEA: The world’s largest furniture retailer undercut many home
goods competitors on price and variety with its warehouse
concept.

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 Operations Strategy Framework

• We start with the business/corporate strategy, laying out

objectives, such as return on investment (ROI), profit, and growth.
• We move to marketing strategy, where we consider factors such
as customer segments, standardization vs. customization,
innovation level, and leader-vs.-follower alternatives.
• Next comes order-winning criteria such as quality, price, delivery
speed, design, and after-sales support.
• Last comes operations/manufacturing strategy, which includes
choices of structure (such as facilities and process) and
infrastructure (such as planning/control systems and work
organization). Feeding into that strategy are the elements of
product/process design, inventory, quality management, human
resources and job design, and maintenance.

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 Steps to Write a Strategic Operations Plan

• Choose the Right People: Select those with the right knowledge to
compile the operations strategy plan, sometimes just called an
operations plan. Some businesses provide more strategy than
others in their operations strategy plan.
• Study the Overall Business Strategy Plan: Sometimes the
operations strategy plan is included as a section of the overall
business plan. In any case, the operations strategy plan should
align with the business plan.
• Develop Measurable Operations Goals: These should match up
with the business plan. Don’t do KPIs in a vacuum. Ensure that
stakeholders have a say and agree to the numbers.
• Gather Key People to Brainstorm Strategies: Work on strategies
(approaches to reach goals) and underlying tactics (specific steps
and tasks to implement the strategy).

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 Steps to Write a Strategic Operations Plan

• Outline Your Major Points to Maintain Your Plan’s Focus: Use

headings, subheadings, and bulleted lists for clear organization.
These will carry over to your fully written plan, providing clear
structure and easy scanning. Your plan might have elements of a
SWOT analysis: strengths, weaknesses, opportunities, and threats.
• Keep Your Audience in Mind: Write so that they will understand
it. The plan is all about communication.
• Include an Index: Use this for easy scanning of the plan and its
sections.
• Use an Appendix: Use this for supplementary material or for items
too detailed for the whole audience.
• Include the Operations Budget: Include it, or cross-reference or
cross-link it in your operations strategy plan. Show the rationale
for key budget items, especially large expenses.

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 Steps to Write a Strategic Operations Plan

• Include a “Stage of Development” Section: Give an overview of

the current state of operations and what you’re trying to
accomplish and improve. Provide a high-level view of how you
make your product, your supply chain, and quality control. Identify
risks and how you’ll monitor them.
• Include a Production Process Section: This goes into detail on the
daily production process, and demonstrates that you’ve worked
out the necessary specifics. For manufacturing, you would list
plant details, equipment, assets, materials, special requirements,
inventory, and quality control steps. For a startup, you might
include prototype and testing details.
• If Necessary, Divide Other Sections by Product Family: You can
also divide them by product, service, or different areas of
operations. You might include overall strategies and tactics and/or
consider them by section.

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 Steps to Write a Strategic Operations Plan

• Use Flowcharts: Use these images and other graphics to make

it more easily understandable.
• Build in Flexibility: Explain how you might adjust operations
based on a changing market.
• Regularly Monitor Your Goals: Do this to see how your
strategies and tactics are working. Adjust as necessary to keep
ahead of the curve. A strong operations strategy plan is key to
your success.

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 Competitive Advantage

• Cost Leadership Strategy. Companies may place themselves

ahead of the pack by offering attractive pricing. Wal-Mart and
Amazon are two companies that have risen to the forefront by this
strategy. While this is effective for companies, low pricing is
seldom a desirable method for individuals.
• Differentiation Strategy. Branding is likely the most widely used
method to differentiate one company from another. With this
method, a name like Nike or Rolex automatically assumes a status
distinct and apart from all other shoes or watches. Individual
executives using this method must seek to find a core strength or
talent that separates them from the pack. Then they leverage this
unique skill or ability through increasing their visibility and the
perception of its value to the company.

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 Competitive Advantage

• Innovative Strategy. Companies may move ahead of the

competition by doing things in new and different ways.
Insightec has created a way to eliminate brain tumors and
other cancers without cutting into the body. Clearly they gain
a competitive edge over traditional surgeries by reducing
pain, risk, and long recovery time. People can gain a
competitive edge as they discover and offer innovative ways
of doing things for the company. If your ideas consistently
result in benefits to the company you’ll have that essential
edge.

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 Competitive Advantage

• Operational Effectiveness Strategy. Some companies

just do what they do better than anyone else. FedEx
started out with an innovative strategy. But it continued
its leadership — even after dozens of other companies
jumped into the overnight shipping business — by doing
it very well. For individuals, this may mean creating
systems of operating or new ways to analyze data. When
you do what you do very well, you gain a competitive
advantage over those doing it the longer and slower way.

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 Competitive Advantage

• Technology Based Competitive Strategy. Since

the time Henry Ford revolutionized the auto
industry with the assembly line, companies have
sought for a competitive edge using new
technology or technology in a new way.
Computers and applications continue to… perhaps
briefly… give companies an advantage over the
competition. Workers who embrace new
technology and learn to master it nearly always
redefine or increase their competitive advantage
over those who resist new methods.

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 Competitive Advantage

• Adaptability Competitive Advantage. As markets, economies,

and other factors change in this increasingly unstable and
unpredictable environment, companies that can adapt have a
distinct advantage. Typically this includes smaller or trendy
companies, however even Apple has successfully negotiated
the waves of change. Executives can bring adaptability to
their core strength by being open to change. They can cross
train and bring new and more current skills to the table.
Perhaps, adaptability is foremost a state of mind.

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 Competitive Advantage

• The Information Advantage. Almost all the other strategies

benefit from excellent information. The definition of
competitive advantage is the skills needed to outpace your
rivals. Most of those come through knowledge and
information. Successful companies seek the latest in
technology, strategies, and data.
• Probably requires the institutionalization within the firm of
the ability to change, to adapt

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• References:

• Operations Management by Jay Heizer & Barry

Render, Pearson
• Operations Management by Krajewski, Ritzman, &
Malhotra, Prentice Hall
• Internet:
https://www.smartsheet.com/operations-strategi
es-definitions-process-plans-pro-insights

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