1-1

Chapter One

Introduction to
Operations Management
1-2

Chapter 1 Learning Objectives

• Define the term operations management

• Identify the three major functional areas of organizations and
describe how they interrelate
• Identify similarities and differences between production and
service operations
• Describe the operations function and the nature of the
operations manager’s job
• Summarize the two major aspects of process management
• Explain the key aspects of operations management decision
making
1-3

Operations Management
• The management of systems or processes that create goods
and/or provide services.
• The business function responsible for planning, coordinating,
and controlling the resources needed to produce a company’s
goods and services.
• It is the design, execution, and control of a firm’s operations
that convert its resources into desired goods and services and
implement its business strategy.
• It is the conversion of inputs into outputs, using physical
resources, so as to provide the desired utility/utilities of form,
place, possession while meeting the other organizational
objectives of effectiveness, efficiency and adaptability.
1-4

Operations Management
• Operations management is a field of study that focuses on the
design, planning, and control of business operations to ensure
efficient and effective production and delivery of goods and
services. It involves managing the processes and resources
necessary to transform inputs into desired outputs, while
maximizing productivity, quality, and customer satisfaction.
1-5

Primary Objective of
Operations Management
• Optimize the use of resources, such as labor, materials,
equipment, and technology, to create value for the
organization and its stakeholders. It plays a critical role in both
manufacturing and service industries, as it is responsible for
overseeing the entire production or service delivery process.
 1-6

Operations Management
Every business is managed through three major functions: finance,
marketing, and operations management. Other business functions
such as accounting, purchasing, human resources, and engineering
support these three major functions.

Organization

Finance Operations Marketing

1-7

3 Basic Functions of Organization

• Assessing consumers wants and needs

Marketing and selling and promoting the
organization goods and services

• Producing the goods or providing the

Operations services offered by the organization

• Securing financial resources at

Finance favorable prices and allocating those
resources throughout the organization
 1-8

Supply Chain
Operations and Supply chains are intrinsically linked, and no
business organization could exist without both.

Supply Chain – a sequence of activities and organizations

involved in producing and delivering a good or service.

Suppliers’ Direct Final

Producer Distributor
suppliers suppliers Customers
1-9

The Transformation Process

The creation of goods or services involves transforming or
converting inputs into outputs.
Value-Added

Inputs Transformation/ Outputs

• Land Conversion • Goods
• Labor • Services
• Capital
Process
• Information (storing, transporting,
Repairing)

Feedback

Feedback Feedback
Control
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.
1-10

Various Operating Systems

1-11

Types of Operations
Operations Examples
Goods Producing Farming, mining, construction ,
manufacturing, power generation
Storage/Transportation Warehousing, trucking, mail
service, moving, taxis, buses,
hotels, airlines
Exchange Retailing, wholesaling, banking,
renting, leasing, library, loans
Entertainment Films, radio and television,
concerts, recording
Communication Newspapers, radio and television
newscasts, telephone, satellites
 1-12

A Supply Chain for Bread

1-13

Value Added
 The essence of the operation function is to add value during
the transformation process
 Value-added is the difference between the cost of inputs and
the value or price of outputs.
 The value added in a for-profit organization as the
difference between cost of inputs and price of output
 Value added could be applied in a non-profit organization
and as their value to society
 value added used in firm for research, improvement, salaries
and investment.
1-14

Goods and Services Continuum

Steel production
Automobile fabrication
House building
Low service content Road construction
High goods content
Dressmaking
Farming

Auto Repair
Appliance repair

Maid Service
Increasing Manual car wash
goods content
Increasing Teaching
service content Lawn mowing
High service content
Low goods content
 1-15

Production of Goods Vs. Providing Services

Goods Services
Definition Physical items produced by Activities that provide some combination of
business organizations time, location, form and psychological value
Output Tangible Intangible
Customer Contact Low High
Labor Content Low High
Uniformity of Input High Low
Uniformity of Output High - standardized Low - Customized
Measurement of Easy Difficult
productivity
Opportunity to correct High Low
problems before delivery
Inventory Much Little
Patent Usually Not Usually
Quality Assurance Easy to control quality and Difficult to control quality and it depends on
it depends on machines. people.
Automobile, Computer, Air travel, Education, Haircut, Legal counsel
Examples
Oven, Shampoo
 1-16

3 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.

• In practice, there is significant interfacing and collaboration among

the various functional areas, involving exchange of information and
cooperative decision making.
• The 3 main functions perform Operations
different activities but their decisions
impact other areas of the organization.
• Consequently, these functions have
numerous interactions as shown in the Marketing Finance
figure.
1-17

Operations interfaces with a number of

supporting functions
 1-18

The Scope of Operations Management

• The operations function includes many interrelated activities, such
as:
o Product and Service Design: Operations managers are responsible for
designing efficient workflows and production processes. This includes
determining the sequence of activities, identifying bottlenecks, and
streamlining operations for maximum productivity.
o Capacity planning: This involves determining the optimal level of
resources (e.g., workforce, machinery, space) needed to meet customer
demand while minimizing costs.
o Supply Chain Management: This encompasses the entire network of
suppliers, manufacturers, distributors, retailers, and customers involved in
the production and delivery of a product or service. Effective supply chain
management aims to optimize the flow of materials, information, and funds
across the supply chain.
 1-19

The Scope of Operations Management

• The operations function includes many interrelated activities, such
as:
o Quality Management: Ensuring that products or services meet or exceed
customer expectations is essential. Operations managers employ quality
control tools and techniques to monitor and improve the quality of goods
and services.
o Inventory Management: Operations managers are responsible for
managing inventory levels to ensure a balance between meeting customer
demand and minimizing holding costs. Techniques such as just-in-time
(JIT) inventory systems and economic order quantity (EOQ) models are
commonly used.
o Project Management: Operations managers often deal with projects that
have specific goals, timelines, and resource requirements. They oversee
project planning, scheduling, resource allocation, and coordination to
ensure successful project completion.
 1-20

The Scope of Operations Management

• The operations function includes many interrelated activities, such
as:
o Lean Operations: Lean principles aim to eliminate waste and improve
efficiency in operations. Techniques such as value stream mapping, 5S
methodology, and continuous improvement (kaizen) are employed to
achieve lean operations.
o Sustainability and Green Operations: With increasing environmental
concerns, operations managers are increasingly focused on incorporating
sustainable practices into their operations. This includes reducing waste,
minimizing energy consumption, and adopting environmentally friendly
processes.
o Process Selection
o Location Planning
o Forecasting
o Scheduling
1-21

The Scope of Operations Management

By effectively managing these areas, operations managers strive to:

• Optimize productivity,
• Reduce costs,
• Enhance product quality,
• Deliver value to customers.

They play a crucial role in:

• Improving operational efficiency,
• Improving competitiveness, and
• Improving overall organizational performance.
1-22

Operations Management and

Decision Making
• The chief role of an operations manager is that of
planner/decision maker.
• 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,
its important to make informed decisions.
 1-23

Operations Management and

Decision Making
Operation Management professionals make a number of key decision
that affect the entire organization
• Resources will be needed
What and what amounts

• Each resource be needed

When and when ordered

Where • The work will be done

• Work will be done and

How work design

Who • Will do the work

1-24

Decision Making Approaches

Models
Quantitative approaches
Performance Metrics
Analysis of Trade-offs
Degree of Customization
A Systems Approach
Establishing Priorities
 1-25

1. Models
• A model is 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
Advantage: visual correspondence with reality
1-26

1. Models
b. Schematic Models
More abstract than their physical counterparts; they have less resemblance to the
physical reality. Ex: Graphs and charts and drawings.
Advantage: Simple to construct and change and have some degree of visual
correspondence
c. Mathematical Models
Are the most abstract, do not look at all like their real-life counterparts. Ex:
numbers, formulas and symbols.
Advantage: The easiest to manipulate and are important forms of inputs for
computers
1-27

Benefits of Models
Easy to use, less expensive than dealing
directly with the actual situation
Require users to organize and sometimes
quantify information
Increase understanding of the problem
Enable managers to analyze “what if”
questions
Consistent tool for evaluation and standardized
format for analyzing a problem
Enable users to bring the power of
mathematics to bear on a problem
1-28

Limitations of Models

Quantitative information may be emphasized

at the expense of qualitative information

Models may be incorrectly applied and the

results misinterpreted

The use of models does not guarantee good

decisions
1-29

2. Quantitative Approaches
• Quantitative approaches to problem solving often embody an
attempt to obtain mathematically optimal solutions to managerial
problems.
• Linear programming and related mathematical techniques.
• Inventory models are widely used to control inventories.
• Project models such as PERT (program evaluation and review
technique) and CPM (critical path method) are useful for planning,
coordinating and controlling large-scale projects.
• Forecasting techniques are widely used in planning and scheduling.
• Statistical models are currently used in many areas of decision
making.
• The growing availability of software packages for quantitative
techniques has greatly increased management’s use of those
techniques.
 1-30

3. Performance Metrics
• All 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.
 1-31

4. Analysis of Trade-offs
• For example: in deciding on the amount of inventory to
stock, the decision maker must take into account the trade-
off between the increased level of customer service that the
additional inventory would yield and the increased costs
required to stock that inventory.
 1-32

5. Degree of Customization
• Providing highly customized products or services such as
home remodeling, legal counseling tends to be more labor
intensive than providing standardized products such as
those you would buy “off the shelf” or internet services.
• More time consuming.
• Requires more highly skilled workers.
• Have a much lower volume of output than standardized
products.
• Carries a higher price tag.
 1-33

6. A System Approach
• A system can be defined as a set of interrelated parts that must
work together.
• In business organization, the organization can be thought of as a
system composed of subsystems (marketing subsystem, finance
subsystem, operations subsystem) which in turn are composed of
lower subsystems.
• The systems approach emphasizes interrelationships among
subsystems.
• The whole is greater than the sum of its individual parts.
• The objectives of the organization as a whole take precedence
over those of any one subsystems.
1-34

7. Establishing Priorities
• A relatively few issues or items are more important than
the others, so that dealing with those factors will
generally have a disproportionately large impact on the
results achieved.
• Recognizing this enables the managers to direct their
efforts to where they will do good and avoid wasting
time and energy on insignificant factors
• This well-known effect is referred to as the Pareto
phenomenon.