Chapter 1 – Introduction to Operations Management
1. Introduction to Operations Management
o Operations are defined as processes that either provide services or create goods, and they are the
core of what every business organization does, whether in restaurants, factories, hospitals, or
universities.
o Operations management is specifically the management of systems or processes that create
goods and/or provide services. It involves managing these operations to achieve organizational
goals.
o Goods are tangible physical items such as raw materials, parts, subassemblies, and final products
(e.g., cell phones, automobiles).
o Services are activities that provide a combination of time, location, form, or psychological value
(e.g., medical treatment, email, transportation).
o The operations function is responsible for producing these goods and/or services.
o A crucial goal for any business is to achieve an economic match of supply and demand. Too much
supply is wasteful and costly, while too little results in lost opportunities and customer
dissatisfaction. Operations and supply chains primarily manage the supply side, while marketing
and sales handle the demand side.
o Every business organization, regardless of its type, has three basic functional areas: Finance,
Marketing, and Operations [Figure 1.1].
▪ Finance secures and allocates financial resources, handles budgeting, and analyzes investment
proposals.
▪ Marketing assesses consumer needs and wants, and promotes/sells the organization's offerings.
▪ Operations is the "engine" of the business, directly responsible for creating goods or services.
Figure 1. 1
o Operations and supply chains are intrinsically linked; neither can exist without the other, and no
business organization can exist without both.
o A supply chain is defined as the sequence of organizations—their facilities, functions, and
activities – involved in producing and delivering a product or service from basic raw material
suppliers to the final customer. These facilities can include warehouses, factories, and retail outlets,
while functions include forecasting, purchasing, inventory management, and distribution. The
supply chain can be visualized as a sequential chain (Figure 1.2) or a complex tree with many
branches (Figure 1.3B).
Figure 1. 2
Figure 1. 3 B
o The creation of goods or services involves a transformation or conversion process where inputs
(land, labor, capital, information) are converted into outputs (goods, services) through various
processes like storing, transporting, or repairing [Table 1.1, Table 1.2]. To ensure that the desired
outputs are obtained, an organization takes measurements at various points in the transformation
process (feedback) and then compares them with previously established standards to determine
whether corrective action is needed (control). (Figure 1.4) depicts the conversion system.
Figure 1. 4
Table 1. 1
Table 1. 2
o Value-added is the difference between the cost of inputs and the value or price of outputs.
Increasing value-added enhances effectiveness for non-profits and provides more funds for for-
profit organizations.
o The design and management of operations systems are significantly influenced by the degree of
customer involvement and the extent of technology use. High customer involvement often adds
complexity, while technology impacts productivity, costs, flexibility, quality, and customer
satisfaction.
2. The Goods - Service Continuum
o While goods and services often occur together in "product packages" (e.g., car oil change includes
oil as a good and the service of changing it, Figure 1.5), there are fundamental differences that
affect management.
Figure 1. 5
o Goods production results in tangible outputs that can be seen or touched (e.g., automobiles,
canned vegetables) [Table 1.3].
o Service delivery generally implies an act (e.g., a physician's examination, lawn care) [Table 1.3].
o Key differences between goods and services include: [Table 1.3]
▪ Customer Contact: High for many services, low for most goods production.
▪ Labor Content: Generally higher in services.
▪ Uniformity of Inputs: Higher in manufacturing due to more control, lower in services due to
unique customer situations.
▪ Measurement of Productivity: More difficult for services because of input variability.
▪ Quality Assurance: More challenging for services as delivery and consumption are simultaneous,
leaving less chance to correct mistakes.
▪ Inventory: Goods production typically involves more inventory; services cannot be stored.
▪ Wages: Manufacturing jobs often have a narrower wage range, while service jobs range from
highly paid professionals to minimum wage.
▪ Ability to Patent: Product designs are generally easier to patent than service designs.
o Despite these differences, many similarities exist in managing both, such as forecasting, capacity
planning, process management, managing variations, cost/productivity control, supply chain
management, and location/inventory/quality/scheduling decisions. Many service activities are also
integral to goods-producing companies.
Table 1. 3
3. Why Learn About Operations Management?
o Studying operations management provides a valuable skill set regardless of your major because
every aspect of business is affected by operations.
o Operations and sales are the two primary line functions in a business organization, with all other
functions (e.g., accounting, finance, marketing, IT) providing support.
o It offers a broader understanding of how business organizations operate, a quality highly sought
by employers.
o Learning about OM and supply chains fosters a better understanding of the global economy,
interdependencies between companies and nations, reasons for business success or failure, and the
importance of collaboration.
o Significant interfacing and collaboration occur among functional areas (Figure 1.6), as decisions
in one area impact others.
▪ Finance and Operations collaborate on budgeting, economic analysis of investment proposals,
and providing funds.
▪ Marketing and Operations interact on assessing customer needs, communicating demand,
providing market insights, and giving realistic lead times.
▪ Operations also interfaces with Legal, Management Information Systems (MIS), Accounting,
Personnel/Human Resources, and Public Relations, ensuring holistic organizational functioning
(Figure 1.7).
Figure 1. 6
Figure 1. 7
4. Career Opportunities and Professional Societies in OM
o The field of operations management and supply chain offers diverse career opportunities, including
roles such as operations manager, production analyst, inventory manager, purchasing manager,
supply chain manager, and quality analyst.
o Successful professionals in OM require a combination of people skills (e.g., political awareness,
collaboration, communication) and knowledge skills (e.g., product/service knowledge, process
knowledge, financial skills, project management) [Table 1.4].
Table 1. 4
o Numerous professional societies support career development in this field, offering resources and
certification examinations. Examples include APICS, American Society for Quality (ASQ),
Institute for Supply Management (ISM), and the Project Management Institute (PMI).
5. Process Management
o A process is defined as one or more actions that transform inputs into outputs, and it forms the
central role of all management.
o Business processes are generally categorized into three types:
▪ Upper-management processes: Govern the entire organization (e.g., organizational strategy).
▪ Operational processes: Core value-stream activities (e.g., purchasing, production, marketing).
▪ Supporting processes: Aid core processes (e.g., accounting, human resources).
o Every step in a business process involves a supplier–customer relationship [Figure 1.8].
Figure 1. 8
o Business Process Management (BPM) involves process design, execution, and monitoring. For
operations and supply chain management, two crucial aspects are managing processes to meet
demand and dealing with process variability.
o Managing a Process to Meet Demand: The ideal capacity of a process should match demand.
Achieving this requires accurate demand forecasts and the ability to translate these into capacity
requirements.
o Process Variation: Variation is inherent in all business processes.
▪ Four basic sources of variation:
1. Variety of goods or services offered: More variety means more varied production/service
requirements.
2. Structural variation in demand: Predictable trends and seasonal variations, crucial for
capacity planning.
3. Random variation: Natural variability, unmanageable.
4. Assignable variation: Caused by identifiable factors like defective inputs or incorrect
methods, which can be reduced or eliminated.
▪ Variations disrupt operations, causing additional costs, delays, shortages, and poor quality,
underscoring the necessity for managers to effectively manage variability.
6. The Scope of Operations Management
o The scope of operations management is broad, covering organizational activities such as
product/service design, process selection, technology management, work system design, location
and facilities planning, and quality improvement.
o Operations managers make both system design decisions (long-term, strategic choices about
capacity, facility location, layout, equipment acquisition) and system operation decisions (tactical,
day-to-day management of personnel, inventory, scheduling, quality assurance).
o The operations function is supported by and interfaces with purchasing, industrial engineering,
distribution, and maintenance departments.
o The operations manager holds the ultimate responsibility for creating goods or providing services.
While expertise varies, the core job is managerial across different organizations.
o The service sector is a dominant and growing part of the U.S. economy, while manufacturing jobs
have declined due to productivity increases and outsourcing. Despite this, manufacturing remains
vital as it is a major source of innovation (70% of private-sector R&D, 90% of U.S. patents) and its
decline impacts related service jobs.
7. Operations Management and Decision Making
o The operations manager's primary role is that of a planner and decision maker, significantly
influencing organizational objectives.
o Key decisions involve determining: What resources are needed, When they are needed, Where
work will be done, How products/services will be designed and work performed, and Who will do
the work. Daily concerns revolve around costs, quality, and schedules.
o General approaches to decision making include:
▪ Models: Simplified representations of reality (physical, schematic, mathematical) used as decision
aids. They organize information, enhance understanding, allow "what-if" analysis, and provide
consistency, but have limitations such as overemphasizing quantitative data or incorrect
application.
▪ Quantitative Approaches: Attempts to obtain mathematically optimal solutions, widely adopted
due to computing power and software. Often combined with qualitative methods.
▪ Performance Metrics: Managers use metrics (e.g., related to profits, costs, quality, productivity,
schedules) to monitor and control operations.
▪ Analysis of Trade-Offs: Decisions often involve balancing conflicting objectives (e.g., increased
customer service vs. increased inventory costs).
▪ Degree of Customization: Impacts labor intensity, skill requirements, equipment flexibility,
volume, and price. Highly customized products/services tend to be more labor-intensive, time-
consuming, and require more skilled labor and flexible equipment.
▪ A Systems Perspective: Encourages a "big picture" view, treating the organization as a set of
interrelated parts where the whole is greater than the sum of its individual components. It
ensures that decisions consider impacts on all parts of the system and prioritize overall
organizational objectives.
▪ Establishing Priorities (Pareto phenomenon): The principle that a relatively few factors account
for a high percentage of events, allowing managers to focus efforts where they will have the
most significant impact.
▪ Analytics: Involves using descriptive and predictive models to gain insights from data and guide
decision-making, particularly with "big data".
8. The Historical Evolution of Operations Management
o The Industrial Revolution (1770s): Began in England, characterized by the substitution of machine
power for human power, notably with the steam engine.
▪ Craft production, where highly skilled workers made customized goods using simple tools, was
the dominant method before this era, but it was slow, costly, and lacked economies of scale.
▪ The development of standard gauging systems and factories rapidly increased production.
o Scientific Management (early 20th century): Led by Frederick Winslow Taylor ("father of
scientific management"), it focused on observation, measurement, and improvement of work
methods, along with economic incentives.
▪ Taylor advocated for management responsibility in planning, worker selection/training, finding
the "best method" for each job, and separating management from work activities.
▪ Other contributors included Frank Gilbreth (motion study), Henry Gantt (scheduling charts,
nonmonetary rewards), and Harrington Emerson (organizational efficiency).
▪ Henry Ford applied scientific management principles, introduced the moving assembly line, and
pioneered mass production.
▪ Mass production involves producing large volumes of standardized goods with low-skilled
workers and specialized equipment. Key to this was interchangeable parts (attributed to Eli
Whitney), allowing parts to fit without custom fitting, and division of labor (Adam Smith),
breaking tasks into small, unskilled components to boost production rate.
o The Human Relations Movement: Countered the scientific management's emphasis on technical
aspects by highlighting the human element in job design and worker motivation. Key figures like
Lillian Gilbreth, Elton Mayo (Hawthorne studies), Abraham Maslow, Frederick Hertzberg, Douglas
McGregor (Theory X/Y), and William Ouchi (Theory Z) emphasized worker well-being and
involvement.
o Decision Models and Management Science: Quantitative techniques began to emerge, such as F.W.
Harris's inventory model (1915) and statistical procedures for quality control developed by Dodge,
Romig, and Shewhart (1930s). These models gained significant traction during and after World War
II, further developing into tools for forecasting, inventory, and project management, with a
resurgence in popularity due to personal computers.
o The Influence of Japanese Manufacturers (1980s): Inspired by Americans like Deming and Juran,
Japanese manufacturers developed highly competitive practices emphasizing quality and
continual improvement, worker teams and empowerment, and customer satisfaction. This
spawned the "quality revolution" and widespread interest in lean production. (Table 1.5)
Table 1. 5
9. Operations Today
o Information technology and global competition significantly influence contemporary operations
management.
o E-business (using the internet to transact business) is reshaping interactions with customers and
suppliers, encompassing e-commerce (consumer-to-business) and e-procurement (business-to-
business).
o Technology (application of scientific knowledge) impacts costs, productivity, and competitiveness
through product and service technology, process technology, and information technology (IT).
Managing technological advancements requires continuous attention to assess benefits, risks, costs,
and upgrades.
o Globalization and trade policies (e.g., tariffs, border security) have expanded the scope and
challenges of supply chain management, leading to reassessments of offshore outsourcing.
o Modern operations emphasize operations strategy, working with fewer resources, revenue
management, process analysis and improvement, quality improvement, agility, and lean
production.
▪ Revenue management (or yield management) maximizes revenue from fixed capacity by
manipulating demand through pricing.
▪ Process analysis and improvement aims for cost/time reduction, productivity, and quality
improvement, often referred to as Six Sigma.
▪ Agility is the ability to quickly respond to demands or opportunities, vital in managing shorter
product life cycles.
▪ Lean production (emerged in 1990s) is an approach that uses minimal resources (space,
inventory, workers) to produce high volumes of high-quality goods with variety, integrating
quality, flexibility, time reduction, and teamwork. It relies on highly skilled, empowered workers
who maintain and improve the system.
10. Key Issues for Today’s Business Operations
o Operations management faces several high-priority issues: economic conditions, innovating, quality
problems, risk management, cyber-security, and competing in a global economy.
o Environmental Concerns: Growing concerns about global warming and pollution drive businesses
to reduce their carbon footprint and adopt sustainability – using resources in ways that do not harm
ecological systems for current and future human existence. This impacts product/service design,
supply chain waste management, and outsourcing decisions (e.g., Hershey's "Cocoa for Good"
initiative). Dietary choices also have environmental implications (Reading: Diet and the
Environment).
o Ethical Conduct: Businesses face increasing pressure for ethical conduct. Managers must consider
the impact of decisions on all stakeholders (shareholders, employees, customers, community,
environment). Organizations often establish codes of ethics and ethical frameworks (sequences of
steps to guide decisions) based on principles like utilitarianism, rights, fairness, common good, and
virtue. Ethical issues in OM include financial statements, worker/product safety, quality,
environmental impact, and fair labor practices.
o The Need to Manage the Supply Chain: Increasing pressure to improve supply chain management
due to operational needs, increased outsourcing (and associated liability concerns for imported
goods), rising transportation costs, competitive pressures (shorter product life cycles,
customization), globalization (longer lead times, cultural differences), e-business growth, supply
chain complexity, inventory management, and trade wars.
▪ Key elements of supply chain management include managing customers, forecasting, design,
capacity planning, processing, inventory, purchasing, suppliers, location, and logistics (Table
1.6).
▪ Strategic supply chain decisions involve design and policy (location, production, distribution,
inventory), while operational decisions cover day-to-day activities like scheduling and quality
control.
▪ Enterprise Resource Planning (ERP) systems are increasingly used for real-time information
sharing across supply chains.
Table 1. 6