Unit 1

571210 – OPERATIONS MANAGEMENT

FACILITAOR- T.PRAVEEN KUMAR

REFERENCE

• Panner selvam R, Production and operations management, Prentice Hall of India,

• Norman Gaither and Gregory Fraizer, Operations Management, south western cengage learning 2002.

• Business line • Journals of production management.

EXPECTATION YOUR SIDE

INTERNAL MARKS

• INTERNAL / MODEL EXAMS- 10 MARKS• ATTENDANCE

/ CLASS PARTICIPATION - 5 MARKS• ASSIGNMENTS - 5 MARKS

–DON’T BEG FOR MARKS

OPERATIONS MANAGEMENT = SQUARE OF TQM

PRODUCTION AND OPERATIONSMANAGEMENT (POM)

AN INTRODUCTION

OVERVIEW

• Introduction• Historical Milestones in POM• Factors Affecting POM Today• Different Ways of Studying POM• Wrap-Up: What World-Class Producers Do

INTRODUCTION

• In the growing global competition the productivity is the key for the survival of business organization.

• Among the different functions in a organization POM is a vital function which does the job of value addition to products /services respectively.

• Maximize value automatically results in productivity improvement.

…contd

• This should be done from starting stage of product development.

• Implementation of proper quality control system, maintenance of equipments and concentrating on various other inter mediate tasks leads to improvement in productivity.

INTRODUCTION

• Production and operations management (POM) is the management of an organization’s production system.

• A production system takes inputs and converts them into outputs.

• The conversion process is the predominant activity of a production system.

• The primary concern of an operations manager is the activities of the conversion process.

HISTORICAL MILESTONES IN POM

• 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 U.S. 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.

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 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 RELATIONSAND BEHAVIORALISM

• In the 1927-1932 period, researchers in the Hawthorne Studies realized that human factors were affecting production.

• Researchers and managers were recognizing that psychological and sociological factors affected production.

• From the work of behavior lists 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 workforce is employed in services.

• About two-thirds of world 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.

• Next 3 months you are going to see about– PRODUCTION/OPERATION MANAGEMENT– TYPES OF PRODUCTION SYSTEM– DIFFERENT PRODUCTIVITY IMPROVEMENT

STRATEGIES– NEW PRODUCT DEVELOPMENT– PROCESS PLANNING– CAPACITY PLANNING– MRP– TQM TOOLS etc………………………………

DIFFERENT WAYS TO STUDY POM

• Production as a System• Production as an Organization Function• Decision Making in POM

ORGANIZATIONAL MODEL

POM

Marketing

MISEngineering

HRM

QA

Accounting

SalesFinance

PRODUCTION SYSTEM

• An organization consists of mainly four functional subsystem

– Marketing– Production– Finance – Personnel

• MARKETING FUNCTION– Aims to promote its products among customers

which helps it to obtain substantial sales order.• PRODUCTION FUNCTION

– This function will managing the physical resources for the production of an item/ provision of services.

– The available facilities need to be managed effectively in order to meet the current market requirements.

…..cont

• The resources are raw material, equipment, labor, working capital.

• The production function needs to organize its resources according to the predetermined production plans.

• FINANCE FUNCTION– This function provides authorization and control to all

other subsystems to utilize the money in more effectively through a well designed mechanism.

• PERSONNEL FUNCTION/HR– This is a supporting function which plans and provides

manpower to all other function of the organization.– It involves in recruitment, training and development,

performance measures of the manpower.

• All functions of the organization are interwoven by many linkages for their effective functioning.

ORGANIZATION CHART-MAJOR ELEMENTS

FacilitiesP roduc tion &Inventory ontrolQ uality Assurance& C ontro lP rocurem entE ngineering DesignIndustrial EngineeringP rocess Engineering

O perations

Disbursements& C reditsF unds Managem entC apital R equirem ents

F inance/Accounting

Sales Prom otionA dvertis ingSalesM arket Research

M arketing

M anufacturing Organization

PRODUCTION AS AN ORGANIZATION FUNCTION

• companies cannot compete using marketing, finance, accounting, and engineering alone.

• We focus on POM 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.

PRODUCTION MANAGEMENT

Production /operations management is the process which combines and transforms various resources used in the production/operation sub system of the organization into value added products/ services in a controlled manner as per the policies of the organization

ANOTHER VIEW

Production/operation management function is the part of the organization which is concerned with the transformation of a range of inputs into the required output(product/service) having the requisite quality level.

IN GENERAL

• The set of interrelated management activities which are involved in manufacturing certain products is called as production management.

• If the above concept is extended to services management then the corresponding set of management activities is called as operations management.

• So in general the concept of manufacturing products/providing services is called production/operations management

DECISIONS AT DIFFERENT LEVEL OF MANAGEMENT

• In the process of managing various subsystem of the organization, executives at different levels of the organization need to take several management. S

TRATEGIC LEVEL

TACTICAL LEVEL

OPERATIONS LEVEL

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

STRATEGIC DECISIONS TACTICAL DECISIONS OPERATIONAL DECISIONS

•Defining the goals

•Making policies

•Determination of organizational objectives

•Acquisition of resources

•Plant location

•New products establishment

•Monitoring of budgets

•Effective and efficient use of facilities and resources to carry out activities within the budget constraint

MARKETING - FUNCTION

• Strategic Decisions– Consideration of new markets and marketing

strategiesThe information requirements for strategic planning– Include customer analysis– Competitor analysis– Consumer survey– Income projection– Demographic projection– Technology projection

…contd

• Tactical Decisions– Comparison of overall performance against a

marketing plan.– Concerns data on customers, competitors and its

products and sales force requirements.• Operational decisions

– Hiring and firing of sales force– Day to day scheduling of sales and promotions

efforts and periodic analysis of sales.

PRODUCTION FUNCTION

• Strategic Decision– Alternative manufacturing approaches and

alternative approaches to automation.• Tactical Decision

– Reports which compare overall planned/standard performance

• Operational Decision– Reports comparing actual performance to

production schedule

FINANCE FUNCTION• Strategic Decision

– Long run strategy to ensure adequate financing .– Long run tax accounting policy to minimize the impact of

taxes.– Planning of systems for budgeting

• Tactical Decision– Information on budgeted versus actual cost of financial

resources.– Cost of processing accounting data.

• Operational Decision– Daily error and exception reports.– Records of processing delays reports of unprocessed

transaction etc.

PERSONNEL /HR FUNCTION• Strategic Decision

– Strategies for recruitment, salary, training and benefits.

– Analysis of shift pattern of employment, education and wage rate etc.

• Tactical Decision– Variance analysis on hiring and firing.– Cost of recruitment– Cost of training, salary paid, distribution of wage rates.

• Operational decision– Decision on hiring, training, termination changing pay

rates and issuing benefits.

SYSTEM CONCEPT OF PRODUCTION

• System– It is a collection of interrelated entities.

Operations management is the management of transformation systems which convert input into goods/services

• Input – materials, labors, equipments, capitalThe types of inputs used vary from one industry to

another

PRODUCTION AS A SYSTEM

InputsInputs OutputsOutputsConversionSubsystemConversionSubsystem

Production System

ControlSubsystem

ControlSubsystem

INPUTMATERIALLABO

REQUIPMENTCAPIT

AL

TRANSFORMATION

(CONVERSION)

PROCESS

GOODS/

SERVICESOUTPUTFEED

BACK IN

FORM

ATION

EnvironmentInternal/external

INPUTS OF A PRODUCTION 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, State, Local)

OUTPUTS OF A PRODUCTION SYSTEM

• Direct– Products– Services

• Indirect– Waste– Pollution– Technological Advances

PRODUCT DESIGN AND ANALYSIS / WORK STUDY

PRODUCTION CONTROL

AGGREGATE PLANNING MRPMASTER PRODUCTION CAPACITY PLANNING SCHEDULINGSCHEDULING

MAINTENANCE MANAGEMENT

FEED BACK --QUALITY CONTROL--INVENTORY CONTROL

WHAT CONTROLS THE OPERATIONS SYSTEM?

• Information about the outputs, the conversions, and the inputs is feed 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

TYPES OF PRODUCTION SYSTEM

• Production system

– The production system of a company mainly uses facilities, equipments and operating methods (production system) to produce goods.

– The requirement of production system depend on the type of product that company offers and strategy that the company follows

CLASSIFICATION OF PRODUCTION SYSTEM

BASIS CLASSIFICATION EXAMPLE

TYPES OF OUTPUT PRODUCTS

SERVICES

CONSUMER GOODS

TRANSPORTATION, HEALTH,BANKING,EDUCATION

TYPE OF FLOW PROJECTS

JOB SHOP

FLOWSHOP

CONTINUOUS PROCESS

CONSTRUCTION

HOSPITAL, AUTO REPAIR

TV FACTORY,AUTO FACTORY

POSTAL SERVICES, TELEPHONE,COMPANY OIL REFINERY

TYPE OF SPECIFICATION

UNDER SERVICE TYPE

CUSTOMIZED

STANDARDIZED

MEDICAL CARE,LEGAL SERVICESINSURANCE ,WHOLE SALE STORES

FLOW SHOP

• FLOW SHOP– It is a conversion process in which successive units

of output undergo the same sequence of operations using specialized equipments usually positioned along a production line.

– Example• Auto assembly• assembly of electronic goods.

• Extreme form of flow shop is sometimes treated as a continuous process

FLOW SHOP

CONTINUOUS FLOW SHOP

(example: cement manufacturing)

INTERMITTENT FLOW SHOP(The process is interrupted to set it up to handle different specification

of some basic design)(example – garments

manufacturing)

CHARACTERISTICS

• Standardization of product and process sequence.

• Large volume of products• Lower in process inventory• Perfectly balanced production line.• Production planning and control is easy.• Material handling can be completely

automatic.

ADVANTAGES• Standardization of

product and process sequence

• Unit cost is lower due to high volume of production.

• Person with limited skills can be used on the production line

• Higher capacity utilization

DISADVANTAGESVery high investment.Product differentiated is

limited.

JOB SHOP

• This is a conversion process in which units of different types of products follow different sequences through different shops.

• This type of system is more flexibility• This system results into more set up time

more in process inventory, complex scheduling, varying quality.– Example -????????????????

CHARACTERISTICS

• High variety of products and low volume.• Use of general purpose machines and

facilities.• Large inventory of materials, tools, parts.• Detailed planning is essential for sequencing

the requirements of each product, capacities for each work centre.

ADVANTAGES• Variety of products can

be produced.• Operators will become

more skilled and competent.

DISADVANTAGES• Higher cost due to

frequent set up changes.

• Production planning is complicated.

• Large space requirements

BATCH MANUFACTURING

• A batch manufacturing facility produces some intermediate varieties of products with intermediate volumes.

• The volume of any single product may not be sufficient to justify the use of dedicated set of equipments for its production.

CHARACTERISTICS

• Shorter production run• Plant and machinery are flexible.• Manufacturing lead time and cost are lower as

compared to job order production.

ADVANTAGES• Better utilization of

plant and machinery• Promotes functional

specialization• Lower investment in

plant and machinery

DISADVANTAGES• Material handling is

complex because of irregular and longer flows

• Production planning and control is complex

• Higher set up costs due to frequent changes in set up

PROJECT

• A project refers to the process of creating a complex kind of product or service with set of well defined tasks in terms of resources required and time phasing.

PRODUCTIVITY

• Productivity = output/input always p>1Several strategies for improving the productivity• Increased output for the same input• Decreased input for the same output• Proportionate increase in the output is more than

the proportionate increase in the input.• Proportionate decrease in the input is more than

the proportionate decrease in the output.• Increase in the output with decrease in the input

OPERATION STRATEGY• The process of making decisions about their

future in this complex and changing environment is called strategic management.

• Changing environment Environment of organization is becoming more complex because of the increased rate of PESTEL

• Strategic management involves making decision with regard to organizations mission and objectives, it also determine the organizations most effective utilization of its resources.

STRATEGIC MANAGEMENT PHASES

• Strategy management has two phases– Strategy formulation

• Defining the organization philosophy and mission.• Establish long and short range objectives.• And choosing the strategy in order achieve the

objective.

– Strategy implementation• It concerned with aligning the organizational structure ,

system and processes.

HIERARCHY OF STRATEGY

• Mission• Objective• Corporate strategies• Business unit strategies• Functional strategies

CORPORATE STRATEGIES

• Stable growth strategy• Growth strategy

– Concentration on a single product/service– Concentric diversification– Vertical diversification– Horizontal diversification– Conglomerate diversification

• End game strategy

…contd

• Retrenchment strategies– Turnaround.– Disinvestment strategy.– Liquidation strategy.

• Combination strategies– Simultaneous strategy.– Sequential strategy.

GENERIC COMPETITIVE (BUSINESS) STARETGIES

• Over all leadership strategy• Differentiation strategy• Focus strategy

FUNCTIONAL STRATEGIES

• Marketing strategy• Financial strategy• Personnel/HR strategy• Production/manufacturing strategies

PRODUCTION/MANUFACTURING STRATEGIES

• Production /operation function of an organization aims to provide product/service to its customer by using a combination of following strategies.– By timely delivery– Flexibility (in meeting customer demands)– Quality– Cost effectiveness.

…contd• The selected strategies alternatives are translated

into operations objectives. Some of the objectives are– Achieving high efficiency– Flexibility in meeting customer demand (in term of

product features)– Flexibility in production volume to meet changing

customers demand.– Satisfy customers demand with good quality.– Effective in labor relation and manpower cost control.– Efficient material utilization and its cost control. – Efficient facility utilization and its cost

WORLD CLASS MANUFACTURING

• The following attributes of the world class manufacturing are aimed to fulfill the customer demands.– Products with high quality– Products at competitive price– Products with several enhanced features– Products in a wider variety– Products delivered on time

ENTRY-LEVEL JOBS IN POM

• Purchasing planner/buyer• Production (or operations) supervisor• Production (or operations)

scheduler/controller• Production (or operations) analyst• Inventory analyst• Quality specialist

TODAY'S FACTORS AFFECTING POM

• Global Competition• Quality, Customer Service, and Cost

Challenges• Computers and Advanced Production

Technology• Growth of Service Sector• Scarcity of Production Resources• Issues of Social Responsibility

SCOPE OF POM

• Adding value by improving Operations Management.• It can help improve its competitiveness and long term

profitability.• Intel, FORD, Hewlett Packard.• Cost effectiveness?• Understanding the fundamental concepts of operations

management and being able to use a variety of common decision-making tools and problem solving approaches is key to making better operations decisions.

SCOPE OF POM• Production of goods is the fabrication of the physical

object through the judicious use of the resources available to the manager.

• These resources include men, materials, money, methods and machines.

• Operations management is substituted for Production Management, as many individuals and organizations continue to use the term Production solely to manufacturing activity.

• Operations management has wider scope, it begins with the idea stage, goes through research and development, manufacturing, purchasing, inspection, quality control and warehousing and ends with customer.

• Production is a subset of operations management. It’s scope is a part of operations management. It focuses on:

• Product Design• Forecasting• Facility Location• Capacity Planning• Process Planning• Plant Layout

Scope cont….

• Resource Management• PPC• Job Design• Maintenance• Quality Management• Work Measurement

• Purchasing• Store Keeping• Warehouse Management• Inventory control• Materials Management• Project Management

Functions of POM

• Production is a process or a set of procedures to be executed in order to convert or transform a set of inputs into pre-determined set of outputs in accordance with the objectives assigned to the production system.

• Planning• Organizing• Staffing• Directing• Controlling

Relationship between POM and other Functions

• Marketing– Customer satisfaction– Developing and maintaining market– Aggregate Production Planning– Sales forecast– Production Scheduling– ASP– Product improvement etc.

• Finance– Economic analysis of investment proposals– Production pricing– Budgeting and timing of funds– Working capital calculations– Provision and release of funds– Capital Budgeting

• R&D– Idea generation– Product formulation– Test facilities– Prototype Development– Facilities for development activities– Test marketing

• Product Design• Maintenance• Industrial Engineering• Materials• Personnel• Accounting and Costing

OPERATIONS STRATEGIESIN A GLOBAL ECONOMY

OVERVIEW

• Introduction• Today’s Global Business Conditions• Operations Strategy• Forming Operations Strategies

INTRODUCTION • Operational effectiveness is the ability to

perform similar operations activities better than competitors.

• It is very difficult for a company to compete successfully in the long run based just on operational effectiveness.

• A firm must also determine how operational effectiveness can be used to achieve a sustainable competitive advantage.

• An effective competitive strategy is critical.

FACTORS AFFECTING TODAY’S GLOBAL BUSINESS CONDITIONS

• ????????????????????????????????????????

?

REALITY OF GLOBAL COMPETITION

• Changing nature of world business• International companies• Strategic alliances and production sharing• Fluctuation of international financial

conditions

changing nature of world business

• The Indian gross domestic product (GDP) growing at 8% making significant presence in the world.

• Companies all over the globe are aggressively exporting their products/services to the different countries

• Many Foreign companies are targeting Indian markets to shore up profits.

• The global economy that interconnects the economies of all nations has been termed the global village.

• One of the most important new markets are BRIC.

International companies

• International companies are those whose scope of operations spans the globe as they buy, produce, and sell.

• International firms search out opportunities for profits relatively unencumbered by national boundaries.

• Operations managers must coordinate geographically dispersed operations.

International companies• World’s Largest Corporations

1. General Motors US2. Wal-Mart Stores US3. Exxon Mobil US4. Ford Motor US5. DaimlerChrysler Germany6. Mitsui Japan7. Mitsubishi Japan8. Toyota Japan9. General Electric US10. Itochu Japan

Strategic Alliances• Strategic alliances are joint ventures among

international companies to exploit global business opportunities.

• Alliances are often motivated by– Product or production technology– Market access– Production capability– Pooling of capital

Strategic Alliances

• Japanese companies have long practiced keiretsu, the linking of companies into industrial groups.– A financial keiretsu links companies together

with cross-holding of shares, sales and purchases within the group, and consultation.

– A production keiretsu is a web of interlocking relationships between a big manufacturer (Toyota) and its suppliers.

Production Sharing

• Production sharing means that a product might be designed and financed in one country, its materials produced in other countries, assembled in another country, and sold in yet other countries.

• The country that is the highest-quality, lowest-cost producer for a particular activity would perform that portion of the production of the product.

Pros and Cons of Globalization

• Pros (Pluses)– Productivity grows more quickly (living standards

can go up faster)– Global competition and cheap imports keep a lid on

prices (inflation less likely to derail economic growth)

– Open economy spurs innovation (with fresh ideas from abroad)

– Export jobs often pay more than other jobs– India has more access to foreign investment (keeps

interest rates low)

Pros and Cons of Globalization

• Cons (Minuses)– Most displaced workers find new jobs that pay less– Workers face pay-cuts demands from employers– Service and white-collar jobs are increasingly

vulnerable– employees lose their comparative advantage

when companies build advanced factories abroad

International Financial Conditions

• International financial conditions are complex due to:– inflation– fluctuating currency exchange rates– turbulent interest rates– volatility of international stock markets– huge national debts of some countries– enormous trade imbalances between countries

International Financial Conditions

• Companies must be ready to move quickly to shift strategies as world financial conditions change.

• Opportunities are usually available to reduce risk– Building smaller, more flexible factories– Using foreign suppliers for materials, parts, or

products– Carefully planning and forecasting so that changing

conditions can be anticipated

QUALITY SERVICE AND COST CHALLENGES

• Quality– The goal of adequate quality must be replaced

with the objective of perfect product and service quality.

– The entire corporate culture must be redirected and committed to the ideal of perfect quality.

– All employees must be empowered to act.– A commitment to continuous improvement has to

be organization-wide.


• Customer Service– Companies must quickly develop innovative

products and respond quickly – Organizational structures must be made more

horizontal to quickly accommodate change.– Multidiscipline teams must have decision-making

authority, responding better to the marketplace.– Large, unwieldy companies are spinning off whole

business units making them autonomous businesses that can compete with small, aggressive competitors.


• Cost– There is continuing pressure to reduce direct costs

(of producing and selling) and overhead costs.– It cost the US automakers $1,500 more per auto for

labor in 1980 than it cost the Japanese auto-makers. By the 1990s the difference was almost zero.

– Giant retailers (like Wal-Mart) squeezed weaker competitors out of the market, giving the retailers the leverage to force their suppliers to streamline operations and reduce costs/prices.


• Cost– Cost-cutting measures being used include:

• Moving production to low-labor-cost countries• Negotiating lower labor rates with unions and workers• Automating processes to reduce the amount of labor

needed, particularly processes that are labor intensive.

ADVANCED TECHNOLOGIES

• The use of automation is one of the most far-reaching developments to affect manufacturing and services in the past century.

• The initial cost of these assets is high.• The benefits go far beyond a reduction in labor

costs.– Increased product/service quality– Reduced scrap and material costs– Faster responses to customer needs– Faster introduction of new products and services

CONTINUED GROWTH OF SERVICE SECTOR

• A robust service sector helps support the manufacturing sector.

• There is much opportunity for quality improvement in service firms all round the globe.

• Many operations managers are being employed in services.

• Planning, analyzing, and controlling approaches from manufacturing are being adapted to service systems.

• The service sector, like the manufacturing sector, must streamline and improve operations if it is to survive.

SCARCITY OF OPERATIONS RESOURCES

• Raw materials like titanium, nickel, coal, natural gas, water, and petroleum products are periodically unavailable or in short supply.

• A shortage of any necessary input to a conversion subsystem, including skilled personnel, can be a challenge for an operations manager.

• An important issue in the formation of business strategy is how to allocate scarce resources among business opportunities.

SOCIAL-RESPONSIBILITY ISSUES• Corporate attitudes are evolving from doing what

companies have a legal right to do, to doing what is right.

• Factors influencing this evolution include:– Consumer attitude -- Consumers are expressing their

likes/dislikes by such means as stockholder meetings, liability suits, and buying preferences.

– Regulation – The EPA, OSHA (Occupational Safety and Health Administration Act), Clean Air Act, and Family Leave Act place constraints on businesses.

– Self-interests -- Companies realize that profits will be greater if they act responsibly.

SOCIAL-RESPONSIBILITY ISSUES

• Environmental Impact• Product-Safety Impact• Employee Impact

Social-Responsibility Issues

• Environmental ImpactConcerns about the global environment include:– Landfill waste reduction– Recycling– Energy conservation– Chemical spills– Acid rain– Radioactive waste disposal– … and more


• Environmental Impact– There is a need for standardizing government

regulations of the environment.– Otherwise, companies will gravitate to the less-

regulated countries.– The International Organization for

Standardization has developed a set of environmental guidelines called ISO 14000.


• Product-Safety ImpactHarm to people or animals that results from poor product design can:– Damage a company’s reputation– Require a large expense to remedy– Cause governments to impose more regulations


• Employee ImpactEmployee benefits and policies include:– Safety and health programs– Fair hiring and promotion practices– Day-care– Family leave– Health care– Retirement benefits– Educational assistance– … and more


• Employee ImpactEmployee benefits and policies impact long-term profitability due to their effect on:– Employee morale and productivity– Recruitment and retention of employees– Demand for a company’s products– Cost of defending against lawsuits and boycotts

DEVELOPING OPERATIONS STRATEGY

Corporate MissionCorporate Mission

Business StrategyBusiness Strategy

Product/Service PlansProduct/Service Plans

Competitive PrioritiesCompetitive Priorities

Operations StrategyOperations Strategy

Assessmentof GlobalBusiness

Conditions

Assessmentof GlobalBusiness

Conditions

DistinctiveCompetencies

orWeaknesses

DistinctiveCompetencies

orWeaknesses

Corporate MissionCorporate Mission

• A corporate mission is a set of long-range goals and including statements about:– the kind of business the company wants to be in– who its customers are– its basic beliefs about business– its goals of survival, growth, and profitability

Business Strategy

• Business strategy is a long-range game plan of an organization and provides a road map of how to achieve the corporate mission.

• Inputs to the business strategy are– Assessment of global business conditions - social,

economic, political, technological, competitive– Distinctive competencies or weaknesses - workers,

sales force, R&D, technology, management

Competitive Priorities

• Low Production Costs– Definition

Unit cost (labor, material, and overhead) of each product/service

– Some Ways of Creating• Redesign of product/service• New technology• Increase in production rates• Reduction of scrap/waste• Reduction of inventory


• Delivery Performance– Definition

a) Fast delivery b) On-time delivery– Some Ways of Creating

a) larger finished-goods inventorya) faster production ratesa) quicker shipping methodsb) more-realistic promisesb) better control of production of ordersb) better information systems

Competitive Priorities• High-Quality Products/Services

– DefinitionCustomers’ perception of degree of

excellence exhibited by products/services– Some Ways of Creating

Improve product/service’s• Appearance• Performance and function• Wear, endurance ability• After-sales service


• Customer Service and Flexibility– Definition

Ability to quickly change production to other products/services. Customer responsiveness.

– Some Ways of Creating• Change in type of processes used• Use of advanced technologies• Reduction in WIP through lean manufacturing• Increase in capacity

OPERATIONS STRATEGY

• Operations strategy is a long-range game plan for the production of a company’s products/services, and provides a road map for the production function in helping to achieve the business strategy.

ELEMENTS OF OPERATIONS STRATEGY

• Positioning the production system• Product/service plans • Outsourcing plans • Process and technology plans• Strategic allocation of resources• Facility plans: capacity, location, and layout

POSITIONING THE PRODUCTION SYSTEM

• Select the type of product design– Standard– Custom

• Select the type of production processing system– Product focused– Process focused

• Select the type of finished-goods inventory policy– Produce-to-stock– Produce-to-order

Product/Service Plans

As a product is designed, all the detailedcharacteristics of the product are established.

Each product characteristic directly affects how the product can be made.

How the product is made determines

the design of the production system.

Stages in a Product’s Life Cycle

• Introduction- Sales begin, production and marketing are developing, profits are negative.

• Growth - sales grow dramatically, marketing efforts intensify, capacity is expanded, profits begin.

• Maturity - production focuses on high-volume, efficiency, low costs; marketing focuses on competitive sales promotion; profits are at peak.

• Decline - declining sales and profit; product might be dropped or replaced.

Outsourcing Plans

• Outsourcing refers to hiring out or subcontracting some of the work that a company needs to do.

• This strategy is being used more and more as companies strive to operate more efficiently.

• Outsourcing has many advantages and disadvantages. • Companies try to determine the best level of out-

sourcing to achieve their operations & business goals.• More outsourcing requires a company to have less

equipment, fewer employees, and a smaller facility.

Outsourcing Plans

• A company might outsource any of the following manufacturing related functions:– Designing the product– Purchasing the basic raw materials– Processing the subcomponents, subassemblies,

major assemblies, and finished product– Distributing the product

Outsourcing Plans

• Many companies even outsource some service functions such as:– Payroll– Billing– Order processing– Developing/maintaining a website– Employee recruitment– Facility maintenance

Process and Technology Plans

• An essential part of operations strategy is the determination of how products/services will be produced.

• The range of technologies available to produce products/services is great and is continually changing.

Strategic Allocation of Resources

• For most companies, the vast majority of the firm’s resources are used in production/operations.

• Some or all of these resources are limited.• The resources must be allocated to products,

services, projects, or profit opportunities in ways that maximize the achievement of the operations objectives.

Facility Plans

• How to provide the long-range capacity to produce the firm’s products/services is a critical strategic decision.

• The location of a new facility may need to be decided.

• The internal arrangement (layout) of workers, equipment, and functional areas within a facility affects the ability to provide the desired volume, quality, and cost of products/services.

Competitive Priorities for Services

• The competitive priorities listed earlier for manufacturers apply to service firms as well– Low production costs– Fast and on-time delivery– High-quality products/services– Customer service and flexibility

• Providing all the priorities simultaneously to customers is seldom possible.

Positioning Strategies for Services

• Type of Service Design– Standard or custom products – Amount of customer contact– Mix of physical goods and intangible services

• Type of Production Process– Quasi manufacturing– Customer-as-participant– Customer-as-product

Positioning Strategies for Services

• EXAMPLE: MCDONALD’S– Highly standardized service design– Low amount of customer contact– Physical goods dominating intangible services– Quasi-manufacturing approach to back-room

production process

Forming Operations StrategiesForming Operations Strategies

• Support the product plans and competitive priorities defined in the business strategy.

• Adjust to the evolving positioning strategies.• Link to the marketing strategies.• Look at alternative operations strategies.

Evolution of Positioning Strategies

• The characteristics of production systems tend to evolve as products move through their product life cycles.

• Operations strategies must include plan for modifying production systems to a changing set of competitive priorities as products mature.

• The capital and production technology required to support these changes must be provided.

Evolution of Positioning Strategies

VolumeVeryLow

Low HighVeryHigh

Focus Process Process Product Product

Fin.Gds. To-Order To-Order To-Stock To-Stock

BatchSize

VerySmall

Small LargeVeryLarge

Product CustomSlightlyStandard

StandardHighly

Standard

LifeStage

Intro.Early

GrowthLate

GrowthMaturity

Linking Operations and Marketing Strategies

• Operations Strategy– Product-focused– Make-to-stock– Standardized products– High volume

• Marketing Strategy– Low production cost– Fast delivery of products– Quality

• Example: TV sets


• Operations Strategy– Product-focused– Make-to-order– Standardized products– Low volume

• Marketing Strategy– Low production cost– Keeping delivery promises– Quality

• Example: School buses


• Operations Strategy– Process-focused– Make-to-stock– Custom products– High volume

• Marketing Strategy– Flexibility– Quality– Fast delivery of products

• Example: Medical instruments


• Operations Strategy– Process-focused– Make-to-order– Custom products– Low volume

• Marketing Strategy– Keeping delivery promises– Quality– Flexibility

• Example: Large supercomputers

No Single Best Strategy

• Start-up and Small ManufacturersUsually prefer positioning strategies with:– Custom products– Process-focused production– Produce-to-order policiesThese systems are more flexible and require lesscapital.


• Start-up and Small ServicesSuccessfully compete with large corporations by:– Carving out a specialty niche– Emphasizing close, personal customer service– Developing a loyal customer base


• Technology-Intensive Business– Production systems must be capable of producing

new products and services in high volume soon after introduction

– Such companies must have two key strengths:• Highly capable technical people• Sufficient capital

Wrap-Up: World-Class Practice

• Put customers first• Get new products/services to market faster• Are high quality producers• Have high labor productivity & low production

costs• Carry little excess inventory• . . . more

World-Class Practice

• Think more globally in purchasing and selling• Quickly adopt and develop new technologies• Trim organizations to be lean and flexible• Are less resistant to strategic alliances/joint

ventures• Consider relevant social issues when setting

strategies