Irwin/McGraw-Hill 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. 2

Irwin/McGraw-Hill Why Study Operations Management? Operations Management Business Education/ Career Opportunities Systematic Approach to Org. Processes Increase Competitive Advantage/Survival Cross-Functional Applications 3

Irwin/McGraw-Hill 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

**Wickham Skinner: The Role of the Industrial Managers in the Massive U.S. Negative Trade Balance, April 2000 Factors Affecting a Firm's Ability to Ward off Imports and/or Export External transportation costs logistics resources labor supply, capabilities training resources communications public infrastructure Environmental/social environmental protection health costs labor unions education system consumer tastes retailing capabilities employee Economic/Political exchange rates trade barriers capital costs inflation capital availability social costs/legal funds flows savings rate interest rates minimum wage Suppliers abilities coordination location competition cooperation Technological R&D engineering product development process development new products development process 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 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 WS6

Irwin/McGraw-Hill Operations Decision Making People PlantsPartsProcesses Planning and Control Materials & Customers Products & Services InputOutput Operations Management Marketing StrategyFinance Strategy Marketplace Corporate Strategy Operations Strategy The Transformation Process (value adding) 4

Irwin/McGraw-Hill 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

Irwin/McGraw-Hill Transformations Physical--manufacturing Locational--transportation Exchange--retailing Storage--warehousing Physiological--health care Informational--telecommunications 5

Irwin/McGraw-Hill Examples of Production Systems 6

Irwin/McGraw-Hill 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

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

Irwin/McGraw-Hill Front and Back Office Front Office Customer Service Provider Back Office 9

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

Irwin/McGraw-Hill Value-Added Services 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 11

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

Irwin/McGraw-Hill 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 Manufacturing Strategy TQM & Six Sigma JIT/Lean Manufacturing Business Process Reengineering Manufacturing Resources Planning Electronic Enterprise Service Quality and Productivity Global Supply Chain Mgt. OM’s Emergence as a Field 13

Irwin/McGraw-Hill 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 14

Irwin/McGraw-Hill 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 15

Irwin/McGraw-Hill 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) 15

Irwin/McGraw-Hill Purchasing Managers Index

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

Irwin/McGraw-Hill Operations Strategy Customer Needs Corporate Strategy Operations Strategy Decisions on Processes and Infrastructure Example Strategy Process More Product Increase Org. Size Increase Production Capacity Build New Factory

Irwin/McGraw-Hill Competitive Dimensions Cost Quality and Reliability Delivery Flexibility Speed Reliability Coping with Changes in Demand New Product Introduction Speed Flexibility

Irwin/McGraw-Hill Dealing with Trade-offs Cost Quality DeliveryFlexibility 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. For example, if we reduce costs by reducing product quality inspections, we might reduce product quality.

Irwin/McGraw-Hill 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

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?

Irwin/McGraw-Hill 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

Irwin/McGraw-Hill 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

Irwin/McGraw-Hill 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

Irwin/McGraw-Hill 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.

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

Irwin/McGraw-Hill 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?

Irwin/McGraw-Hill 10,000 units/500hrs = 20 units/hour or we can arrive at a unitless figure (10,000 unit*$10/unit)/(500hrs*$9/hr) = Example--Labor Productivity

Irwin/McGraw-Hill 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?

Irwin/McGraw-Hill Balanced Scorecard 1.Financial perspective 2.Internal perspective 3.Customer perspective 4.Innovation and learning perspective