OMT 8501: Production and

OPERATIONS MANAGEMENT
Chapter 1: Introduction

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 LEARNING OUTCOMES
 Identify the elements of production and operations management
(POM)
 Know the potential career opportunities in POM
 Recognize the major concepts that define the POM
 Evaluate the efficiency of a firm

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 Definition: Production and Operations Management
• POM may be defined as the design, operation, and improvement of the
production systems that create and deliver the firm’s primary products and
services.

• It is a functional field of business with clear line management responsibilities.

• It is concerned with the management of the entire system that produces a

product. For example, producing an item like automobile, providing a service like
smart phone account, etc.

• POM’s distinct management role distinguishes it from operations research (OR)

and management science (MS). 3
 Functions of Production and Operations Management
 Managing of the productive resources (raw materials, human resources,
equipment, and facilities etc.)

 Providing direction in gaining and maintaining competitive advantage

 Delivering high-quality, cost-competitive products and services is essential

to survive in today’s global economy

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 Characteristics
 A business education is incomplete without an understanding of modern
approaches to managing production and operations.

 POM provides a systematic way of looking at organizational processes.

 POM presents interesting career opportunities.

 The concept and tools of POM are widely used in managing other functions
of a business.

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Exhibit 1.1
 It shows a supply network for a Men Nylon’s Supplex Parka sold on websites
such as L.L. Bean or Land’s End.

 We can understand the network by looking at the four color-coded paths.

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PROCESS STEPS FOR MEN’S NYLON SUPPLEX PARKAS
Exhibit 1.1
 Blue Paths:
 The activities needed to produce the Polartec insulation material used in the
parkas.
 Polartec insulation is purchased in bulk, processed to get the proper finish, and
then dyed prior to being checked for consistency – or grading.
 It is then stored in a warehouse.
 Red Paths:
 It traces the production of the nylon, Supplex, used in the parkas.
 Using a petroleum based polymer, the nylon is extruded and drawn into a yarn like
material. 8
Exhibit 1.1
 Green Paths:
 It traces the many steps required to fabricate the clothlike Supplex used to make
the parkas.
 Yellow Paths:
 The yellow path shows the Supplex and Polartec material coming together and
used to assemble the lightweight and warm parkas.
 The completed parkas are sent to a warehouse and then on to the retailer’s
distribution center.
 Afterward, the parkas are picked out and packed for shipment to individual
customers.
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Exhibit 1.1
 There are key locations in the pipeline (supply network) where material and
information are stored for future use: Polartec is stored near the end of the blue
pipeline; Supplex is stored near the end of the red pipeline.

 In both cases, fabric is cut prior to merging with the yellow pipeline.

 At the beginning of the yellow path, bundles of Supplex and Polartec are stored
prior to their use in the fabrication.

 At the end of the yellow path, the distribution steps which involve storing to await
orders, picking according to actual customer order, and finally shipping to the
customer are performed. 10
 Supply Network
 For any product or service, a supply network like above can be constructed.
 Each part of the network is controlled by different companies (the Nylon Supplex
manufacturer, Polartec producer, the parka manufacturer, and the catalog sales
retailer).
 All of the material is moved using different types of vehicles, i.e., ships, trucks, etc.
 The network also has a global dimension, with each entity potentially located in a
different country.
 To be successful, all of the mentioned steps/activities need to be coordinated and
operated to keep costs low and minimize waste.
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 POM manages all of these steps as effectively as possible.
 Operations vs Supply Chain Processes
In today’s global market, success depends on –

 The strategy that matches the preference of the customers with the realities imposed
by complex supply networks.

 A sustainable strategy that meet the need of the stakeholders and preserves the
environment is critical

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OPERATIONS AND SUPPLY CHAIN
PROCESSES

Supply
Operations
Chain
Manufacturing and service Processes that move
processes used to information and material
transform resources to and from the
employed by a firm into manufacturing and service
products desired by processes of the firm
customers
ACCOMPLISHED?
 Operations
A manufacturing process produce some kind of physical product, i.e., car,
computer, cloths, etc.

A service process produce kind of intangible product, i.e., a call center provide
information to customers.

 Planning to use the operations processes involves analyzing capacity, labor, and
material needs over time.

 Ensuring quality and making ongoing improvement to these processes are

needed to manage these processes.

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 Supply Chain Processes
It refers to processes that move information and material to and from the
manufacturing and service processes including the logistics processes (moving
product, the warehousing and storage processes that position products for quick
delivery to the customer)

Supply chain refers to providing products and service to plants and warehouse at
the input end and also to the supply of products and service to the customer on
the output end of the supply network.

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 Supply and Demand Planning and Control
It refers to the use of operations and supply chain resources.

It starts with demand forecast and then resources are planned in increasingly
short increments of time to match supply inputs with the demand driven outputs
of the firm.

These planning activities are completed using integrated computer systems that
capture the activities and current status of a firm’s resources

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 Things to Understand
All managers should understand the basic principles that guide the design of the
transformation processes.
 How different types of processes are organized?

 How to determine the capacity of the process?

 How long it should take a process to make/produce a unit?

 How the quality of a process is monitored?

 How information and data is used to make decisions related to the design and
operations of these processes?

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 Dynamic Nature of POM
The field of POM is ever changing due to the dynamic nature of competing in
global business and the constant evolution of information technology.

The application of POM concepts in new and innovative ways is very exciting.

Internet technology has made the sharing of real-time information inexpensive.

Capturing information directly from the source through systems, such as, point-of-
sales, RFID (radio frequency identification device) tags, bar-code scanners, and
automatic recognition has shifted the focus to understanding both what all the
information is saying and also how good the decisions that can be made using it
are.
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Operations Decisions
Marketplace

Corporate Strategy

Finance Strategy Operations Strategy Marketing Strategy

OM

People Plants Parts Processes

Planning and Control Systems 20

Levels of Management Decisions
• OM decisions at the strategic level impact the company’s long-term
effectiveness in terms of how it can address its customers needs.

• Tactical planning primarily addresses how to efficiently schedule

material and labor within the constraints of previously made strategic
decisions. These, in turn, become the constraints under which
operational planning and control decisions are made.

• POM decisions with respect to operational planning and control are

narrow and short-term.
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Heart of POM
• Management of production systems.

• It uses operations resources (5P’s – People, Plants, Parts,

Processes, and Planning and Control Systems) to transform
inputs into some desired outputs.

• These transformations are not mutually exclusive. For

example, a department store can allow shoppers to compare
prices and quality, hold items in inventory until needed, sell
goods etc. 22
 OPERATIONS AND SUPPLY CHAIN PROCESS ACTIVITIES
 POM processes can be categorized from the view of a producer of consumer
products and services as planning, sourcing, making, delivering, and returning.

 Exhibit 1.3 depicts where the processes are used in different parts of a supply
chain.
OPERATIONS AND SUPPLY CHAIN PROCESSES
 PROCESS ACTIVITIES
 Planning –
It consists of processes needed to operate an existing supply chain strategically.
A firm must determine how anticipated demand will be met with available resources
and develop set of metrics/parameters to monitor the supply chain’s effectiveness
and efficiency
 Sourcing –
It involves the selection of suppliers that will deliver the goods and services needed to
create the firm’s product.
A set of pricing, delivery, and payment processes are needed along with metrics for
monitoring and improving relationships with the partners.
Processes are selecting suppliers, finalizing price and quantity, receiving and verifying
shipment, and authorizing payment.
 PROCESS ACTIVITIES
 Making–
 It consists of producing the product or providing the service.
 Major activities are scheduling and coordinating resources (materials, equipments, human
resources, etc.).
 Speed, quality, and worker productivity are used to monitor the process.
 Delivering –
 It referred to as logistic processes. Major activities :
 Select carriers to move products to warehouse and customers
 Coordinate and schedule the movement of goods and information through the network
 Develop and operate a network of warehouse
 Run the information system that receives orders from customers and
 Maintain the invoicing system that collect payments from customers
 PROCESS ACTIVITIES
 Returning –
It involves processes for receiving worn-out, defective, and excess products back
from customers and support for customers who have problems with delivered
products.
In service, it may involve all types of follow up activities that are required for
after sales support.
 OPERATIONS AND SUPPLY CHAIN PROCESS ACTIVITIES
 Many different players need to coordinate activities in a typical supply chain.

 Theprocess activities mentioned above are fine for manufacturing and also for
some other processes that do not involve movement and production of parts.

 In a service farm, i.e., a hospital, supplies are typically delivered daily (drug,
health care supplies, etc.) and require coordination among drug companies,
local warehouse operations, local deliver services, and hospital receiving;
patients need to be scheduled into the services provided by the hospital;
emergency rooms need to be stuffed to provide service on demand.
 Differences Between Services and Production
• There are five essential differences between goods and services.
 The first is that goods produced are tangible and service is an intangible process. Service
innovation cannot be patented unlike product innovation.
 In services, location of the service facility and direct customer involvement in creating the
output are often essential factors: in goods production, they usually are not.
 Services (except hard technologies such as ATMs, information technologies, etc.) are
inherently heterogeneous (vary day to day as a function of the attitudes of the customer
and the server).
 Services as a process are perishable and time dependent, and unlike goods, they cannot
be stored.
 The specification of a service are defined and evaluated as a package of features that
affect the five senses. 29
 GOODS VERSUS SERVICES

Goods Services

Pure Goods Core Goods Core Services Pure Services

Intangible
Tangible Interaction with customer required
Less interaction with customers Inherently heterogeneous
Often homogeneous Perishable/time dependent
Not perishable – can be inventoried Defined and evaluated as a package
of features
 The Goods-Service Continuum
• Almost all product offering is a combination of goods and service.
• The continuum captures the main focus of the business and spans from firms that just produce
products to those that only provides services.
• Pure goods industries have become low-margin commodity businesses, and in order to
differentiate, they are often adding some services. For example, help with logistical aspects of
stocking items, maintaining extensive information database, and providing consulting service.
• Core goods providers already provide a significant service component as part of their businesses.
For example, automobile manufactures provide extensive spare parts distribution services to
support repair centers at dealers.
• Core service providers must integrate tangible goods. For example, cable television company
must provide cable hookup and repair service, and also HD cable boxes.
• Pure services, such as, financial consulting firm, do use products like textbooks, references, and
spreadsheets, etc.
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 Operations as Service
• Every organization is in the service business. This is true
whether the organization makes big planes or big Macs.
• Manufacturing operations as well as every other part of any
organization are also in the service business even if the
customer is an internal one.

In manufacturing, such services are divided into two types- core

and value-added services.

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 Operations as Service Continued
Core Services – services for making the product correctly, customizing the
products to the needs of the customers, delivering product on time, and
pricing the product competitively (quality, flexibility, speed, and price).

Value-added Service - services that simply make the external customer’s

life easier or, in the case of internal customers, help them to better carry
out their particular function. Value-added services can be classified into
four broad categories: Information, Problem Solving, Sales Support, and
Field Support.

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 Product-Service Bundling
 It refers to a company building service activities into its product offerings, i.e.,
maintenance, spare parts provisioning, customer training, system design, R&D, etc.
 Companies that are most successful in implementing this strategy start by drawing
together the service aspects of the business under one roof in order to create a
consolidated service organization.
 The service evolves from a focus on enhancing the product’s performance to developing
systems and product modifications that support the company’s move up the “value
stream” into new markets.
 But, this type of strategy might not be the best approach for all product companies.
 A recent study found that companies that implement this strategy might generate
lower profits compared to product focused firms because of high service-related costs.
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CAREERS IN OPERATIONS AND SUPPLY CHAIN
MANAGEMENT

Hospital Department
Plant manager Branch manager
administrator store manager

Call center Supply chain Purchasing Quality control

manager manager manager manager

Business process Lean

Production
improvement improvement Project manager
control analyst
analyst manager

Facilities Chief operating

manager officer
HISTORICAL DEVELOPMENT OF OPERATIONS AND SUPPLY
CHAIN MANAGEMENT

Manufacturing strategy developed

Late 1970s
Just-in-time (JIT) production
Early 1980s pioneered by the Japanese
Mid 1980s Service quality and productivity
Total quality management Early 1990s
(TQM) and Quality Six-sigma quality
certification programs Mid 1990s Supply chain
Business process management (SCM)
Late 1990s
reengineering (BPR)
Electronic commerce
Early 2000s Service science

Mid 2010s
Business analytics
 Historical Development
 Now,we are going to discuss the major operation-related concepts that have
been popular since the 1980s.

 Where appropriate, how a supposedly new idea relates to an older idea is

discussed.

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 Manufacturing Strategy Paradigm
 The late 1970s and early 1980s saw the development of manufacturing strategy
paradigm by researchers at Harvard Business School.
 They showed how manufacturing executives could use their factories capabilities as
strategic competitive weapons.
 Factory focus and manufacturing trade-offs were major concepts.
 The argument was that because a factory cannot excel on all performance measures, its
management must devise a focused strategy, creating a focused factory that performs a
limited set of tasks extremely well.
 The above strategy requires trade-offs among such performance measures as low cost,
high quality, and high flexibility in designing and managing factories.
 Ford seems to have realized this about 60 years before the Harvard Researchers.
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 Lean Manufacturing, JIT, and TQC
 Inthe 1980s, Just-in-Time (JIT) production was the major breakthrough in
manufacturing philosophy.

 Pioneered by the Japanese, JIT is an integrated set of activities designed to

achieve high volume production using minimal inventories of part that arrive at
workstation exactly when they are needed.

 The philosophy – coupled with total quality control (TQC), which aggressively
seek to eliminate cause of production defects – is now a cornerstone in many
manufacturers production practices.

 The term lean manufacturing is used to refer to the set of concepts.

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 Service Quality and Productivity
 The great diversity of service industries – from airlines to zoos, with many
different types in between – preclude identifying any single pioneer or developer
that has had made a major impact in these areas.

 McDonlad’s unique approach to quality and productivity has been so successful

that it sends as a reference point in thinking about how to deliver high volume
standardized service.

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 TQM and Quality Certification
 Another major development was the focus on total quality management (TQM) in the
late 1980s and 1990s.
 All quality executives are aware of the quality message put forth by the quality gurus:
W.Edwards Deming, Joseph M.Juran, and Philip Crosby.
 It’s interesting is that these individuals were students of Shewhart, Dodge, and Romig in
the 1930s.
 The Balbridge National Quality Award, which was started in 1987 under the direction of
the National Institute of Standards and Technology, USA. It recognizes companies each
year for outstanding quality management techniques.
 Different ISO certification standards like 9000, 14000, 16000, 20000, etc. created by ISO
play a major role in setting quality and other standards. 41
 Business Process Reengineering (BPR)
 The need to become lean to remain competitive in the global economic recession in the
1990s pushed companies to seek innovations in the processes by which they run their
operations.

 BPR approach seeks to make revolutionary changes opposed to evolutionary changes

(commonly advocated in TQM).

 It does this by taking a fresh look at what the organization is trying to do in all its
business processes, and then eliminating non-value added steps and computerizing the
remaining steps to achieve the desired outcome.

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 Six Sigma Quality
 Originally developed in the 1980s as part of TQM, Six Sigma quality in the 1990s saw an
dramatic expansion as an extensive set of diagnostic tools was developed.

 The tools are now applied not only to the well-known manufacturing applications, but
also to nonmanufacturing processes such as accounts receivables, sales, R&D, etc.

 Six Sigma quality has been applied to environmental health, and safety services of
companies and is now being applied to R&D, finance, information systems, legal,
marketing, public relations, and human resources processes.

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 Supply Chain Management
 The central idea of supply chain management is to apply a total system approach to
managing the flow of information, materials, and services from raw material suppliers
through factories and warehouse to the end customer.

 Trends such as outsourcing and mass customization are forcing companies to find
flexible ways to meet customer demands.

 The focus is on optimizing core activities to maximize the speed of response to changes
in customer expectations.

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 E-Commerce
 The quick adoption of the internet and world wide web during the late 1990s was
remarkable.

 The term e-commerce refers to the internet as an essential elements of business activity.

 The use of web pages, forms, and interactive search engines has changed the way
people collect information, shop, and communicate.

 It has changed the way operations managers coordinate and execute production and
distribution functions.

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 Service Science
 A direct response to the growth of services is the development of major industry and university
program call service science management and engineering (SSME).

 It aims to apply the latest concepts in IT to continue to improve service productivity of

technology-based organizations.

 An interesting question raised by Jim Spohrer, leader of the IBM team that started the effort, is
where will the labor go once productivity improves in the service sector?

 The short answer is new service sector industries and business – the service sector is very
diverse and becoming more so every day.

 For example, growth of retail (franchises, amazon, eBay), communication (telephone, T-mobile,
Skype, whatsapp, Facebook), transportation (airline, Fedex), Financial (discount e-brokers,
Schwab), Information (television, CNN, Google) 46
 Business Analytics
 It involves the analysis of data to better solve business problems. Data has always been used to
solve problems.

 The new reality is that so much more data is now captured and available for decision-making
analysis. In addition, mathematical tools are now readily available.

 Now-a-days, software allowed querying and “drill down” analysis to the level of the individual
transaction, useful features for understanding what happened in the past.

 Currently, statistical analysis, forecasting to extrapolate what to expect in the future, and even
optimization, possibly in real time, are used for decision making.

 Mathematical results are used to support the decision maker and in case to automate decision
making.
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 CURRENT ISSUES IN OSCM
 Coordinating relationships between members of SC

 Optimizing global network of suppliers, producers, and distributors

 Managing customer touch points

 Raising awareness of OSCM as a competitive weapon

 Sustainability and triple bottom line

 Coordinate Relationship:
 Recently, there has been a surge of outsourcing of processes and activities (information systems,
product design, engineering services, distribution, etc.) to minimize cost and improving quality.
 The ability to coordinate these activities with all the partners is a significant challenge.

 Optimizing Networks:
 The implementation of global ERP systems has challenged managers to use all of this information.
 Operations and supply chain analytics involves leveraging this information for making decisions
related to inventory, transportation, and production.

 Managing Customer Touch Points:

 For cutting costs. Companies often reduce customer support personnel required to effectively
staff service departments, help lines, and checkout counters. This leads to frustration of
customers.
 The issue here is to compare implicit cost of lost customers with direct cost of staffing.
 Raising Senior Management Awareness:
 Often, senior executives take OSCM for granted. This can be a critical mistake when it is realized
how profitable companies such as Apple, Amazon, Samsung, Walmart, Taco Bell, etc. are because
of creative use of OSCM strategies for gaining competitive advantage.

 Sustainability:
 It is the ability to maintain balance in the system. Management must now consider the mandates
related to the ongoing economic, employee, and environmental viability.
 Economically, the form must be profitable.
 Employee job security, positive working conditions, and development opportunity are essential.
 Non-polluting and non resource depleting products and processes presents new challenges to
the managers.
EFFICIENCY, EFFECTIVENESS, AND VALUE

Efficiency

• Doing something at the lowest possible cost

Effectiveness

• Doing the right things to create the most value for

your customer

Value

• The attractiveness of a product relative to its cost

 EFFICIENCY
 It means doing something at the lowest possible cost.

 The goal of an efficient process is to produce a good or service by using the smallest
input of resources.

 In general, these resources are the material, labor, equipment, and facilities used in the
process.
 EFFECTIVENESS
 It means doing the right thing to create the most value for the company.

 For example, to be effective at a grocery store it is important to have plenty of

operating check-out lines even though they may often stand idle.
 EFFICIENCY VS EFFECTIVENESS
 Often maximizing effectiveness and efficiency at the same time creates conflict between
the two goals.

 This trade-off is seen everywhere in a business organizations.

 At the grocery store check-out lines, being efficient means using the fewest people and
being effective means minimizing the waiting time of the customers.
 VALUE
 Value can be defined as quality and benefits divided by price.

 Here, quality means attractiveness of the product considering its features and
durability. Benefits means functional and emotional benefits.

 Price or costs means monetary costs, time costs, energy costs, etc.

 If we can provide a better car without changing price, value has gone up. If we can a
better car at lower price, value has gone up.
 EFFICIENCY AND WALL STREET
 Comparison of firms is important to investors
 From an operations and supply chain perspective, the relative cost of providing a
good or service is closely related to earnings growth
 Management efficiency ratios
 Labor productivity
 Net income per employee
 Revenue (or sales) per employee
 Asset productivity