Because learning changes everything.

Chapter 1

Introduction to Operations
Management

Operations Management
FOURTEENTH EDITION
William J. Stevenson

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Chapter 1: Learning Objectives

You should be able to:

LO 1.1 Define the terms operations management and supply chain
LO 1.2 Identify similarities and differences between production and service
operations
LO 1.3 Explain the importance of learning about operations management
LO 1.4 Identify the three major functional areas of organizations and explain how
they interrelate
LO 1.5 Summarize the two major aspects of process management
LO 1.6 Describe the operations function and the nature of the operations
manager’s job
LO 1.7 Explain the key aspects of operations management decision making
LO 1.8 Briefly describe the historical evolution of operations management
LO 1.9 Describe the current issues in business that impact operations
management
LO 1.10 Explain the importance of ethical decision making
LO 1.11 Explain the need to manage the supply chain

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 Operations Management

What is operations?
• The part of a business organization that is responsible for
producing goods or services
How can we define operations management?
• The management of systems or processes that create
goods and/or provide services

LO 1.1
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 Good or Service?

Goods are physical items that include raw materials, parts,

subassemblies, and final products
• Automobile
• Computer
• Oven
• Shampoo
Services are activities that provide some combination of time,
location, form or psychological value
• Air travel
• Education
• Haircut
• Legal counsel
LO 1.1
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 Supply Chain

Supply chain – a sequence of activities and organizations

involved in producing and delivering a good or service

LO 1.1
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 The Transformation Process

Feedback = Measurements taken at various points in the transformation process

Control = The comparison of feedback against previously established standards
to determine if corrective action is needed
LO 1.1
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 Goods-service Continuum

Products are typically neither purely service- or purely goods-

based

LO 1.2
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 Table 1.2
Illustrations of the transformation process

Inputs Processing Output

Food Processor Raw vegetables Cleaning Canned vegetables
Metals sheets Making cans
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment
Hospital Doctors, nurses Examination Treated patients
Hospital Surgery
Medical supplies Monitoring
Equipment Medication
Laboratories Therapy

LO 1.2
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 Manufacturing vs. Service

1. Degree of customer contact

2. Labor content of jobs
3. Uniformity of input
4. Uniformity of output
5. Measurement of productivity
6. Production and delivery
7. Quality assurance
8. Amount of inventory
9. Evaluation of work
10. Ability to patent design

LO 1.2
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 Table 1.3 Typical differences between production of
goods and provision of services

Characteristic Goods Services

Output Tangible Intangible
Customer contact Low High
Labor content Low High
Uniformity of input High Low
Measurement of productivity Easy Difficult
Opportunity to correct problems before delivery High Low
Inventory Much Little
Wages Narrow range Wide range
Patentable Usually Not usually

LO 1.2
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 Why Study Operations Management?

Every aspect of business affects or is affected by operations

Many service jobs are closely related to operations
• Financial services
• Marketing services
• Accounting services
• Information services
Through learning about operations and supply chains you
will have a better understanding of:
• The world you live in
• The global dependencies of companies and nations
• Reasons that companies succeed or fail
• The importance of working with others

LO 1.3
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 Basic Functions of the Business Organization

LO 1.4
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 Function Overlap

Finance & operations

• Budgeting
• Economic analysis of investment
proposals
• Provision of funds
Marketing & operations
• Demand data
• Product and service design
• Competitor analysis
• Lead time data

LO 1.4
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 OM and Supply Chain Career Opportunities

Operations manager
Supply chain manager
Production analyst
Schedule coordinator
Production manager
Industrial engineer
Purchasing manager
Inventory manager
Quality manager

LO 1.4
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 OM-Related Professional Societies

APICS - The Association for Operations Management

American Society for Quality (ASQ)
Institute for Supply Management (ISM)
Institute for Operations Research and Management Science
(INFORMS)
The Production and Operations Management Society
(POMS)
The Project Management Institute (PMI)
Council of Supply Chain Management Professionals
(CSCMP)

LO 1.4
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 Process Management

Process - one or more actions that transform inputs into

outputs

Three Categories of Business

Processes:
Upper-management These govern the operation of the
processes entire organization.
Operational processes These are core processes that make
up the value stream.
Operational processes These support the core processes.

LO 1.5
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 Supply & Demand

LO 1.5 Access the text alternative for slide images.

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 Process Variation

Four Sources of Variation:

Variety of goods or services being The greater the variety of goods and services
offered offered, the greater the variation in production or
service requirements.
Structural variation in demand These are generally predictable. They are
important for capacity planning.
Random variation Natural variation that is present in all processes.
Generally, it cannot be influenced by managers.
Assignable variation Variation that has identifiable sources. This type
of variation can be reduced, or eliminated, by
analysis and corrective action.

Variations can be disruptive to operations and supply chain

processes. They may result in additional costs, delays and
shortages, poor quality, and inefficient work systems.
LO 1.5
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 Scope of Operations Management

The scope of operations management ranges across the organization.

The operations function includes many interrelated activities such as:

• Forecasting
• Capacity planning
• Locating facilities
• Facilities and layout
• Scheduling
• Managing inventories
• Assuring quality
• Motivating employees
• And more . . .
LO 1.6
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 Role of the Operations Manager

The Operations function consists of all activities directly

related to producing goods or providing services.
A primary function of the operations manager is to guide
the system by decision making.
• System design decisions
• System operation decisions

LO 1.6
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 System Design Decisions

System design
• Capacity
• Facility location
• Facility layout
• Product and service planning
• Acquisition and placement of equipment

These are typically strategic decisions that

• usually require long-term commitment of resources
• determine parameters of system operation
LO 1.6
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 System Operation Decisions

System operation
• These are generally tactical and operational decisions
• Management of personnel
• Inventory management and control
• Scheduling
• Project management
• Quality assurance
Operations managers spend more time on system operation
decision than any other decision area
• They still have a vital stake in system design

LO 1.6
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 OM Decision Making

Most operations decisions involve many alternatives that can have

quite different impacts on costs or profits
Typical operations decisions include:

• What: What resources are 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?

• Where: Where will the work be done?

• How: How will the product or service be designed? How will the work
be done? How will resources be allocated?

• Who: Who will do the work?

LO 1.7
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 General Approach to Decision Making

Modeling is a key tool used by all decision makers

• Model - an abstraction of reality; a simplification of something
• Common features of models:
• They are simplifications of real-life phenomena
• They omit unimportant details of the real-life systems they mimic so
that attention can be focused on the most important aspects of the
real-life system

• Physical Model – miniature airplane

• Schematic Model – drawing of a city
• Mathematical Model – Inventory optimization

LO 1.7
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 Understanding Models

Keys to successfully using a model in decision making

• What is its purpose?
• How is it used to generate results?
• How are the results interpreted and used?
• What are the model’s assumptions and limitations?

LO 1.7
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 Benefits of Models

1. Generally easier to use and less expensive than dealing

with the real system
2. Require users to organize and sometimes quantify
information
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
LO 1.7
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 Model Limitations

Quantitative information may be emphasized at the expense

of qualitative information
Models may be incorrectly applied and the results
misinterpreted
• This is a real risk with the widespread availability of
sophisticated, computerized models placed in the hands of
uninformed users
The use of models does not guarantee good decisions

LO 1.7
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 Quantitative Approaches

A decision-making approach that frequently seeks to obtain a

mathematically optimal solution
• Supported by computer calculations
• Often work together with qualitative approaches

LO 1.7
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 Metrics and Trade-Offs

Performance metrics Analysis of trade-offs

• All managers use metrics • A trade-off is giving up one
to manage and control thing in return for
operations something else
• Profits
• Costs • Carrying more inventory (an
expense) in order to achieve
• Quality a greater level of customer
• Productivity service
• Flexibility
• Inventories
• Schedules
• Forecast accuracy

LO 1.7
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 Systems Perspective

System - a set of interrelated parts that must work together

• The business organization is a system composed of subsystems
• Marketing subsystem

• Operations subsystem

• Finance subsystem

The systems perspective

• Emphasizes interrelationships among subsystems
• Main theme is that the whole is greater than the sum of its parts
• The output and objectives of the organization take precedence over
those of any one subsystem

LO 1.7
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 Establishing Priorities

In nearly all cases, certain issues or items are more

important than others
Recognizing this allows managers to focus their attention to
those efforts that will do the most good
• Pareto Phenomenon - a few factors account for a high
percentage of occurrence of some event(s)
• The critical few factors should receive the highest priority
• This is a concept that is appropriately applied to all areas and levels
of management

LO 1.7
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 Historical Evolution of OM

Industrial Revolution
Scientific management
Human relations movement
Decision models and management science
Influence of Japanese manufacturers

LO 1.8
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 Industrial Revolution

Pre-Industrial Revolution
• Craft production - System in which highly skilled workers use
simple, flexible tools to produce small quantities of customized
goods
Some key elements of the industrial revolution
• Began in England in the 1770s
• Division of labor - Adam Smith, 1776
• Application of the “rotative” steam engine, 1780s
• Cotton gin and interchangeable parts - Eli Whitney, 1792
Management theory and practice did not advance appreciably
during this period
LO 1.8
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 Scientific Management

Movement was led by efficiency engineer, Frederick

Winslow Taylor
• Believed in a “science of management” based on
observation, measurement, analysis and improvement of
work methods, and economic incentives
• Management is responsible for planning, carefully
selecting and training workers, finding the best way to
perform each job, achieving cooperation between
management and workers, and separating management
activities from work activities
• Emphasis was on maximizing output

LO 1.8
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 Human Relations Movement

The human relations movement emphasized the importance

of the human element in job design
• Lillian Gilbreth – applications of psychology
• Elton Mayo – Hawthorne studies on worker motivation, 1930
• Abraham Maslow – motivation theory, 1940s; hierarchy of
needs, 1954
• Frederick Hertzberg – Two Factor Theory, 1959
• Douglas McGregor – Theory X and Theory Y, 1960s
• William Ouchi – Theory Z, 1981

LO 1.8
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 Decision Models & Management Science

F.W. Harris – mathematical model for inventory management,

1915
Dodge, Romig, and Shewart – statistical procedures for
sampling and quality control, 1930s
Tippett – statistical sampling theory, 1935
Operations Research (OR) Groups – OR applications in
warfare
George Dantzig – linear programming, 1947

LO 1.8
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 Influence of Japanese Manufacturers

Refined and developed management practices that

increased productivity
• Credited with fueling the “quality revolution”
• Just-in-Time production

LO 1.8
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 Table 1.5
Historical summary of operations management
Approximate Date Contribution/Concept Originator

1776 Division of labor Adam Smith

1790 Interchangeable parts Eli Whitney

1911 Principles of scientific management Frederick W. Taylor

1911 Motion study, use of industrial psychology Frank and Lillian Gilbreth

1912 Chart for scheduling activities Henry Gantt

1913 Moving assembly line Henry Ford

1915 Mathematical model for inventory ordering F.W. Harris

1930 Hawthorne studies on worker motivation Elton Mayo

1935 Statistical procedures for sampling and quality control H.F. Dodge, H. G. Romig, W. Shewhart, L.H.C. Tippett

1940 Operations research applications in warfare Operations research groups

1947 Linear programming George Dantzig

1951 Commercial digital computers Sperry Univac, IBM

1950s Automation Numerous

1960s Extensive development of quantitative tools Numerous

1960s Industrial dynamics Jay Forrester

1975 Emphasis on manufacturing strategy W. Skinner

1980s Emphasis on flexibility, time-based competition, lean production T. Ohno, S. Shingo, Toyota

1980s Emphasis on quality W. Edwards Deming, J. Juran, K. Ishikawa

1990s Internet, supply chain management Numerous

2000s Applications service providers and outsourcing Numerous

Social media, YouTube, and others Numerous

LO 1.8
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 Operations Today

Technology Management
Global competition
Working with fewer resources
Revenue management
Agility

LO 1.9
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 Key Issues for Operations Managers Today

Economic conditions
Innovating
Quality problems
Risk management
Cyber-security
Competing in a global economy

LO 1.10
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 Environmental Concerns

Sustainability
• Using resources in ways that do not harm ecological systems
that support 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
• Product and service design
• Consumer education programs
• Disaster preparation and response
• Supply chain waste management
• Outsourcing decisions
LO 1.10
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 Ethical Issues in Operations

Ethical issues that may arise in many aspects of operations

management:
• Financial statements
• Worker safety
• Product safety
• Quality
• The environment
• The community
• Hiring and firing workers
• Closing facilities
• Workers’ rights
LO 1.10
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 The Need for Supply Chain Management

In the past, organizations did little to manage the supply

chain beyond their own operations and immediate suppliers
which led to numerous problems
• Oscillating inventory levels
• Inventory stockouts
• Late deliveries
• Quality problems

LO 1.11
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 Supply Chain Issues

1. The need to improve operations

2. Increasing levels of outsourcing
3. Increasing transportation costs
4. Competitive pressures
5. Increasing globalization
6. Increasing importance of e-business
7. The complexity of supply chains
8. The need to manage inventories

LO 1.11
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© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.