1 Chapter 1 INTRODUCTION TO OPERATIONS MANAGEMENT
Dec 20, 2015
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Operations Management = OM Management of ANY activities/process that create goods and provide services
» Exemplary Activities: Forecasting, Scheduling, Quality management
Why to study OM» At a typical manufacturing company
Profit 5%
OM Cost 21%
Marketing Cost 26%
Manufacturing Cost 48%
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The management of systems or processes that create goods and/or provide services
Organization
Finance Operations Marketing
The distinct –active- role of operations:Inputs become Outputs after some Transformation
Operations Management = OM
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Operations example in Manufacturing: Food Processing
INPUTS PROCESS OUTPUTS
Raw vegetables Cleaning Clean vegetables
Metal sheets Cutting/Rolling/Welding Cans
Energy, Vegetables Cutting Cut vegetables
Energy, Water, Vegetables
Cooking Boiled vegetables
Energy, Cans, Boiled vegetables
Placing Can food
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Operations example in service: Health care
Inputs Processing Outputs
Doctors, nurses Examination Healthy patientsHospital Surgery
Medical Supplies MonitoringEquipment MedicationLaboratories Therapy
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Types of Operations
Operation Examples
Goods producing Farming, mining, construction
Storage/transportation Warehousing, trucking, mail, taxis, buses, hotels, location
Exchange Trade, retailing, wholesaling, renting, leasing, loans
Entertainment Radio, movies, TV, concerts, recording
Communication Newspapers, journals, magazines, radio, TV, telephones, satellite
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Why OM?
Core of all business organizations Many areas interrelated with OM activities Management of operations is critical to create and
maintain competitive advantages
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Organization of Businesses
Three basic functions– Operations/Production
» Goods oriented (manufacturing and assembly)
» Service oriented (health care, transportation and retailing)
» Value-added (the essence of the operations functions)
– Finance-Accounting» Budgets (plan financial requirements)
» Economic analysis of investment proposals
» Provision of funds (the necessary funding of the operations)
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Organization of Businesses (Cont.)– Marketing
» Selling
» Promoting
» Assessing customer wants and needs
» Communicating those needs to operations
The need for working closelyOperations
FinanceMarketing
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Operations Interfaces
Accounting
IndustrialEngineering
Operations
Maintenance
Public Relations
PersonnelPurchasing
Distribution
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Systems (Holistic) Approach
Emphasizes interrelations among subsystems. A systems approach is essential whenever something is being
designed, redesigned, implemented, or improved. It is important to take into account the impact on all parts of the system.
Example: A new feature is added to a product. Designer must take into account how customers will view the
change, instruction for using new feature, the cost, training of workers, production schedule, quality standard, advertising must be informed about the new feature.
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Systems Approach
“The whole is greater than the sum of the parts.”
SuboptimizationSuboptimization
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Value Added
Value added: The difference between cost of inputs and price (??) of outputs.
Is this definition right? Should value added include profit?
Value added: The difference between the cost of inputs and the (market or fair) value or price of outputs.
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Value-Added
Inputs Land Labor Capital
Transformation/Conversion
process
Outputs Goods Services
Control
Feedback
FeedbackFeedback
Value added
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Degree of Standardization !
Standardized output– Take advantage of standardized methods, less skilled
workers, materials…» Example: Iron, Wheat, most of commodities
Customized output – Each job is different
– Workers must be skilled» Example: Hair cut
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Manufacturing (=Goods) vs. Service operations
Production of goods (goods oriented)– Tangible products
» Automobile
» Refrigerator
Services (TV and auto repair, lawn care)» Government
» Regulatory bodies, FAA, FDA
» Wholesale/retail
» Financial services
» Education
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Goods vs. Service Operations (Cont)
Differences1. 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
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Manufacturing vs. Service !
Characteristic Manufacturing ServiceOutput Tangible IntangibleCustomer contact Low HighUniformity of output High LowLabor content Low HighUniformity of input High LowMeasurement of productivity
Easy Difficult
Opportunity to correct quality problems
Easy Difficult
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Steel productionAutomobile fabrication
Home remodelingRetail sales
Auto RepairAppliance repair
Maid ServiceManual car wash
TeachingLawn mowing
High percentage goodsLow percentage service
Goods-service Continuum
Low percentage goodsHigh percentage service
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U.S. Manufacturing vs. Service Employment
0
20
40
60
80
100
45 50 55 60 65 70 75 80 85 90 95 00
Year
Perc
ent
Year Mfg. Service45 79 2150 72 2855 72 2860 68 3265 64 3670 64 3675 58 4280 44 4685 43 5790 35 6595 32 6800 30 70
Manufacturing vs. Service Industries in US
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Responsibilities of Operations Management
Planning– Capacity, utilization– Location– Choosing products or services– Make or buy– Layout– Projects– Scheduling– Market share– Plan for risk reduction, plan B?– Forecasting
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Operations Managers Controlling
– Inventory– Quality– Costs
Organization– Degree of standardization– Subcontracting– Process selection
Staffing– Hiring/lay off– Use of overtime– Incentive plans– Job assignments
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Operations Management includes:– Forecasting
– Capacity planning
– Scheduling
– Managing inventories
– Assuring quality
– Motivating employees
– Deciding where to locate facilities– And more . . .
Scope of Operations Management
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Help comes from Models
A structure which has been built purposefully to exhibit features and characteristics of some other object.
Do not use “thing” or “something” in a definition.
For– Improved understanding and communication– Experimentation– Standardization for analysis
Abstraction vs. computability
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Modeling !
Use models– Physical models (prototypes)
– Schematic models (Graphs, charts, pictures)
– Mathematical models,» Statistical models
» Inventory models
» Linear programming
» Queuing techniques
» Project management models
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What type of models
Simulation models : to test a proposed idea– Monte Carlo Simulation
Optimization models : to create an optimal idea– Linear programming
Pattern recognition models : to recognize a pattern– Statistics, Forecasting, data mining
Other classes to learn the rest.
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Models Are Beneficial
Easy to use, less expensive Require users to organize
– Increase understanding of the problem
– Consistent tool
– Standardized format
– Specific objectives
Systematic approach to problem solving– Analysis of tradeoffs
– Enable “what if” questions
Power of mathematics
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Pareto Phenomenon
• A few factors account for a high percentage of the occurrence of some event(s).
• 80/20 Rule - 80% of problems are caused by 20% of the activities.
How do we identify the vital few?
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Historical Evolution of Operations Management
Industrial revolution (1770’s) Scientific management (1911)
– Mass production
– Interchangeable parts
– Division of labor
Human relations movement (1920-60)– Unemployment insurance
– Pension plans
Decision models (1915, 1960-70’s) Influence of Japanese manufacturers (1970-1990)
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Trends in Business
Major trends– The Internet, e-commerce, e-business
– Management technology
– Globalization
– Management of supply chains
– Agility
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Recent Trends !
Worker involvement Environmental issues, emission reductions are popular after
Central European floods
Service economy in US, foreign production E-business – information technology Supply chain management Total Quality Management Globalization, emerging markets, NAFTA Lean Production – see the next page
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Production systems classified
Craft Production : System in which highly skilled workers use simple, flexible tools to produce small quantities of customized goods.– Carpenter
Lean production : System that uses minimal amounts of resources to produce a high volume of high-quality goods with some variety.– Dell
Mass production: System in which lower-skilled workers use specialized machinery to produce high volumes of standardized goods.– Ford
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Production systems classifiedAgile=Lean manufacturing
It provides flexibility to switch quickly and economically from one product design to another with little disruption. This characteristic, in turn enables faster response to changes in customer demand.
A sophisticated computerized inventory control system allows the plant to keep track of large number of parts.
Keys to being an agile manufacturer are : – Reduction in inventories, – Reduction in turnaround times, – Availability of automated flexible machinery, – Rapid collection and processing of information
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Suppliers’ Suppliers
DirectSuppliers Producer Distributor Final
Consumer
Simple Product Supply Chain
Supply Chain: A sequence of activities and organizations involved in producing and delivering a good or service
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Stage of Production Value Added
Value of Product
Farmer produces and harvests wheat $0.15 $0.15
Wheat transported to mill $0.08 $0.23
Mill produces flour $0.15 $0.38
Flour transported to baker $0.08 $0.46
Baker produces bread $0.54 $1.00
Bread transported to grocery store $0.08 $1.08
Grocery store displays and sells bread $0.21 $1.29
Total Value-Added $1.29
A Supply Chain for Bread
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Other Important Trends
Ethical behavior Operations strategy Working with fewer resources Cost control and productivity Quality and process improvement Increased regulation and product liability Lean production