Operations Management Definition Operations management is defined as the design, operation, and improvement of the systems that create and deliver the firm’s primary products and services. Operations Management --> OM, POM, OPS NOT OR/MS or IE OM uses their tools to manage production. OM is the management of a company’s production system. Marketing Sells Finance keeps track of the money OPS produces 2 Introduction 2

Why Study Operations Management? Systematic Approach to Org. Processes Business Education/ Career Opportunities Increase Competitive Advantage/Survival Operations Management Systematic approach to Org. Processes: An Organized way of Looking at work. Career Opportunities: Direct – Plant Manager, Production Supervisor Indirect – Material Manager, Consulting Cross-Functional Applications: Everyone needs to plan & control their work. Business Education: New ideas such as SCM, ERP, Reengineering, and six sigma Cross-Functional Applications 3 Introduction 3

Current Trends 96 of the top 100 industries in the U.S. have large $ worth of exports. Exporting industries are characterized by early ongoing investments in advanced product and process technologies. Productivity is increasing and has become a basis for competition. Success domestically and globally is dependent on the ability to compete on many fronts, including operations (e.g., internet - easy to find potential customers, but hard to deliver) Outsourcing of manufacturing and services (e.g., India and China) is accelerating. WS8 Introduction WS8

Factors Affecting a Firm's Ability to Ward off Imports and/or Export Economic/Political exchange rates trade barriers capital costs inflation capital availability social costs/legal funds flows savings rate interest rates minimum wage Environmental/social environmental protection health costs labor unions education system consumer tastes retailing capabilities employee External transportation costs logistics resources labor supply, capabilities training resources communications public infrastructure Corporate strategy risk avoidance role of functions Fin-Mktg-Mfg-Eng-R&D balance sheet financial capacity marketing policies export sales competencies Technological sophistication of mgt Technological R&D engineering product development process development new products development process Operations costs/productivity quality delivery cycle delivery reliability flexibility for prod change flexibility for vol. change New product introduction inventory mgt. Prod. Planning Control Equip. & process tech #, size, location of facilities logistics customer service information technology Suppliers abilities coordination location competition cooperation The top half is caused by the overall economy The bottom half is affected by Corporate Managers. WS6 **Wickham Skinner: The Role of the Industrial Managers in the Massive U.S. Negative Trade Balance, April 2000 Introduction WS6

Operations Decision Making Marketing Strategy Finance Strategy Marketplace Corporate Strategy Operations Strategy Materials & Customers Products & Services Input Output Operations Management Long Range Decisions: Plants Locations Products Medium Range Decisions: # employees # shifts or hours Short Range Decisions Scheduling of products Inputs: Materials Supplies Labor Capital Output: Goods Services Process: Conversion Planning and control People Plants Parts Processes Planning and Control The Transformation Process (value adding) 4 Introduction 4

Key OM Concepts Efficiency - Doing something at the lowest possible cost Effectiveness - Doing the right things to create the most value for the organization Value - Quality divided by price 8 Introduction 8

Transformations Physical--manufacturing Locational--transportation Exchange--retailing Storage--warehousing Physiological--health care Informational--telecommunications Physical: Saturn Locational: FedEx Exchange: Target Storage: Self or Cold Storage Physiological: Hospitals, clinics Informational: Transfer of information, Information networks 5 Introduction 5

Examples of Production Systems Production as a system Whole is worth more than the sum of its parts. 6 Introduction 6

Service or Good? “If you drop it on your foot, it won’t hurt you.” (Good or service?) “Services never include goods and goods never include services.” (True or false?) 7 Introduction 7

What about McDonald’s? Service or Manufacturing? The company certainly manufactures tangible products Why then would we consider McDonald’s a service business? 8 Introduction 8

Front and Back Office Service Provider Customer Back Office Front Office Customer 9 Introduction 9

Core “Factory Services” Core Services are basic things that customers want from products that they purchase. Quality Flexibility Speed Price (or production cost) 10 Introduction 10

Value-Added Services Information Problem Solving and Field Support Value-added services differentiate the organization from competitors and build relationships that bind customers to the firm in a positive way. Information Problem Solving and Field Support Sales Support Will make a customer’s (internal and external) life easier. Information: Websites, UPS on-site knowledge Product data Problem Solving & Field Support Send out factory employees to solve problems Develop solution by changing manufacturing Quick response to down equipment Sales Support CIM – Digital MAZAK – Machining Centers 11 Introduction 11

History of Operations TIME Cottage System Industrial Revolution <1700 Industrial Revolution 1700 - 1800 1850s Civil War 1890s Scientific Management Moving Assembly Line 1910s Hawthorne Studies 1930s Operations Research 1940s Global Competition 1970s Service Revolution 1980s Mass Customization 1990s 12 Introduction 12

Development of OM as a Field – The Names and Emphasis Change, but the Elements Remain Basically the Same! Scientific Management Moving Assembly Line Hawthorne Studies Operations Research Historical Underpinnings OM’s Emergence as a Field Manufacturing Strategy TQM & Six Sigma JIT/Lean Manufacturing Business Process Reengineering Manufacturing Resources Planning Electronic Enterprise Service Quality and Productivity Global Supply Chain Mgt. 13 Introduction 13

Social Responsibility/Environment and increase in need for production. Some Current Issues Implementing/sustaining Quality Management initiatives Consolidating operations resulting from mergers Speeding up the time to get new products to market Developing flexible production systems to enable mass customization of products and services Developing and integrating new technologies Managing global supplier, production and distribution networks Outsourcing Paradox: Social Responsibility/Environment and increase in need for production. 14 Introduction 14

Purchasing Managers Index Began 1931 Measures: New Manufacturing Orders Production Volume Deliveries Inventory Levels Employment Index Measures Economic Activity >50.0% Expanding <42.7% Contracting PMI index --- is eagerly sought after by Wall Street This index links operations ideas to Corp. success 1.) How have employment levels changed? 2.) How have inventory levels changed? 3.) Inventory levels versus new orders. 15 Introduction 15

Purchasing Managers Index A “Leading Indicator” since: - Manufacturing must order materials in advance of production - The indicator is based on plans of supply management (purchasing) executives Source: Institute for Supply Management (ISM) – ism.org (previously National Association of Purchasing Management) PMI index --- is eagerly sought after by Wall Street This index links operations ideas to Corp. success 1.) How have employment levels changed? 2.) How have inventory levels changed? 3.) Inventory levels versus new orders. 15 Introduction 15

Purchasing Managers Index

Operations Management - Overview Supply Chain Management Process Analysis and Design Process Control and Improvement Supply Chain Management Project Management Operations Strategy Quality Management Supply Chain Strategy Process Analysis Statistical Process Control Just in Time Job Design Planning for Production Consulting and Reengineering Manufacturing Capacity Management Facility Layout Aggregate Planning Services Inventory Control Waiting Line Analysis and Simulation Materials Requirement Planning Introduction

Operations Strategy Strategy Process Example Customer Needs More Product Corporate Strategy Increase Org. Size Definition: Long Range plan for the production of a company's products and services Gives a roadmap for what the production function should do to achieve the goals of a business strategy. distinctive competence Interested in Core Competencies and aligning the strategies Operations Strategy Increase Production Capacity Decisions on Processes and Infrastructure Build New Factory Introduction

Competitive Dimensions Cost Quality and Reliability Delivery Flexibility Speed Reliability Coping with Changes in Demand New Product Introduction In Order of Time Cost for type of market& type of product Involves tradeoffs Introduction

Dealing with Trade-offs For example, if we reduce costs by reducing product quality inspections, we might reduce product quality. Example II, if we improve customer service problem solving by cross-training personnel to deal with a wider-range of problems, they may become less efficient at dealing with commonly occurring problems. Cost Quality Delivery Flexibility Introduction

Order Qualifiers and Winners Order Qualifiers: Screening criterion that permits a firm’s products or services to be considered as possible candidates for purchase Order Winners: Criterion that differentiates the products or services of one firm from another Order qualifiers? -They are the basic criteria that permit the firms products to be considered as candidates for purchase by customers. - Indicates what is expected Order winners? -They are the criteria that differentiates the products and services of one firm from another. - Are special attributes about your organization that will win the job. - They are product specific ---- Saturn’s Service Example: Job Search - need degree and minimum experience Definition of WCM: being better in at least one thing than all of your competitors Introduction

Strategy Begins with Priorities Consider the personal computer assembler 1. How would we segment the market according to product group? 2. How would we identify product requirements, demand patterns, and profit margins for each group? 3. How do we identify order winners and order qualifiers for each group? 4. How do we convert order winners into specific performance requirements? How to develop strategy product group: Hi tech - best up to date - - money is no object Everyday User - good tech. & reliable Bargain Hunter - Cost Introduction

Manufacturing’s Role in Corporate Strategy Stage I--Internally Neutral - minimize potential manufacturing negative Stage II--Externally Neutral - achieve parity with competitors Stage III--Internally Supportive - support business strategy Stage IV--Externally Supportive - manufacturing based competitive strategy Stage 1--Internally Neutral - minimize manufacturing’s neg. potential - management control systems Stage II--Externally Neutral - Achieve parity with competitors Off the shelve machines - Follows industry practice Stage III--Internally Supportive - Support the business strategy Stage IV--Externally Supportive - manufacturing based competitive advantage - Levi’s Strauss Introduction

Four Stages of Service Firm Competitiveness Stage I. Available for Service Stage II. Journeyman Stage III. Distinctive Competence Achieved Stage IV. World Class Service Delivery Stage I. Available for Service - Reactive, non-performance-based survival - will not change unless has to - highly variable - cost is primary competence Stage II. Journeyman - Firm neither sought nor avoided Stage III. Distinctive Competence Achieved - Reputation for meeting customers’ expectations Stage IV. World Class Service Delivery - Firm name synonymous with service excellence--Focus on delighting - Roto Rotor, UPS Introduction

U. S. Competitiveness Drivers Product Development speed development & enhance manufacturability Waste Reduction (JIT Philosophy) WIP, space, tool costs, and human effort Improved Customer-Supplier Relationships borrowed from Japanese Keiretsu Improved Leadership strong, independent boards of directors Currently Board of directors willing to direct managers Introduction

Execution!! Unless you translate big thoughts into concrete steps for action, they’re pointless. (Larry Bossidy) Strategy is execution. (Louis Gerstner) In the business world, having a good objective means nothing if you implement it badly. (Fareed Zakaria) You cannot have an execution culture without robust dialogue - one that brings reality to the surface through openness, candor, and informality. Robust dialogue starts when people go in with open minds. You cannot set realistic goals until you’ve debated the assumptions behind them. Financial perspective – ultimate benefit to shareholder Internal perspective – key internal processes To the future Leading measures – are descriptive of what has happened Lagging measures – predictive Such as: retention versus customer satisfaction rejects versus absenteeism Introduction

Productivity Partial measures Multi-factor measures Total measure output/(single input) Multi-factor measures output/(multiple inputs) Total measure output/(total inputs) Introduction

Example 10,000 Units Produced Sold for $10/unit 500 labor hours Labor rate: $9/hr Cost of raw material: $5,000 Cost of purchased material: $25,000 What is the labor productivity? Introduction

Example--Labor Productivity 10,000 units/500hrs = 20 units/hour ... ... or we can arrive at a unitless figure (10,000 unit*$10/unit)/(500hrs*$9/hr) = 22.22 Units per hour -- Supervisors Units per $ -- Upper Management Timeless Introduction

Example: Productivity Measurement You have just determined that your service employees have used a total of 2400 hours of labor this week to process 560 insurance forms. Last week the same crew used only 2000 hours of labor to process 480 forms. Is productivity increasing or decreasing? Answer: Could be classified as a Total Measure or Partial Measure. Answer: Last week’s productivity = 480/2000 = 0.24 This week’s productivity is = 560/2400 = 0.23 Introduction

Balanced Scorecard Financial perspective Internal perspective Customer perspective Innovation and learning perspective Financial perspective – ultimate benefit to shareholder Internal perspective – key internal processes To the future Leading measures – are descriptive of what has happened Lagging measures – predictive Such as: retention versus customer satisfaction rejects versus absenteeism Introduction