Introduction to Operations Management

Overview
Introduction
Historical Milestones in OM
Factors Affecting OM Today
Different Ways of Studying OM
Wrap-Up: What World-Class Producers Do
Introduction
Operations management is the management of an organizations
productive resources or its 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.
Entry-Level Jobs in OM
Purchasing planner/buyer
Production (or operations) supervisor
Production (or operations) scheduler/controller
Production (or operations) analyst
Inventory analyst
Quality specialist
Historical Milestones in OM
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 Smiths 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 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 US 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By the mid-1800s, the old cottage system of production had been
replaced by the factory system.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 Western US 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 workers 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.
In the 1920s, Ford Motor Companys 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 Relations and Behavioralism

In the 1927-1932 period, researchers in the Hawthorne Studies

realized that human factors were affecting production.
Researchers and managers alike were recognizing that psychological
and sociological factors affected production.
From the work of behavioralists 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 US workforce is employed in
services.
About two-thirds of the US 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.

The Computer Revolution

Explosive growth of computer and communication technologies

Easy access to information and the availability of more information

Advances in software applications such as Enterprise Resource

Planning (ERP) software
Widespread use of email
More and more firms becoming involved in E-Business using the
Internet
Result: faster, better decisions over greater distances

Global Competition
Quality, Customer Service, and Cost Challenges
Rapid Expansion of Advanced Technologies
Continued Growth of the Service Sector
Scarcity of Operations Resources
Social-Responsibility Issues

Today's Factors Affecting OM

Studying Operations Management

Operations as a System
Decision Making in OM

Operations as a System
Production System

Inputs of an Operations 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)

Outputs of an Operations System

Direct
Products
Services
Indirect
Waste
P o llu tio n
Technological Advances

Chapitre 2 : Product, Process, and Service Design

Overview
Designing and Developing Products and Services
Process Planning and Design
Major Factors Affecting Process Design Decisions
Types of Process Designs
Interrelationships Among Product Design, Process
Inventory Policy
Process Design in Services
Deciding Among Processing Alternatives
Wrap-Up: What World-Class Companies Do

Product/Service Design
Stages of product/service design:
Functional design (form, shape, size, materials, etc.)
Process design (processing technology and tooling)

Design, and

 Production design (production line & plant layout)

Impact of Product/Service Design

Product/service quality
Production/delivery cost
Customer satisfaction
Important Topics in Product/Service Design and Development
Developing New Products/Services
Sources of Product Innovation
Getting Them to Market Faster
Designing and Developing New Services
Improving Current Products/Services
Designing for Ease of Production
Designing for Quality

Sources of Product/Service Innovation

Customers
Managers
Marketing
Operations
Engineering
Research and Development (R&D)
Basic research
Applied research

Steps in Developing New Products

1. Technical and economic feasibility studies
2. Prototype design
3. Performance testing of prototype
4. Market sensing/evaluation and economic evaluation
of the prototype
5. Design of production model
6. Market/performance/process testing and economic
evaluation of production model
7. Continuous modification of production model

1. Technical and Economic Feasibility Studies

Determine the advisability of establishing a project for
developing the product
If initial feasibility studies are favorable, engineers prepare an
initial prototype design
2. Prototype Design
This design should exhibit the basic form, fit, and function of
the final product
It will not necessarily be identical to the production model
3. Performance Testing of Prototype
Performance testing and redesign of the prototype continues
until this design-test-redesign process produces a
satisfactorily performing prototype
4. Market Sensing/Evaluation and Economic Evaluation of the
Prototype
Accomplished by demonstrations to potential customers,
market test, or market surveys
If the response to the prototype is favorable, economic
evaluation of the prototype is performed to estimate
production volume, costs, and profits
If the economic evaluation is favorable, the project enters the
production design phase.
5. Design of Production Model
The initial design of the production model will not be the
final design; the model will evolve
6. Market/Performance/Process Testing and Economic
Evaluation of Production Model
The production model should exhibit:
low cost
reliable quality
superior performance
the ability to be produced in the desired quantities on
the intended equipment
7. Continuous Modification of Production Model
Production designs are continuously modified to:

Adapt to changing market conditions

Adapt to changing production technology
Allow for manufacturing improvements

Managing New Product Development Projects

About 5% of all new-product ideas survive to production, and only

about 10% of these are successful.
It is best to cancel unpromising new-product/service development
projects early!
Employees often become emotionally caught up in these projects
and are overly optimistic
An impartial management review board is needed for periodic
reviews of the progress of these projects.
Getting New Products to Market Faster
Speed creates competitive advantages
Speed saves money
Tools to improve speed:
Autonomous design and development teams
Computer-aided design/computer-aided manufacturing
(CAD/CAM)
Simultaneous (concurrent) engineering
Tools to Improve Speed to Market
Autonomous Design and Development Teams
Teams are given decision-making responsibility and more
freedom to design and introduce new products/services
Time-to-market has been slashed dramatically
Enormous sums of money have been saved
Teams do not have to deal with the bureaucratic red tape
ordinarily required to obtain approvals
Tools to Improve Speed to Market
Computer-Aided Design/Computer-Aided Manufacturing
(CAD/CAM)
Engineers, using CAD/CAM, can generate many views of
parts, rotate images, magnify views, and check for
interference between parts

Part designs can be stored in a data base for use on other

products
When it is time for manufacturing, the product design is
retrieved, translated into a language that production
machinery understands, and then the production system can
be automatically set up.
Tools to Improve Speed to Market
Simultaneous
(Concurrent)
Engineering
Improving the Design
of Existing Products/Services
Focus is improving performance, quality, and cost
Objective is maintaining or improving market share of maturing
products/services
Little changes can be significant
Small, steady (continuous) improvements can add up to huge longterm improvements
Value analysis is practiced, meaning design features are examined
in terms of their cost/benefit (value).
Designing for Ease of Production
Ease of Production (Manufacturability)
Specifications - Precise information about the characteristics
of the product
Tolerances - Minimum & maximum limits on a dimension
that allows the item to function as designed
Standardization - Reduce variety among a group of products
or parts
Simplification - Reduce or eliminate the complexity of a part
or product
Designing for Quality
Crucial element of product design is its impact on quality
Quality is determined by the customers perception of the degree of
excellence of the product/services characteristics

 Chapter 7 covers the principles of designing products/services for

quality
Designing and Developing New Services
Three general dimensions of service design are:
Degree of Standardization of the Service
Custom-fashioned for particular customers or basically the
same for all customers?
Degree of Customer Contact in Delivering the Service
High level of contact (dress boutique) or low level (fast-food
restaurant)?
Mix of Physical Goods and Intangible Services
Mix dominated by physical goods (tailors shop) or by
intangible services (university)?
Designing and Developing New Services
Differences Between New Service and New Product Development
Unless services are dominated by physical goods, their
development usually does not require engineering, testing,
and prototype building.
Because many service businesses involve intangible services,
market sensing tends to be more by surveys rather than by
market tests and demonstrations.
Process
Planning and Design
Process Planning and Design System
Major Factors Affecting Process Designs
Nature of product/service demand
Degree of vertical integration
Production flexibility
Degree of automation
Product/Service quality
Nature of Product Demand
Demand
fluctuates over time and
is affected by product price, so pricing decisions and the
choice of processes must be synchronized.

 Therefore,
Production processes must have adequate capacity to produce
the volume of the products that customers need.
Provisions must be made for expanding or contracting
capacity to keep pace with demand patterns.
Some types of processes are more easily expanded and
contracted than others.
Degree of Vertical Integration
Vertical integration is the amount of the production and distribution
chain that is brought under the ownership of a company.
This determines how many production processes need to be
planned and designed.
Decision of integration is based on cost, availability of capital,
quality, technological capability, and more.
Strategic outsourcing (lower degree of integration) is the
outsourcing of processes in order to react quicker to changes in
customer needs, competitor actions, and technology.
Production Flexibility
Product flexibility -- ability of the production (or delivery) system
to quickly change from producing (delivering) one product (or
service) to another.
Volume flexibility -- ability to quickly increase or reduce the
volume of product( or service) produced (or delivered).
Degree of Automation
Advantages of automation
Improves product quality
Improves product flexibility
Reduces labor and related costs
Disadvantages of automation
Equipment can be very expensive
Integration into existing operations can be difficult
Product/Service Quality
Old viewpoint
High-quality products must be made in small quantities by
expert craftsmen

 New viewpoint
High-quality products can be mass-produced using automated
machinery
Automated machinery can produce products of incredible
uniformity
The choice of design of production processes is affected by
the need for superior quality.
Types of Process Designs
Product-Focused
Process-Focused
Group Technology/Cellular Manufacturing
Product-Focused
Processes (conversions) are arranged based on the sequence of
operations required to produce a product or provide a service
Also called production line, assembly line, and flow line
Two general forms
Discrete unit automobiles, dishwashers
Process (Continuous) petrochemicals, paper
Product-Focused
Product-Focused
Advantages
Lower labor-skill requirements
Reduced worker training
Reduced supervision
Ease of planning and controlling production
Disadvantages
Higher initial investment level
Relatively low product flexibility
Process-Focused
Processes (conversions) are arranged based on the type of process,
i.e., similar processes are grouped together
Products/services (jobs) move from department (process group) to
department based on that particular jobs processing requirements
Also called job shop or intermittent production
Examples

Machine shop
Auto body repair
Custom woodworking shop
Process-Focused
Process-Focused
Advantages
High product flexibility
Lower initial investment level
Disadvantages
Higher labor-skill requirements
More worker training
More supervision
More complex production planning and controlling
Group Technology/Cellular Manufacturing
Group Technology
Each part produced receives a multi-digit code that describes
the physical characteristics of the part.
Parts with similar characteristics are grouped into part
families
Parts in a part family are typically made on the same
machines with similar tooling
Group Technology/Cellular Manufacturing
Cellular Manufacturing
Some part families (those requiring significant batch sizes)
can be assigned to manufacturing cells.
The organization of the shop floor into cells is referred to as
cellular manufacturing.
Flow of parts within cells tend to be more like productfocused systems
Group Technology/Cellular Manufacturing
Advantages (relative to a job shop)
Process changeovers simplified
Variability of tasks reduced (less training needed)
More direct routes through the system
Quality control is improved

Production planning and control simpler

Automation simpler
Group Technology/Cellular Manufacturing
Disadvantages
Duplication of equipment
Under-utilization of facilities
Processing of items that do not fit into a family may be
inefficient
Group Technology/Cellular Manufacturing
Candidates for GT/CM are job shops having:
A degree of parts standardization
Moderate batch sizes
Product/Process Design & Inventory Policy
Standard Products and Produce to Stock
Sales forecasts drive production schedule
Maintain pre-determined finished-goods levels
MRP forecast drives material ordering
Custom Products and Produce to Order
Orders set production schedule and drive material deliveries
Design time (pre-production planning) may be required
before production can be scheduled
Process Design in Services
Some of the factors important in process design for products are
also important in services:
Nature (level and pattern) of customer demand
Degree of vertical integration
Production flexibility
Degree of automation
Service quality
Process Design in Services
Three schemes for producing and delivering services
Quasi-Manufacturing
Customer-as-Participant
Customer-as-Product
Process Design in Services

 Quasi-Manufacturing
Physical goods are dominant over intangible service
Production of goods takes place along a production line
Operations can be highly automated
Almost no customer interaction
Little regard for customer relations
Example McDonalds kitchen operation
Process Design in Services
Customer-as-Participant
Physical goods may be a significant part of the service
Services may be either standardized or custom
High degree of customer involvement in the process
Examples: ATM, self-service gas station, grocery
Process Design in Services
Customer-as-Product
Service is provided through personal attention to the customer
Customized service on the customer
High degree of customer contact
There is a perception of high quality
Customer becomes the central focus of the process design
Examples: medical clinic, hair salon
Process Reengineering
The concept of drastically changing an existing process design
Not merely making marginal improvements to the process
A correctly reengineered process should be more efficient
A smaller labor force is often the result
Deciding Among Processing Alternatives
1. Batch Size vs. Product Variety
2. Capital Requirements
3. Economic Analysis
1. Cost Functions of Alternative Processes
2. Break-Even Analysis
3. Financial Analysis
Process Design Depends
on Product Diversity and Batch Size

 Economic Analysis
Cost Functions of Processing Alternatives
Fixed Costs
Annual cost when production volume is zero
Initial cost of buildings, equipment, and other fixed
assets
Variable Costs
Costs that vary with production volumes
Labor, material, and variable overhead
Cost Functions of Processing Alternatives
Cost Functions of Processing Alternatives
Example
Three production processes (A, B, and C) have the
following cost structure:
Fixed Cost Variable Cost
Process
Per Year
Per Year
A
$120,000
$3.00
B
90,000
4.00
C
80,000
4.50
What is the most economical process for a volume of 8,000
units per year?
Cost Functions of Processing Alternatives
Example
TC = FC + v(Q)
A: TC = 120,000 + 3.00(8,000) = $144,000 per year
B: TC = 90,000 + 4.00(8,000) = $122,000 per year
C: TC = 80,000 + 4.50(8,000) = $116,000 per year
The most economical process at 8,000 units is Process
C, with the lowest annual cost.
Economic Analysis
Break-Even Analysis
Widely used to analyze and compare decision alternatives
Can be displayed either algebraically or graphically
Disadvantages:
Cannot incorporate uncertainty

Costs assumed over entire range of values

Does not take into account time value of money
Break-Even Analysis
Example
Break-Even Points of Processes A, B, and C, assuming a
$6.95 selling price per unit
Q = FC / (p-v)
A: Q = 120,000 / (6.95 - 3.00) = 30,380 units
B: Q = 90,000 / (6.95 - 4.00) = 30,509 units
C: Q = 80,000 / (6.95 - 4.50) = 32,654 units
Process A has the lowest break-even point.
Economic Analysis
Financial Analysis
A great amount of money is invested in production processes
and these assets are expected to last a long time
The time value of money is an important consideration
Payback period
net present value
internal rate of return
Profitability index
Deciding Among Processing Alternatives
Assembly Charts (Gozinto Charts)
Macro-view of how materials are united
Starting point to understand factory layout needs, equipment
needs, training needs
Process Charts
Details of how to build product at each process
Includes materials needed, types of processes product flows
through, time it takes to process product through each step of
f lo w
Wrap-Up: World Class Practice
Fast new product introduction
Design products for ease of production
Refine forecasting
Focus on core competencies ... less vertical integration

Lean production
Flexible automation
Job shops move toward cellular manufacturing
Manage information flow ..... automate and simplify!