Definition of Operations Management Definition of Operations Management

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1 Definition of Operations Management Definition of Operations Management Operations Management is concerned with the production of goods and services. It deals with the management of resources (inputs: machines, raw materials, human skills, etc), AND the distribution of finished goods and services (outputs) to the customers. 1

2 Operations Function Operations function is much broader than activities occur in a factory. Products must be developed, Materials must be purchased, Facilities must be maintained, Products must be distributed, and so on. Operations Function Inputs Operations Function Output Customers 2

3 Operations Function Operations function must also be well integrated with other parts of business. Operations function is one of 3 primary functions within a business: Finance, Marketing, and Operations. Work of 3 primary functions overlaps each other and all 3 must work to reach the full potential of the system. Operations Function In many companies, operations function retains the greatest percentage of employees. And, it is responsible for the largest part of the budget. 3

4 Operations Function Therefore, operations function plays a significant role in success of businesses. Historical Evolution of Operations Management Until the 19th century, the world was mostly rural and agricultural. Most of the products were made by highly skilled people called artisans. Under the apprenticeship system, an artisan supervised the work of several apprentices during long training period. 4

5 Historical Evolution of Operations Management In the 18th century, most manufacturing was performed by rural families in their own homes under the domestic or cottage industry system. Merchants supplied families in small towns with raw materials and later found markets for the finished products. The development of steam power and the introduction of labor-saving equipment (or automation) early in the 18th century led to the development of the factory system. Historical Evolution of Operations Management The principle of the factory systems was simple: Assign workers a small set of tasks that they repeat over and over. This reduces the time spent by workers in switching tasks and they become specialized. The result is improved labor productivity and lower production costs. Technological developments in 1850s transformed factory system into mass-production. Factories became larger. They produced huge volumes of identical products. 5

6 Historical Evolution of Operations Management Manufacturing costs were reduced because no time was needed for setting machines and people to produce other types of products. As the sizes of the factories increased, management of these operations became a major problem. Frederick Taylor introduced systematic approaches to operations management at the turn of 19th century. His intent was to eliminate waste, especially the wasted effort, in order to minimize costs. Historical Evolution of Operations Management Henry Ford combined the teachings of Taylor with the concepts of labor specialization and interchangeable parts to design the first moving assembly line in In 1920s and 1930s, a series of studies were conducted at the Hawthorne Works of Western Electric by Elton Mayo. The results showed that psychological factors were as important as scientific job design. 6

7 Historical Evolution of Operations Management The Hawthorne Studies stimulated the development of human relations movement by demonstrating that worker motivation is a crucial element in improving productivity. As the complexity of operations increased, sophisticated decisionmaking tools were needed. Historical Evolution of Operations Management Some of the quantitative models and statistical techniques used by modern operations managers are: 1- Statistical Quality Control: Uses statistics in the control of product quality by controlling the processes by which products are made. 2- Economic Order Quantity: Used for finding the least cost inventory ordering 7

8 Historical Evolution of Operations Management 3- Gantt charts for sequencing operations and Critical Path Method for finding optimum completion time of operations. 4- Linear programming: A management tool for optimum resource allocation given some restrictions of the resources. Historical Evolution of Operations Management The 1950s was the beginning of the information technology era. The discovery of transistor by Shockley led to the ability process data and information at continuously decreasing costs. Today, you can imagine the difficulty of monitoring inventories of hundreds of units OR managing a large project without a computerized system. 8

9 Historical Evolution of Operations Management In the late 1950s and early 1960s scholars began to write books dealing specifically with the problems faced by operations managers. These books also contained information regarding the application of quantitative models to operations management. Types of Operations If a company has an ability to manufacture tangible products, we call it a manufacturing company. Manufacturing operations deal with goods/tangible products. Example industries: Agriculture, forestry and fishing, Mining, Construction, etc. Inputs (raw materials, etc.) and outputs (products) are tangible and visible objects. 9

10 Types of Operations Manufacturing transformation processes are some kind of chemical or physical processes (ex: welding, assembling). The other companies who are not manufacturers are referred to as service companies. Types of Operations These deal with non-manufacturing operations or service type operations. Example industries: Transportation, Finance, real estate, insurance, hotels, etc. Here, there are also inputs and outputs. The output is a satisfied customer. Processes in service operations include giving advice (consultant firms), transporting, packaging, storing, serving (food), etc. Other examples: educational institutions, repair shops, and barbers. 10

11 Types of Operations The change in the percentage of work force between years 1900 and 1994 is as follows: - Number of People working in finance, services, real estate and insurance increased dramatically (graphic illustration) - People working in agriculture and mining declined dramatically - People working in communication and transportation increased slightly - People working in construction and manufacturing not much changed Types of Service Operations Some service operations deal with tangible outputs even though they do not manufacture a product: examples are distributors, mail service, library, etc. Other service operations deal with intangible products. These are pure service operations: examples are financial advice, counseling, etc. 11

12 Types of Service Operations In some service operations, customer is not present as a participant: examples are architectural design, repairing automobiles, insurance, etc. Types of Service Operations In some others, customer is present: examples are health care, hair cut, travel, etc. 12

13 Types of Manufacturing Operations Some companies are make-to-stock producers. These firms make items that are completed and placed in stock before customer order is received. Ex: Arcelik plant. Some companies are make-to-order producers. These complete the end item only after receiving a customer order. Types of Manufacturing Operations Because manufacturer cannot anticipate what each customer wants. Example: a metal fabrication shop, which gives the desired shape to any kind of metal. When the company produces standard modules and assembles these modules according to the specifics of a customer order, this is an assemble-to-order producer. Examples are: PVC window assemblers, and modular kitchen board assemblers. 13

14 Types of Manufacturing Operations The extent to which a factory has the flexibility to produce a variety of products is another characteristic used to distinguish between types of factories. One extreme is to produce custom products in low volume or in single units. Example is a metal fabrication shop. Types of Manufacturing Operations Other extreme is to produce a standard product in very high volume. Example: nuts and nails. According to variety and volume of production, operations are categorized as 1) Job Shops, 2) Repetitive Manufacturing, and 3) Batch Manufacturing. 14

15 Types of Manufacturing Operations Job Shops The volume of each product is low. Generally produces make-to-order, custom products in accordance with design supplied by the customer. Needs general-purpose production equipment (e.g., Turn, welding machine, etc.) 15

16 Job Shops Each job may be unique AND may require a special set of production steps. Further, each job may require a particular routing. There are no standard routings. Products follow different paths. Job Shops 16

17 Job Shops Examples of job shops are woodworking shops, and metal fabrication shops. May require an inventory of some of the raw materials. BUT, here the largest percentage of the inventory is Work in Process (WIP). Work in Process is the inventory that accumulates in between process stages. Repetitive Manufacturing These are mass production facilities that produce high volumes of the same products. They are usually make-to-stock producers. Automated, special-purpose equipments are used. 17

18 Repetitive Manufacturing WIP is low because the items move quickly in the plant. Examples are television, radio, and telephone producers. Product(s) follow the same path: Batch Manufacturing Many mfg. Operations fall between job shops and repetitive mfg. These are called batch mfg. Batch means a single production run AND batch size means the quantity produced in a single production run. It may be lass than 100 units OR up to a few 1000 units. 18

19 Batch Manufacturing The batch mfg company makes a batch of one product, then switch over (set up) the equipment AND make a batch of another item. Production equipment should be more flexible than repetitive mfg. AND it is generally less flexible than job shops. Batch Manufacturing Here, products having same or similar processes may be grouped into a product family. Examples are small had tools (e.g., drill, screw driver), and hand mixers. 19

20 Project type A project is a highly flexible AND low volume type operation. Usually the item to be produced stays in a fixed place AND all the resources come to it. At the end of production, resources leave the place. Examples are ship construction, bridge construction, buildings and large machines. Project type Some types of service operations may also be called as Projects because they involve a team of people over a period of time and then they leave the project. Example: Developing a software package may be a project type of service operation. 20

21 Continuous flow (flow shop) Some products flow continuously through a linear process AND usually the products are not discrete. Continuous flow (flow shop) These types of operations are called continuous flow (flow shop) operations and sometimes also called as process type operations (as opposed to discrete operations). Examples are chemical, oil, petroleum, and sugar refineries. 21

22 The Race For Competitive Excellence Global competition intensified companies competitive struggles to survive. Businesses must be world-class competitors today. The Race For Competitive Excellence Companies gain market share when invest in product and process development AND in equipment that would raise their competitiveness. 22

23 The Race For Competitive Excellence The role of Customer Satisfaction in Competitiveness Customers determine how successful a business will be. Customers compare a company s offerings with its competitors offerings. 23

24 The role of Customer Satisfaction in Competitiveness Adding what customers value is an important key. Value is based on customers perceptions of the worth of a good. The role of Customer Satisfaction in Competitiveness Some customers consider only the purchasing price of a product. Some others consider the total cost over the long-term use of the product. A company must understand its target market. 24

25 The role of Customer Satisfaction in Competitiveness Based on the needs and perceptions of their target customers, they should either improve their products, OR reduce the cost of the product IN ORDER TO enhance the customers value. Ex: Cheap Japanese cameras offer %90 of the functions offered by expensive German camera. The role of Customer Satisfaction in Competitiveness To achieve a high value ratio, a company must 1) be very effective at producing what customers desire, and 2) be very efficient in using all the resources. An excellent company is the one that who 1) is better than most of the companies in its industry at providing customer satisfaction, and 2) will retain a strong market share. 25

26 The role of Customer Satisfaction in Competitiveness Of course, to provide satisfaction on a long-term basis, a company must also remain financially healthy. Customer satisfaction leads to customer loyalty, which is crucial to long-term profitability. The role of Customer Satisfaction in Competitiveness The factors that influence customers buying decision can be grouped into six broad categories: 1) Selling price (product cost), 2) Quality, 3) Dependability, 4) Flexibility, 5) Time, and 6) Service. 26

27 1) Selling Price (Product Cost) A cost efficient company keeps its capital, labor, and operating costs lower than its competitors AND provide the customer with the lowest selling price. 1) Selling Price (Product Cost) Price is a function of product cost. A common practice was to simply calculate selling price by adding a margin (profit) to the product cost: Cost + Desired Profit = Selling price 27

28 1) Selling Price (Product Cost) However, today, many firms are operating in a buyers market rather than a sellers market. In a buyers market, customers are informed about competitors prices and competition is much more intense. 1) Selling Price (Product Cost) Therefore, these firms should provide the best value to the customers while ensuring that total costs are lower than market-dictated prices. 28

29 1) Selling Price (Product Cost) This means to calculate price as follows: Market-dictated price - Cost = Profit Consumers are also concerned with the total cost of owing a product, not just the initial purchase price. 1) Selling Price (Product Cost) When buying an automobile, for example, consumers compare operating costs (gas economy) and maintenance costs as well as the selling prices. In summary, most prices are marketdriven, and customers are pricesensitive. Therefore, operation costs must be tightly controlled. 29

30 2) Quality A company emphasizing quality provides a level of quality superior to its competitors (and even pay some extra to do so). Ex: Rolex hand watches. Customers always expect high-quality products. Dimensions of Quality 1- Performance. Ex: Quick acceleration capability of a car. 2- Features. Ex: Air-conditioning in a car. 3- Reliability. When I get into the car, I want to be sure it will start. 30

31 Dimensions of Quality 4- Durability. I want a car that will last at least 10 years. 5- Aesthetics. I want a good looking, sport car. 6- Professionalism. I want professional service, maintaining, and repairing for my car. 3) Dependability A dependable company can be relied on to have its products available for customers at any time. 31

32 3) Dependability It delivers products on the scheduled and promised time. Service is excellent. Ex: Aygaz, or the advertisement of Mogaz. Customers do not want to buy products of the companies that they cannot trust. They want dependable producers. 4) Flexibility Flexibility is the ability to respond to new situations. It has several dimensions as well: 1- Product flexibility refers to the ability to quickly develop new products and modify existing ones to meet changing market requirements. 32

33 4) Flexibility 2- Process flexibility is the ability to produce a broad range of products, switch from one product to another quickly and easily, and handle variations in the raw materials used. 3- Infrastructure flexibility is the ability of a firm to adapt itself and its organizational structure to changes. 4) Flexibility Customer needs and preferences are continually evolving. Therefore, flexibility is important if a firm is to respond quickly to changes in marketplace. 33

34 5) Time Time is money. Firms that can design, produce, and distribute their products faster than the competitors incur lower production costs 5) Time AND this allows them to capture a greater market share. Time is important for customers. Products must be designed, produced, and delivered quickly. 34

35 6) Service Today the notion of service includes introducing a wide variety of products to the market, making commitments to the customers, helping them install their products at home and providing after-sales support and guarantees. 6) Service Customers always appreciate and value the provision of service before and after the sale. 35

36 6) Service Some books take only the major 4 of these factors excluding the last two (time and service). Service factor can be considered as a dimension of dependability and time factor can be considered as a flexibility issue. 6) Service Each of the four dimensions of these competitive capabilities can be seen as a corner of a pyramid. 36

37 6) Service Companies should try to occupy as much space in this pyramid. But it is hard to be best in all dimensions. Because there are trade-offs among these dimensions, that is, being good in one dimension can be a reason for being bad in other dimension(s). Which one of these measures is the most important to you? Why? 37