Profit 5% OM Cost 21% Marketing Cost 26% Manufacturing Cost 48% 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
Organization Finance Marketing Operations Operations Management = OM The management of systems or processes that create goods and/or provide services • The distinct –active- role of operations: • Inputs become Outputs after some Transformation
Doctors, nurses Examination Healthy patients Hospital Surgery Medical Supplies Monitoring Equipment Medication Laboratories Therapy Operations example in service: Health care Inputs Processing Outputs
Why OM? • Core of all business organizations • Many areas interrelated with OM activities • Management of operations is critical to create and maintain competitive advantages
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)
Operations Marketing Finance Organization of Businesses (Cont.) • Marketing • Selling • Promoting • Assessing customer wants and needs • Communicating those needs to operations • The need for working closely
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.
Suboptimization Systems Approach “The whole is greater than the sum of the parts.”
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 inputsand the (market or fair) value or price of outputs.
Value added Inputs Outputs Transformation/ Land Goods Conversion Labor Services process Capital Feedback Control Feedback Feedback Value-Added
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
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
Goods vs. Service Operations (Cont) • Differences • Customer contact • Uniformity of input • Labor content of jobs • Uniformity of output • Measurement of productivity • Production and delivery • Quality assurance • Amount of inventory
Goods-service Continuum Steel productionAutomobile fabrication Home remodelingRetail sales Auto Repair Appliance repair Maid Service Manual car wash Teaching Lawn mowing High percentage goods Low percentage service Low percentage goods High percentage service
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
Operations Managers • Controlling • Inventory • Quality • Costs • Organization • Degree of standardization • Subcontracting • Process selection • Staffing • Hiring/lay off • Use of overtime • Incentive plans • Job assignments
Scope of Operations Management • Operations Management includes: • Forecasting • Capacity planning • Scheduling • Managing inventories • Assuring quality • Motivating employees • Deciding where to locate facilities • And more . . .
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
Modeling ! • Use models • Physical models (prototypes) • Schematic models (Graphs, charts, pictures) • Mathematical models, • Statistical models • Inventory models • Linear programming • Queuing techniques • Project management models
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.
Decision Making • Models • Quantitative approaches • Analysis of trade-offs • Systems approach
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
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?
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)
Trends in Business • Major trends • The Internet, e-commerce, e-business • Management technology • Globalization • Management of supply chains • Agility
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
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
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
Suppliers’ Suppliers DirectSuppliers Final Consumer Distributor Producer Simple Product Supply Chain Supply Chain: A sequence of activities and organizations involved in producing and delivering a good or service
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
Summary • Definition of OM • OM’s relationship with Marketing, Finance and Accounting • Goods vs. service industries • OM issues, trends and models • Manufacturing systems