CHAPTER 1: INTRODUCTION TO OPERATIONS MANAGEMENT

Operations is that part of a business organization that is responsible for producing goods and/or
services.
Goods – Physical items produced by business organizations.
Services – activities that provide some combination of time, location, form and psychological
value.

Three basic functions of business organization:

1. Finance – is responsible for securing financial resources at favorable prices and
allocating those resources throughout the organization, as well as budgeting, analyzing
investment proposals, and providing funds for operations.
2. Marketing – is responsible for assessing consumer wants and needs, and selling and
promoting the organization’s goods or services.
3. Operations – is responsible for producing the goods or providing the services offered by
the organization.

OPERATIONS MANAGEMENT is the management of systems or processes that create goods

and/or provide services.
SUPPLY CHAIN is the sequence of organizations—their facilities, functions, and activities—that are
involved in producing and delivering a product or service.

Figure 1.1
A simple Product supply chain

The creation of goods or services involves transforming or converting inputs into outputs.
Various inputs such as capital, labor, and information are used to create goods or services using
one or more transformation processes (e.g., storing, transporting, repairing). To ensure that the
desired outputs are obtained, an organization takes measurements at various points in the
transformation process (feedback) and then compares them with previously established
standards to determine whether corrective action is needed (control).

Figure 1.2
The operations function involves the conversion of inputs into outputs.

The essence of the operations function is to add value during the transformation process
Value-added is the term used to describe the difference between the cost of inputs and the value
or price of outputs.
Firms use the money generated by value-added for research and development,
investment in new facilities and equipment, worker salaries, and profits. Consequently, the greater
the value-added, the greater the amount of funds available for these purposes.
PRODUCTION OF GOODS vs. PROVIDING SERVICES
Production of goods results in a tangible output
Delivery of service, on the other hand, generally implies an act.
Manufacturing and service are often different in terms of what is done but quite similar in terms
of how it is done.
Consider these points of comparison:
✓ Degree of Customer contact
✓ Labor content of jobs
✓ Uniformity of inputs
✓ Measurement of productivity
✓ Quality Assurance
✓ Inventory
✓ Wages
✓ Ability to patent

Note that many service activities are essential in goods-producing companies. These include
training, human resource management, customer service, equipment repair, procurement, and
administrative services.

Working together successfully means that all members of the organization understand not only
their own role, but they also understand the roles of others. In practice, there is significant
interfacing and collaboration among the various functional areas, involving exchange of
information and cooperative decision making. For example, although the three primary functions
in business organizations perform different activities, many of their decisions impact the other
areas of the organization.

Finance and operations management personnel cooperate by exchanging information and

expertise in such activities as the following:
1. Budgeting
2. Economic analysis of investment proposals
3. Provision of funds

One important piece of information marketing needs from operations is the manufacturing or
service lead time in order to give customers realistic estimates of how long it will take to fill their
orders.
Lead time - The time between ordering a good or service and receiving it.

Operations also interacts with other functional areas of the organization:

1. Legal
2. Accounting
3. Management Information System (MIS)
4. The personnel or human resources
5. Public relations

CAREER OPPORTUNITIES AND PROFESSIONAL SOCIETIES

There are many career opportunities in the operations management and supply chain
fields. Among the numerous job titles are operations manager, production analyst, production
manager, inventory manager, purchasing manager, schedule coordinator, distribution manager,
supply chain manager, quality analyst, and quality manager. Other titles include office manager,
store manager, and service manager.
People who work in the operations field should have a skill set that includes both people
skills and knowledge skills.

PROCESS MANAGEMENT
A key aspect of operations management is process management. A process consists of
one or more actions that transform inputs into outputs. In essence, the central role of all
management is process management.
There are three categories of business processes:
1. Upper-management processes. These govern the operation of the entire organization.
Examples include organizational governance and organizational strategy.
2. Operational processes. These are the core processes that make up the value stream.
Examples include purchasing, production and/or service, marketing, and sales.
3. Supporting processes. These support the core processes. Examples include accounting,
human resources, and IT (information technology).

THE SCOPE OF OPERATIONS MANAGEMENT

1. Forecasting such things as weather and landing conditions, seat demand for flights, and
the growth in air travel.
2. Capacity planning, essential for the airline to maintain cash flow and make a reasonable
profit. (Too few or too many planes, or even the right number of planes but in the wrong
places, will hurt profits.)
3. Locating facilities according to managers’ decisions on which cities to provide service for,
where to locate maintenance facilities, and where to locate major and minor hubs.
4. Facilities and layout, important in achieving effective use of workers and equipment.
5. Scheduling of planes for flights and for routine maintenance; scheduling of pilots and flight
attendants; and scheduling of ground crews, counter staff, and baggage handlers.
6. Managing inventories of such items as foods and beverages, first-aid equipment, inflight
magazines, pillows and blankets, and life preservers.
7. Assuring quality, essential in flying and maintenance operations, where the emphasis is on
safety, and important in dealing with customers at ticket counters, check-in, telephone
and electronic reservations, and curb service, where the emphasis is on efficiency and
courtesy.
8. Motivating and training employees in all phases of operations.

OPERATIONS MANAGEMENT AND DECISION MAKING

The chief role of an operations manager is that of planner/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.
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?

General approaches to decision making, includes;

1. Model – an abstraction of reality; a simplified representation of something.
Models are sometimes classified as physical, schematic, or mathematical:
a) Physical models look like their real-life counterparts.
b) 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,
c) pictures, and drawings.
d) 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.
2. Quantitative Approaches - often embody an attempt to obtain mathematically optimal
solutions to managerial problems. Example: PERT, CPM, Linear Programming.
3. Performance Metrics
4. Analysis of Trade-offs
 5. Degree of Customization
6. A System Approach
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.
7. Establishing Priorities

THE HISTORICAL EVOLUTION OF OPERATIONS MANAGEMENT

Systems for production have existed since ancient times.
1. The Industrial Revolution - In the earliest days of manufacturing, goods were produced
using craft production: highly skilled workers using simple, flexible tools produced goods
according to customer specifications.
2. The Scientific Management era brought widespread changes to the management of
factories.
Frederick Winslow Taylor, who is often referred to as the father of scientific management.
A number of other pioneers also contributed heavily to this movement, including the following:
o Frank Gilbreth was an industrial engineer who is often referred to as the father of motion
study. He developed principles of motion economy that could be applied to incredibly
small portions of a task.
o Henry Gantt recognized the value of nonmonetary rewards to motivate workers, and
developed a widely used system for scheduling, called Gantt charts.
o Harrington Emerson applied Taylor’s ideas to organization structure and encouraged the
use of experts to improve organizational efficiency. He testified in a congressional hearing
that railroads could save a million dollars a day by applying principles of scientific
management.
o Henry Ford, the great industrialist, employed scientific management techniques in his
factories.
Among Ford’s many contributions were the introduction of mass production.
Mass production System in which low-skilled workers use specialized machinery to produce high
volumes of standardized
goods.
Other concepts that Ford introduced is the division of labor.
Division of labor - The breaking up of a production process into small tasks, so that each worker
performs a small portion of the overall job.
3. The Human Relations Movement – Emphasized the importance of human election of job
design.
4. Decision Models and Management Science
5. The Influence of Japanese Manufacturers

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. In many cases, the Internet has altered the way companies compete in the
marketplace.

Electronic business, or e-business, involves the use of the Internet to transact business. E-
business is changing the way business organizations interact with their customers and their
suppliers. Most familiar to the general public is e-commerce, consumer–business transactions such
as buying online or requesting information. However, business-to-business transactions such as e-
procurement represent an increasing share of e-business. E-business is receiving increased
attention from business owners and managers in developing strategies, planning, and decision
making.
The word technology has several definitions, depending on the context. Generally,
technology refers to the application of scientific discoveries 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.
Three kinds of technology:
1. Product and service technology
2. Process technology
3. Information Technology (IT)

KEY ISSUES FOR TODAY’S BUSINESS OPERATIONS

There are a number of issues that are high priorities of many business organizations. Although not
every business is faced with these issues, many are. Chief among the issues is the following:
o 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.
o 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.
o 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.
o Risk management. The need for managing risk is underscored by recent events that
include the crisis in housing, product recalls, oil spills, and 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.
o 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.

KEY AREAS
1. Environmental Concerns - Concern about global warming and pollution has had an
increasing effect on how businesses operate.
2. 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.
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.