Introduction toOperations Management

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What is Operations Management?

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• Production is the creation of goods and services

• Operations management is the set of activities that creates value in the form of goods and services by transforming input into output.

• Operations management is the science and art of ensuring that goods and services are created and delivered successfully to customers.

• Operations Management is the management of systems or processes that create goods and/or provide services (Stevenson)

• OM’s principles help one to view a business as a total system: activities are coordinated vertically and horizontally across functions.

• Operations Management affects:– Companies’ ability to compete– Nation’s ability to compete internationally

A simple system

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Inputs Land Labor Capital

Transformation/Conversion

process

Outputs Goods Services

Control

Feedback

FeedbackFeedback

Value added

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© 1995 Corel Corp.

Marketing

Operations

Finance

© 1995 Corel Corp.

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Function vs. Process

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Customer Benefit Package

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Percentage of Job Creation:80 – 20

Percentage of Output:70% of what we export

Productivity:

Basic Differences (But Cliches!)

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ManufacturingLabor content lowMechanization / Automation highCustomer contact lowCan be resoldCan be easily inventoriedEasy to evaluate workQuality easily measurableSelling is distinct from productionProduct is transportableSite of facility important for costEasy to patent

ServiceLabor content highMechanization / Automation lowCustomer contact highReselling unusualDifficult to inventoryDifficult to evaluate workQuality difficult to measureSelling is part of service providerProduct is not transportableSite of facility important for contactDifficult to patent

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Evolution of Operations Management• Industrial revolution (1770’s)

– Steam Engine; Coal and Iron; Standard parts and Products; Mass Production; Economies of Scale. Later: refinement of Steel (1855 by Henry Bessemer)

• Scientific management (1911)– Frederick Taylor: The Principles of Scientific Management (1911)– Henry Ford introduced “Mass Production” by using Assembly Lines and:

• Frederick Taylor’s principles• Eli Whitney’s ideas of Interchangeable Parts (late 1700)• Adam Smith’s ideas of Division of Labor (The Wealth of Nations – 1776)

– Frank and Lillian Gilbreth (motion studies); Henry Gantt (scheduling)

• Human relations movement– Gilbreths (Human Factor-1920s); Elton Mayo (Motivation/Productivity-1930s); Abraham

Maslow (Motivational Theory-1940s); Douglas McGregor (Theory X / Theory Y-1960s); William Ouchi (Theory Z-1970s)

• Decision models / Management Science / Quantitative Approaches• Influence of Japanese manufacturers

– Continuous Quality Improvement; Teams; Empowerment; Customer Satisfaction; JIT

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Tools for Decision Making in Operations

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• Models:

• Quantitative approaches:

• Analysis of trade-offs / Establishing priorities:

• Systems approach:Performance Metrics: Profit; Productivity; Quality;

Inventory; Schedule; Costs

• Inventory models: Harris-1915

• Queuing Techniques: Erlang-1920s

• Linear programming: Dantzig-1940s

• Project models: Late 1950s

• Statistical models / Forecasting

• Physical

• Schematic

• Mathematical

• Pareto Phenomenon; 80 - 20

• Break even Analysis

• No Sub-optimization

• The whole is greater than the sum of the parts

Next Slide

Models

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Three commonly known types of models:1. Physical Models2. Schematic Models3. Mathematical Models

Breakeven Mathematical ModelsWe can find the break-even point by developing a simple mathematical model. Let x be the sales volume at the break-even point. Then

Total cost = 100,000 + 12x Total revenue = 20x.Setting the total revenue equal to total cost we have

100,000 + 12x = 20xHence:x = 12,500.

If sales are less than 12,500 units, the firm will incur a loss; If sales are more than 12,500, a profit will be realized.

$

Quantity x

Costs

Revenues

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Trends in Business Operations

– The Internet, e-commerce, e-business Middle man; ERP– Management of technology Federal Labs– Globalization NAFTA – Miata – US vs Japan Cars– Management of supply chains Low Bids vs Partnerships - JIT– Outsourcing– Agility On time vs Fast Delivery - Thailand - Singapore– Ethical behavior Low Cost vs Environment - Water Bottles– Operations strategy Electronics - 70-30 - VCR/HDTV - Lee Iacocca 1– Working with fewer resources – Lean Standard Products vs Mass Customization– Revenue management– Process analysis and improvement Reengineering: Michael Hammer– Increased regulation and product liability

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