Introduction to

Operations
Management

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No

reproduction or distribution without the prior written consent of McGraw-
Hill Education 1-1
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 need to manage the supply chain

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or 1-2
distribution without the prior written consent of McGraw-Hill Education
— 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 1-3
LO 1.1 without the prior written consent of McGraw-Hill Education
 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 1-4
LO 1.1 without the prior written consent of McGraw-Hill Education
 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education 1-5
LO 1.1
 Value-Added

Inputs Transformation/ Outputs

•Land Conversion •Goods
•Labor •Services
Process
•Capital
•Information

Measurement
and Feedback
Measurement Measurement
and Feedback and 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
1-6
LO 1.1 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education
 Products are typically neither purely service- or purely goods-
based.
Goods Services
Surgery, Teaching

Songwriting, Software Development

Computer Repair, Restaurant Meal

Home Remodeling, Retail Sales

Automobile Assembly, Steelmaking

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 1-7
LO 1.2 the prior written consent of McGraw-Hill Education
1. Degree of customer contact
2. Uniformity of input
3. Labor content of jobs
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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 1-8
LO 1.2 the prior written consent of McGraw-Hill Education
— 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 1-9
LO 1.3 the prior written consent of McGraw-Hill Education
 Organization

Marketing Operations Finance

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 1-10
LO 1.4 without the prior written consent of McGraw-Hill Education
— Finance & operations
— Budgeting
— Economic analysis of investment
proposals
— Provision of funds
— Marketing & operations
— Demand data
— Product and service design
— Competitor analysis
— Lead time data

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education 1-11
LO 1.4
— Operations manager
— Supply chain manager
— Production analyst
— Schedule coordinator
— Production manager
— Industrial engineer
— Purchasing manager
— Inventory manager
— Quality manager

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education 1-12
— 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)

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the
prior written consent of McGraw-Hill Education 1-13
 Process - one or more actions that transform inputs into outputs

Three Categories of Business Processes:

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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 1-14
LO 1.5 the prior written consent of McGraw-Hill Education
 Operations &
Sales & Marketing
Supply Chains

Wasteful
Supply
> Demand Costly

Opportunity Loss
Supply
< Demand Customer
Dissatisfaction

Supply
= Demand Ideal

1-15
LO 1.5 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education
 Four Sources of Variation:
Variety of goods or services The greater the variety of goods and services
being 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.

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the 1-16
LO 1.5 prior written consent of McGraw-Hill Education
 The scope of operations management ranges across
the organization.
The operations function includes many interrelated
activities such as:
— Forecasting
— Capacity planning
— Facilities and layout
— Scheduling
— Managing inventories
— Assuring quality
— Motivating employees
— Deciding where to locate facilities
— And more . . .

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 1-17
LO 1.6 without the prior written consent of McGraw-Hill Education
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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 1-18
LO 1.6 the prior written consent of McGraw-Hill Education
• 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 1-19
LO 1.6 without the prior written consent of McGraw-Hill Education
• 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education 1-20
LO 1.6
— 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 he product or service be designed? How will the work be
done? How will resources be allocated?
— Who: Who will do the work?

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the 1-21
LO 1.7 prior written consent of McGraw-Hill Education
— 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 1-22
LO 1.7 without the prior written consent of McGraw-Hill Education
— 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?

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education 1-23
LO 1.7
1. Models are 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.

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 1-24
LO 1.7 without the prior written consent of McGraw-Hill Education
— 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 are placed in the
hands of uninformed users
— The use of models does not guarantee good decisions

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the 1-25
LO 1.7 prior written consent of McGraw-Hill Education
— A decision-making approach that frequently seeks to
obtain a mathematically optimal solution
— Supported by computer calculations
— Often work together with qualitative approaches

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 1-26
LO 1.7 the prior written consent of McGraw-Hill Education
— Performance metrics — Analysis of trade-offs
— All managers use metrics to — A trade-off is giving up one
manage and control operations thing in return for
— Profits something else
— Costs — Carrying more inventory
— Quality (an expense) in order to
— Productivity achieve a greater level of
— Flexibility customer service
— Inventories
— Schedules
— Forecast accuracy

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 1-27
LO 1.7 without the prior written consent of McGraw-Hill Education
— 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 approach

— 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
1-28
LO 1.7 the prior written consent of McGraw-Hill Education
— 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 1-29
LO 1.7 without the prior written consent of McGraw-Hill Education
— Industrial Revolution
— Scientific management
— Human relations movement
— Decision models and management science
— Influence of Japanese manufacturers

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 1-30
LO 1.8 the prior written consent of McGraw-Hill Education
— 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 1-31
LO 1.8 the prior written consent of McGraw-Hill Education
— 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 1-32
LO 1.8 the prior written consent of McGraw-Hill Education
— 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 1-33
LO 1.8 without the prior written consent of McGraw-Hill Education
— 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 1-34
LO 1.8 without the prior written consent of McGraw-Hill Education
— Refined and developed management practices that
increased productivity
— Credited with fueling the “quality revolution”
— Just-in-Time production

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 1-35
LO 1.8 the prior written consent of McGraw-Hill Education
— Economic conditions
— Innovating
— Quality problems
— Risk management
— Competing in a global economy

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 1-36
LO 1.9 the prior written consent of McGraw-Hill Education
— 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 1-37
LO 1.9 the prior written consent of McGraw-Hill Education
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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the 1-38
LO 1.9 prior written consent of McGraw-Hill Education
 — 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 1-39
LO 1.10 the prior written consent of McGraw-Hill Education
 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

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the 1-40
LO 1.10 prior written consent of McGraw-Hill Education