IB 208 Operations Management

Lecture 3: Introduction
Operations Management (14 Edition)
William J Stevenson
Chapter 1 Introduction to Operations Management

IB 208_BBA 14 2028_ Operations Management Lecture 3

11/02/2024 1
Introduction
Difference – Product vs Service
• Measurement of productivity. Measurement of productivity can be more difficult for service jobs due largely to
the high variations of inputs. Thus, one doctor might have a higher level of routine cases to deal with, while
another might have more difficult cases. Unless a careful analysis is conducted, it may appear that the doctor with
the difficult cases has a much lower productivity than the one with the routine cases.
• Quality assurance. Quality assurance is usually more challenging for services due to the higher variation in input,
and because delivery and consumption occur at the same time. Unlike manufacturing, which typically occurs away
from the customer and allows mistakes that are identified to be corrected, services have less opportunity to avoid
exposing the customer to mistakes.
• Inventory. Many services tend to involve less use of inventory than manufacturing operations, so the costs of
having inventory on hand are lower than they are for manufacturing. However, unlike manufactured goods,
services cannot be stored. Instead, they must be provided “on demand.”
• Wages. Manufacturing jobs are often well paid, and have less wage variation than service jobs, which can range
from highly paid professional services to minimum-wage workers.
• Ability to patent. Product designs are often easier to patent than service designs, and some services cannot be
patented, making them easier for competitors to copy.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 2

Similarity – • There are also many similarities between managing
the production of products and managing services.
Here are some of the primary factors for both:
Product, 1. Forecasting and capacity planning to match
supply and demand

Service 2. Process management

3. Managing variations
4. Monitoring and controlling costs and
productivity
5. Supply chain management
6. Location planning, inventory management,
quality control, and scheduling

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 3

Typical differences between production of
goods and provision of services

IB 208_BBA 14 2028_ Operations Management Lecture 3

11/02/2024 4
Introduction
The three major functions of
business organizations overlap

• Working together successfully means that

all members of the organization
understand not only their own role, but
they also understand the roles of others.
• There is significant interfacing and
collaboration among the various
functional areas, involving exchange of
information and cooperative decision
making.
• Although the three primary functions in
business organizations perform different
activities, many of their decisions impact
the other areas of the organization.

IB 208_BBA 14 2028_ Operations Management Lecture 3

2/11/2024 Introduction 5
 Operations
interfaces with
a number of
supporting
functions
Process • A process consists of one or more actions that transform
inputs into outputs. In essence, the central role of all
Management management is process management.
• Businesses are composed of many interrelated
processes. There are three categories of business
processes:
• Upper-management processes. These govern the
operation of the entire organization. Examples include
organizational governance and organizational strategy.
• Operational processes. These are the core processes
that make up the value stream. Examples include
purchasing, production and/or service, marketing, and
sales.
• Supporting processes. These support the core
processes. Examples include accounting, human
resources, and IT (information technology).

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 7

 • Business processes are composed of a series of supplier–customer relationships,
where every business organization, every department, and every individual operation
Business is both a customer of the previous step in the process and a supplier to the next step
in the process.
Process • A major process can consist of many subprocesses, each having its own goals that
contribute to the goals of the overall process. Business organizations and supply chains
Management have many such processes and subprocesses, and they benefit greatly when
management is using a process perspective.
• Business process management (BPM) activities include process design, process
execution, and process monitoring.
• Two basic aspects of BPM for operations and supply chain management are:
1. Managing processes to meet demand
2. Dealing with process variability.

2/11/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 8

 • The capacity of a process will be such that its output just
matches demand.
• Excess capacity is wasteful and costly; too little
capacity means dissatisfied customers and lost
revenue.
• Having the right capacity requires having accurate
forecasts of demand, the ability to translate forecasts
into capacity requirements, and a process in place
Managing a Process to capable of meeting expected demand.
• Process variation and demand variability can make the
Meet Demand achievement of a match between process output and
demand difficult. Therefore, to be effective, it is also
necessary for managers to be able to deal with
variation.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 9

Process Variation
• Variation occurs in all business processes. It can be due to variety or variability.
• Random variability is inherent in every process; it is always present.
• Variation can occur as the result of deliberate management choices to offer customers variety.
• There are four basic sources of variation:
1. The variety of goods or services being offered. The greater the variety of goods and services, the
greater the variation in production or service requirements.
2. Structural variation in demand. These variations, which include trends and seasonal variations,
are generally predictable. They are particularly important for capacity planning.
3. Random variation. This natural variability is present to some extent in all processes, as well as in
demand for services and products, and it cannot generally be influenced by managers.
4. Assignable variation. These variations are caused by defective inputs, incorrect work methods,
out-of-adjustment equipment, and so on. This type of variation can be reduced or eliminated by
analysis and corrective action.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 10

Process
• Variations can be disruptive to operations and supply
chain processes, interfering with optimal functioning.
• Variations result in additional cost, delays and shortages,
Variation poor quality, and inefficient work systems.
• Poor quality and product shortages or service delays
can lead to dissatisfied customers and can damage
an organization’s reputation and image.
• The ability to deal with variability is absolutely necessary
for managers.
• An important aspect of being able to deal with variation is
to use metrics to describe
• Two widely used metrics are the mean (average) and the
standard deviation. The standard deviation quantifies
variation around the mean.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 11

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 12
 • The scope of operations management ranges across
the organization. Operations management people are
involved in product and service design, process
selection, selection and management of technology,
design of work systems, location planning, facilities

THE SCOPE OF
planning, and quality improvement of the
organization’s products or services.
• Activities:

OPERATIONS 1. Forecasting
2. Capacity planning

MANAGEMENT 3. Locating facilities

4. Facilities and layout
5. Scheduling
6. Managing inventories
7. Assuring quality
8. Motivating and training employees

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 13

 • 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

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

MANAGEMENT • Key Decisions:

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

AND DECISION • When: When will each resource be needed? When

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

MAKING
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?

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 14

Approaches to Decision Making

• Models: A model is an abstraction of reality, a simplified representation of something.

• Quantitative Approaches: Quantitative approaches to problem solving often embody an
attempt to obtain mathematically optimal solutions to managerial problems.
• 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.
• Degree of Customization: A major influence on the entire organization is the degree of
customization of products or services being offered to its customers.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 15

Approaches to Decision Making
• A Systems Perspective: 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, 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.
• 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.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 16

OPERATIONS TODAY

• Advances in information technology and global competition have had a major

influence on operations management. While the internet offers great potential
for business organizations, the potential, as well as the risks, must be clearly
understood in order to determine if and how to exploit this potential.
• E-business: The use of electronic technology to facilitate business
transactions.
• E-commerce: Consumer-to business transactions.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 17

Technology

• The word technology has several definitions, depending on the context.

Generally, technology refers to the application of scientific knowledge to the
development and improvement of goods and services. It can involve
knowledge, materials, methods, and equipment.
• The term high technology refers to the most advanced and developed
machines and methods.
• Operations management is primarily concerned with three kinds of
technology: product and service technology, process technology, and
information technology (IT).

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 18

Three Types of Technology

• 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.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 19

Major Trends of Operations Management

Management of technology is high on the list of major trends, and it promises to be high well into the
future.

• Tremendous impact on businesses in many ways

• Technological advance also places a burden on management. Management must keep abreast of changes and quickly assess
both their benefits and risks.
• Conflicting technologies can exist that make technological choices even more difficult.

The General Agreement on Tariffs and Trade (GATT) of 1994 reduced tariffs and subsidies in many
countries, expanding world trade. However, new tariffs in 2018 and 2019, some temporary, have had an
impact on the strategies and operations of businesses large and small around the world. One effect is
the importance business organizations are giving to management of their supply chains.

IB 208_BBA 14 2028_ Operations Management Lecture 3

11/02/2024 20
Introduction
Major Trends of Operations Management

• Globalization and the need for global supply chains have broadened the scope of supply chain
management.
• Tightened border security in certain instances and new tariffs have added challenges and
uncertainties to managing supply chain operations. In some instances, organizations are
reassessing their use of offshore outsourcing.
• Competitive pressures and changing economic conditions have caused business organizations to
put more emphasis on operations strategy, working with fewer resources, revenue management,
process analysis and improvement, quality improvement, agility, and lean production.
• Working with fewer resources due to layoffs, corporate downsizing, and general cost cutting is
forcing managers to make trade-off decisions on resource allocation, and to place increased
emphasis on cost control and productivity improvement.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 21

Major Trends of Operations Management

• Revenue management is a method used by some companies to maximize the revenue they
receive from fixed operating capacity by influencing demand through price manipulation. Also
known as yield management, it has been successfully used in the travel and tourism industries
by airlines, cruise lines, hotels, amusement parks, and rental car companies, and in other
industries such as trucking and public utilities.
• Process analysis and improvement includes cost and time reduction, productivity
improvement, process yield improvement, and quality improvement and increasing customer
satisfaction. This is sometimes referred to as a Six Sigma process.
• Given a boost by the “quality revolution” of the 1980s and 1990s, quality is now ingrained in
business. Some businesses use the term total quality management (TQM) to describe their
quality efforts.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 22

Major Trends of Operations Management

• Agility refers to the ability of an organization to respond quickly to demands or

opportunities. It is a strategy that involves maintaining a flexible system that can
quickly respond to changes in either the volume of demand or changes in
product/service offerings. This is particularly important as organizations scramble to
remain competitive and cope with increasingly shorter product life cycles and strive
to achieve shorter development times for new or improved products and services.
• Lean production, a new approach to production, emerged in the 1990s. It
incorporates a number of the recent trends listed here, with an emphasis on quality,
flexibility, time reduction, and teamwork. This has led to a flattening of the
organizational structure, with fewer levels of management.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 23

KEY ISSUES FOR TODAY’S BUSINESS
OPERATIONS

• There are a number of issues that are high priorities of many business organizations.
• Economic conditions: Trade disputes and tariffs have created uncertainties for decision makers.
• 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 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.
• Competing in a global economy. Low labor costs in third-world countries have increased pressure to reduce labor costs.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 24

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 25
 KEY ISSUES FOR TODAY’S
BUSINESS OPERATIONS
• 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.
• 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

IB 208_BBA 14 2028_ Operations Management Lecture 3

11/02/2024 Introduction 26
KEY ISSUES FOR TODAY’S BUSINESS
OPERATIONS

• 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.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 27

KEY ISSUES FOR TODAY’S BUSINESS
OPERATIONS

• Ethical Code of Conduct: Many organizations have developed codes of ethics to guide employees’ or
members’ conduct. Ethics is a standard of behavior that guides how one should act in various situations.
• The Markula Center for Applied Ethics at Santa Clara University identifies five principles for thinking
ethically:
1. The Utilitarian Principle: The good done by an action or inaction should outweigh any harm it
causes or might cause. An example is not allowing a person who has had too much to drink to
drive.
2. The Rights Principle: Actions should respect and protect the moral rights of others. An example
is not taking advantage of a vulnerable person.
3. The Fairness Principle: Equals should be held to, or evaluated by, the same standards. An
example is equal pay for equal work.
4. The Common Good Principle: Actions should contribute to the common good of the community.
An example is an ordinance on noise abatement.
5. The Virtue Principle: Actions should be consistent with certain ideal virtues. Examples include
honesty, compassion, generosity, tolerance, fidelity, integrity, and self-control.
11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 28
KEY ISSUES FOR TODAY’S BUSINESS
OPERATIONS
• Developing Ethical Framework: An ethical framework is a sequence of steps intended to guide
thinking and subsequent decisions or actions.
1. Recognize an ethical issue by asking if an action could be damaging to a group or an
individual. Is there more to it than just what is legal?
2. Make sure the pertinent facts are known, such as who will be impacted, and what
options are available.
3. Evaluate the options by referring to the appropriate preceding ethical principle.
4. Identify the “best” option and then further examine it by asking how someone you
respect would view it.
5. In retrospect, consider the effect your decision had and what you can learn from it.

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 29

 • In Kachchh, India, Fair trade
allows cotton farmers to have the
assurance of a minimum price,
which gives them more security to
plan their business and invest in
their communities.

2/11/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 30

KEY ISSUES FOR TODAY’S BUSINESS
OPERATIONS
• 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;
• 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.

IB 208_BBA 14 2028_ Operations Management Lecture 3

11/02/2024 31
Introduction
KEY ISSUES FOR TODAY’S BUSINESS
OPERATIONS

• These and other issues now make it clear that management of supply chains is essential to business success.
• The other issues include the following:
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.
9. The need to deal with trade wars

11/02/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 32

 Elements of
Supply Chain
Management

2/11/2024 IB 208_BBA 14 2028_ Operations Management Lecture 3 Introduction 33