Chapter 1 Learning Objectives

1. To understand the nature of typical OM activities

in business, what operations managers do, and
how everyone uses OM principles in their work,
no matter what their functional job is.

2. To understand the nature of goods and services,

their similarities and differences, the concept of
a customer benefit package, and why they are
important for managing operations.

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©2007 Thomson South-Western 1
 Chapter 1 Learning Objectives

3. To understand the concept of a process and

value chain, and how they are used in operations
to support the creation of goods and services.

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©2007 Thomson South-Western 2
 Why Study OM?

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 Why Study OM?
• OM is one of three major functions
(marketing, finance, and operations) of any
organization.
• We want (and need) to know how goods
and services are produced.
• We want to understand what operations
managers do.
• OM is such a costly part of an organization.
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Management, 5e, and
 Options for Increasing Contribution
Marketing Finance & OM Option
Option Accounting
Option
Current Sales Finance Production
Revenue : Costs: -50% Costs: -20%
+50%
Sales $100,000 $150,000 $100,000 $100,000
Cost of -80,000 -120,000 -80,000 -64,000
Goods Sold
Gross 20,000 30,000 20,000 36,000
Margin
Finance -6,000 -6,000 -3,000 -6,000
Costs
Net 14,000 24,000 17,000 30,000
Margin
Taxes @ -3,500 -6,000 -4,250 -7,500
25%
Contribution 10,500 18,000 12,750 22,500
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 What Operations Managers Do

Plan - Organize - Staff - Lead - Control

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 Ten Critical Decisions
• Service, product design……………..
• Quality management…………………
• Process, capacity design…………..
• Location …………….…………………
• Layout design ………………………..
• Human resources, job design……..
• Supply-chain management…………
• Inventory management …………….
• Scheduling ……………………………
• Maintenance ………………………….
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 What is Operations Mgt?

• Operations Management is the systematic design, direction and control

of the processes that transform inputs into products and services.
• It is a set of decisions

 Create operational systems.

 Manage (plan, organize, staff, direct and control) the activities relating to the
production of goods and/or services with maximum efficiency (at the lowest
cost) and effectiveness (in the eyes of the customer).
 Improve those processes continuously to create competitive advantage.
 What is Operations???

• What is Operations?
– a function or system that transforms inputs into outputs of
greater value
• What is a Transformation Process?
– a series of activities along a value chain extending from
supplier to customer
– activities that do not add value are superfluous and should
be eliminated
 The Operations System

The operations system transforms inputs into

desired goods and services.
EXTERNAL
FACTORS

INPUTS PROCESS OUTPUTS

FEEDBACK
Material flow

Information Flow
 Cross-Functional Linkages
MIS
Finance
Budgeting.
What IT solutions Human
to make it all work
Analysis. together? Resources
Funds. Skills? Training?
# of Employees?

Design
Sustainability. Operations
Quality.
Manufacturability.
Marketing
What products?
Accounting What volumes?
Performance measurement systems. Costs? Quality?
Planning and control. Delivery?
 Chapter 1 Goods, Services & Operations Management

Understanding Goods and Services

• A good is a physical product that you can see,
touch, or possibly consume. Examples of goods
include: oranges, flowers, televisions, soap,
airplanes, fish, furniture, coal, lumber, personal
computers, paper, and industrial machines.

• A durable good is a product that typically lasts

at least three years. Vehicles, dishwashers, and
furniture are some examples of durable goods.

Operations Management, 2e/Ch. 1 Goods,

Services, and Operations Management
©2007 Thomson South-Western
 Chapter 1 Goods, Services & Operations Management

Understanding Goods and Services

• A non-durable good is perishable and
generally lasts for less than three years.
Examples are toothpaste, software, shoes,
and fruit.

• A service is any primary or complementary

activity that does not directly produce a
physical product.

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 Chapter 1 Goods, Services & Operations Management

Understanding Goods and Services

• Service management integrates
marketing, human resource, and operations
functions to plan, create, and deliver goods
and services, and their associated service
encounters.

• A service encounter is an interaction

between the customer and the service
provider.

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 Chapter 1 Goods, Services & Operations Management

Understanding Goods and Services

A broader definition is
• Service encounters consist of one or more
moments of truth – any episodes, transactions,
or experiences in which a customer comes into
contact with any aspect of the delivery system,
however remote, and thereby has an opportunity to
form an impression.
• Here, a service encounter includes the impression
an empty parking lot has on whether the customer
goes into a facility or the interaction with other
customers such as while waiting in line.
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©2007 Thomson South-Western 15
 Chapter 1 Goods, Services & Operations Management

Similarities Between Goods and Services

1. Goods and services provide value and
satisfaction to customers who purchase
and use them.
2. They both can be standardized or
customized to individual wants and
needs.
3. A process creates and delivers each good
or service, and therefore, OM is a critical
skill.
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©2007 Thomson South-Western 16
Chapter 1 Goods, Services & Operations Management

Differences Between Goods and Services

1. Goods are tangible while services are intangible.
2. Customers participate in many service processes,
activities, and transactions.
3. The demand for services is more difficult to
predict than the demand for goods.
4. Services cannot be stored as physical inventory.
5. Service management skills are paramount to a
successful service encounter.
6. Service facilities typically need to be in close
proximity to the customer.
7. Patents do not protect services.
Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management
©2007 Thomson South-Western 17
Exhibit 1.3 Examples of Goods and Service Content

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©2007 Thomson South-Western 18
End of session
 Historical Milestones in OM
• The Industrial Revolution
• Post-Civil War Period
• Scientific Management
• Human Relations and Behaviorism
• Operations Research
• The Service Revolution
 The Industrial Revolution
• The industrial revolution developed in England in
the 1700s.
• The steam engine, invented by James Watt in
1764, largely replaced human and water power
for factories.
• Adam Smith’s The Wealth of Nations in 1776
touted the economic benefits of the
specialization of labor.
• Thus the late-1700s factories had not only
machine power but also ways of planning and
controlling the tasks of workers.
 The Industrial Revolution
• The industrial revolution spread from England to other
European countries and to the United Sates.
• In 1790 an American, Eli Whitney, developed the
concept of interchangeable parts.
• The first great industry in the US was the textile
industry.
• In the 1800s the development of the gasoline engine
and electricity further advanced the revolution.
• By the mid-1800s, the old cottage system of production
had been replaced by the factory system.
• . . . more
 Post-Civil War Period
• During the post-Civil War period great
expansion of production capacity occurred.
• By post-Civil War the following developments
set the stage for the great production
explosion of the 20th century:
– increased capital and production capacity
– the expanded urban workforce
– new Western US markets
– an effective national transportation system
 Scientific Management
• Frederick Taylor is known as the father of
scientific management. His shop system
employed these steps:
– Each worker’s skill, strength, and learning ability were
determined.
– Stopwatch studies were conducted to precisely set
standard output per worker on each task.
– Material specifications, work methods, and routing
sequences were used to organize the shop.
– Supervisors were carefully selected and trained.
– Incentive pay systems were initiated.
 Scientific Management
• In the 1920s, Ford Motor Company’s
operation embodied the key elements of
scientific management:
– standardized product designs
– mass production
– low manufacturing costs
– mechanized assembly lines
– specialization of labor
– interchangeable parts
 Human Relations and Behavioralism
• In the 1927-1932 period, researchers in the
Hawthorne Studies realized that human
factors were affecting production.
• Researchers and managers alike were
recognizing that psychological and sociological
factors affected production.
• From the work of behavioralists came a
gradual change in the way managers thought
about and treated workers.
 Operations Research
• During World War II, enormous quantities of
resources (personnel, supplies, equipment, …)
had to be deployed.
• Military operations research (OR) teams were
formed to deal with the complexity of the
deployment.
• After the war, operations researchers found their
way back to universities, industry, government,
and consulting firms.
• OR helps operations managers make decisions
when problems are complex and wrong decisions
are costly.
 The Service Revolution
• The creation of services organizations accelerated
sharply after World War II.
• Today, more than two-thirds of the US workforce
is employed in services.
• About two-thirds of the US GDP is from services.
• There is a huge trade surplus in services.
• Investment per office worker now exceeds the
investment per factory worker.
• Thus there is a growing need for service
operations management.
 The Computer Revolution
• Explosive growth of computer and
communication technologies
• Easy access to information and the availability of
more information
• Advances in software applications such as
Enterprise Resource Planning (ERP) software
• Widespread use of email
• More and more firms becoming involved in E-
Business using the Internet faster, better
decisions over greater distances
 Today's Factors Affecting OM
• Global Competition
• Quality, Customer Service, and Cost
Challenges
• Rapid Expansion of Advanced Technologies
• Continued Growth of the Service Sector
• Scarcity of Operations Resources
• Social-Responsibility Issues
End of Session 2
Studying Operations Management
• Operations as a System
• Decision Making in OM
 Operations as a System
Production System

Conversion
Inputs Outputs
Subsystem

Control
Subsystem
 Inputs of an Operations System
• External
– Legal, Economic, Social, Technological
• Market
– Competition, Customer Desires, Product Info.
• Primary Resources
– Materials, Personnel, Capital, Utilities
 Conversion Subsystem
• Physical (Manufacturing)
• Locational Services (Transportation)
• Exchange Services (Retailing)
• Storage Services (Warehousing)
• Other Private Services (Insurance)
• Government Services (Federal)
 Outputs of an Operations System
• Direct
– Products
– Services
• Indirect
– Waste
– Pollution
– Technological Advances
 Production as an Organization
Function
• US companies cannot compete with marketing,
finance, accounting, and engineering alone.
• We focus on OM as we think of global
competitiveness, because that is where the vast
majority of a firm’s workers, capital assets, and
expenses reside.
• To succeed, a firm must have a strong operations
function teaming with the other organization
functions.
 Decision Making in OM
• Strategic Decisions
• Operating Decisions
• Control Decisions
 Strategic Decisions
• These decisions are of strategic importance
and have long-term significance for the
organization.
• Examples include deciding:
– the design for a new product’s production process
– where to locate a new factory
– whether to launch a new-product development
plan
 Operating Decisions
• These decisions are necessary if the ongoing
production of goods and services is to satisfy
market demands and provide profits.
• Examples include deciding:
– how much finished-goods inventory to carry
– the amount of overtime to use next week
– the details for purchasing raw material next
month
 Control Decisions
• These decisions concern the day-to-day
activities of workers, quality of products and
services, production and overhead costs, and
machine maintenance.
• Examples include deciding:
– labor cost standards for a new product
– frequency of preventive maintenance
– new quality control acceptance criteria
What Controls the Operations System?
• Information about the outputs, the
conversions, and the inputs is fed back to
management.
• This information is matched with
management’s expectations
• When there is a difference, management must
take corrective action to maintain control of
the system
 Wrap-Up: World Class Practice
• OM important in any organization
• Global competition forces rapid evolution of
OM
• Decision based framework focus of course
– Strategic, Operating, and Control
End of Session 3