MODULE 1 1.

1 INTRODUCTION TO OPERATIONS MANAGEMENT Production of goods and services has been in existence since the evolution of civilized society, but here we limit our discussion to developments that led to the widespread production of consumer goods. Prior to the development of markets for massive amounts of consumer goods, most production took place in the home or in small communities of artisans and craftsmen. Products were often handcrafted, unique, and made entirely by one person. Some people trace the development of the first factories to the textile industry in England. In preindustrial societies, people often prepared only enough goods for their families, along with a small excess to obtain items unavailable within the family (cottage industries). As land became scarce and people moved off farms and into cities, mercantilism and trade developed. This created a market for massive amounts of goods, like textiles, which previously had been produced from wool and linen available on the farm. In pre-industrial societies, producers of textiles (often women and children) were likely to produce only enough of what was needed to sustain the family for the coming year. After that production, they would likely engage in other work activities. As merchants saw their markets grow, they were discouraged by the fact that they could not get consistent amounts of goods from the cottage industry. They therefore centralized production by building factories and removing women and children from the farm so they would not be distracted from textile production. This allowed much greater control over workers and production, a development that was soon to be lamented by those who saw the development of mass production factories as essentially exploitive of the poorest labourers. What is Operations Management? Heizer and Render (2005) (page 4) define operations management as a set of activities that creates value in the form of goods and services by transforming inputs into outputs. Operations management focuses on carefully managing the processes to produce and distribute products and services. Usually, small businesses do not talk about operations management, but they carry out the activities that management schools typically associate with the phrase operations management. Major, overall activities often include product creation, development, production and distribution. Related activities include managing purchases, inventory control, quality control, storage, logistics and evaluations. A great deal of focus is on efficiency and effectiveness of processes. Operations management is a field of management. Management science is the application of quantitative methods to decision making in all fields. Therefore, operations management often includes substantial measurement and analysis of internal processes. Ultimately, the nature of how operations management is carried out in an organization depends very much on the nature of products or services in the organization, for example, retail, manufacturing and wholesale. Why Study Operations Management? Operations management activities are at the core of all business organizations regardless of what business they are in.

At least 35% of all jobs are in OM related areas, including customer service, quality assurance, production planning and control, scheduling, job design and inventory management. Other functional areas such as information systems, finance, accounting, human resources, logistics, marketing and purchasing are all interrelated with OM activities. Products and Services Differences The differences between goods and services: - Services are usually intangible. - Service output is variable. - Services have higher customer contact. - Services are perishable. - Services are usually produced and consumed simultaneously; there is no stored inventory of services. The service concept involves creating a service bundle that meets the following customer needs: physical items the goods that the service is providing, like food, drinks, tableware, and other touchable commodities, sensing benefits the parts of the service that stimulate the senses, like the smell and aroma of food, the sound of music, and the sight of fine surroundings and psychological benefits the parts of the service that provide intrinsic emotional value, like relaxation, comfort, status, or a sense of well-being. The Production System The production system is the heart of OM. It uses resources to transform inputs into some desired output.

Inputs, such as material, machines, labour, management, and capital, are transformed into outputs, like products, goods, and services. Requirements and feedback from customers are used to adjust factors in the transformation process, which may also alter the inputs. Transformation processes can include manufacturing and service activities. In fact, most organizations do include both. If organizations are ranked on a continuum with pure services on one end and pure goods on the other end, we would find that most fall somewhere in between. Some types of transformation processes are: - Physical as in the manufacture of goods - Locational as in transportation or warehouse operations - Exchange as in retail operations - Psychological as in entertainment, or - Informational as in communications

Another way to think about transformation activities is to identify the step-by-step chain of activities that changes inputs into outputs. A typical production chain contains the following activities: > > > Parts Fabrication or Formation > SubAssembly > Assembly > Packing and Finishing

Raw Material Materials Extraction Processing

For example, the transformation process for an automobile company would look something like the table below: Mining SteelMaking Making Pistons from Steel Assembling Pistons in Engines Assembling Engines in Vehicles Painting

Companies differ, of course, on the number of major production activities needed to produce a product. For example, oil companies would not have assembly activities. Furthermore, many companies only perform one or two of the production chain activities and purchase the output of other companies to complete the production chain. Ideally, operations include only those activities that add value to the input so that the value of the output exceeds that of the sum of all the inputs. These activities are referred to as a value chain. The value chain includes such things as manufacturing activity, distribution of goods, market research, and customer service. Processes that have not been properly designed or that have not been evaluated over time grow to include many activities that are non-value-adding. Non-value-adding activities absorb resources even though they do not increase the worth of the production or service output. They include such things as waiting in line, filling out bureaucratic paperwork, excessive movement of a product, employee, or customer in a work process, and sorting goods before storage. The purpose of operations management is to make all processes as efficient as possible. All processes should be evaluated periodically to ensure that non-value-adding activities are eliminated or minimized Strategic & Tactical Thinking Operations decisions complement corporate strategy. Decisions within operations also should be linked. The operations manager deals with strategy and analysis. Operations management decisions are made in the context of the firm as a whole starting with customers (i.e. the marketplace) and explicitly considering a firms corporate strategy. According to Heizer and Rendel (2005), the ten major decision areas of an operations manager are: 1. Service and product quality. 2. Quality management. 3. Process and capacity design. 4. Location. 5. Layout design. 6. Human resources and job design. 7. Supply-chain management.

8. Inventory, material requirements planning and just-in-time (JIT). 9. Intermediate and short-term scheduling. 10. Maintenance. 1.2 OPERATIONS STRATEGY When U. S. mass production was in its heyday (around the 1950s and 1960s), the typical operations manager was seen as something of an efficiency expert someone with an eye for detail, cost-cutting fanaticism, and a robot-like response to problems. The stereotype was probably somewhat exaggerated, but we now acknowledge that part of the decline experienced by U. S. manufacturers in the 1970s was due to an inability to see how the operations function needed to relate to a changing business environment. Wickham Skinner, a well-known professor from Harvard, began a revolution in the mid-1970s that resulted in the development of strategic thought for the operations function. His most important contribution was in pointing out that the cost-cutting orientation of operations managers did not mesh well with a changing consumer taste for greater product variety and higher quality in the 1970s. When organizations make choices about the specific emphasis they will place on what products to make, what services to offer, and how to provide them, we call it strategy formulation. The key to successful strategy formulation is articulating the choice so that a mismatch between the market and operations is not created over time. Strategy Formulation Strategy formulation consists of four basic steps: - Defining a primary task represents the primary purpose of the firm, what the firm is in the business of doing. - Assessing core competencies identifying what the firm does better than anyone else. - Determining order winners and order qualifiers - Positioning the firm choosing one or two important things to concentrate on and do extremely well. According to Meredith and Shafer (2002) (page 34), order qualifiers are those characteristics that must be present for a product to be considered for purchase by a consumer. For example, for a particular consumer to consider the purchase of skis for a child, the skis must have certain features like safe construction, parabolic shaping, and proper length. After identifying the skis that "qualify" with those characteristics, the order winner might be price. The order winner is the final factor on which the consumer bases the purchasing decision. Order winners and order qualifiers are sometimes determined by individual customers, but they can also be signaled by the whole market to an industry. Furthermore, they could change over time. Strategy Overview There are many kinds of strategy. Listed below are some of the important types.

Derived from: http://www.sba.oakland.edu/Faculty/Fliedner/POM 343/Operations Strategy.doc Business strategy provides the framework of goals for the organization. It is the long-range game plan for the the organization. It provides road-map of how to achieve the corporate mission given global business conditions and the distinctive competencies or weaknesses (anything that helps the firm to capture market share). Market analysis, on the other hand: 1. Categorize the customers (segmentation). 2. Identify customers needs. 3. Assess competitors strengths. Competitive priorities consist of the operating system capabilities and strengths required to serve the customers. Functional strategies are made up of the goals and long-term plans for each functional area in the organization (e.g. finance, operations, marketing). Corporate Strategy There are a few strategic considerations that are crucial to an operations managers decision-making process. Corporate strategy must respond to pressures for flexibility. Flexibility is defined as an ability to develop a capability for change. There are many ways to respond to the needs for flexibility. A manager must also monitor and adjust to changes in the business environment. Environmental scanning requires the manager to monitor socioeconomic trends for potential opportunities or threats. These socioeconomic trends include economic trends, competitive trends, political conditions, social changes and technological changes. The manager must also identify and develop distinctive competencies. Some examples of core competencies include a well-trained workforce, flexible facilities, marketing and financial skills and innovative systems and technology. Market Analysis

To perform a market analysis, two steps are generally needed. Market segmentation The first step is market segmentation. The customer groups which have common characteristics that differentiate them from other market segments have to be identified. The market segment needs have to be incorporated into the product or service design and the operations system design. The dimension that are used to determine market segments include demographic factors, psychological factors and industry factors. Needs Assessment The second step is known as needs assessment. The customer benefit package typically consists of the core product or service, together with a set of peripheral products or services. There are four categories of market needs the product/service needs, the delivery system (logistics) need, the volume needs and other needs (e.g. financial needs and administrative needs). Competitive Priorities Different organizations would have different competitive priorities. Some of these competitive priorities include low-cost operations, higher quality design, superior features, faster delivery time and flexibility (customization). When selecting competitive priorities, it must be remembered that further improvements in one area sometimes require a trade-off in other areas. The order qualifiers, which are prerequisites to entering a marketplace, are quality and reliability. The table below shows some examples of competitive priorities: Competitive Definition Some ways of creating Priority Low production Unit cost of each product Redesign of products costs or service including labor, New production technology material and overhead Increase in production rates costs. Reduction of scrap Reduction of inventories Delivery Fast delivery Larger finished-goods inventories performance Faster production rates Quicker shipping methods On-time delivery More realistic promises Better control of production of orders Better information systems High quality Customers perceptions of Improve product or services: products or degree of excellence - Appearance services exhibited by products or - Malfunction or defect rates services - Performance and function - Wear and endurance ability After-sales service Customer Ability to quickly change Change in type of production process service and production to order used flexibility products or services and CAD/CAM other production volumes, Reduce work-in-progress through justcustomer responsiveness in-time processes Increase capacity Source:

http://www.business.uca.edu/faculty/dbradley/mgmt3344/3344ppt/ch ap2.ppt Service Strategies There are three types of service strategies. The standardized-services strategy supports processes that are designed for low variety and high volume. Flow tends to follow a linear pattern. Tasks are repetitive and routine. In an assemble-to-order strategy, processes are designed to produce a set of standardized services and to assemble standardized offerings for specific customer needs. Typical competitive priorities in this strategy include customization and fast delivery time. The customized-services strategy use nested processes that are typically grouped by the function they perform. These processes are designed to provide a high variety of customized services. Typical competitive priorities include high performance design as well as customization. Manufacturing Strategies There are three different kinds of manufacturing strategy: make-to-stock strategy, assemble-to-order strategy and make-to-order strategy. The make-to-stock strategy requires finished goods to be held in stock for immediate delivery. There are high volumes of standard products and a linear flow. Production is based on forecasted demand. This strategy supports low cost, consistent quality and competitive priority. Assemblies and components are held in stock in the assemble-to-order strategy. Final assembly is completed after the customer selects the options. A very large number of final configurations are possible. Forecasting the final configuration becomes impractical because of the many combinations. The make-to-order strategy requires that most of the materials be ordered after the customer places the order. When using this strategy, flexible processes and flow are typical. This strategy supports customization as a competitive priority. Mass Customization Some firms use mass customization, which is an assemble-to-order strategy, but typically focus on large volumes. The task of differentiating the product or service is postponed until the last possible moment. To facilitate mass customization, the product or service must be designed in modular forms that can be easily and quickly assembled for a specific customer. The processes must be designed as independent modules that can be easily arranged to meet a variety of needs at the latest possible moment. Operations Strategy as a Pattern of Decisions Operations strategy translates service or product plans and competitive priorities for each market segment into decisions affecting the processes that support those market segments. A service or manufacturing strategy must be selected for each process. These decisions must be continually reevaluated according to the needs of the market.

This pattern of decisions is also a function of the firms core competencies. Operations Strategy across the Organization A firm is a system of interconnected parts or functional areas. Most organizations use management information systems (MIS) to help to link the various functional areas. Full collaboration among the functional areas on decisions is a vital requirement for success. PRACTICE QUIZ: OPERATIONS INTRODUCTION AND STRATEGY Question 1: Order the following sequentially. i. operations strategy ii. business strategy iii. competitive priorities iv. corporate mission A. B. C. D. E. iii, iv, ii, i iv, ii, i, iii iv, iii, ii, i iv, ii, iii, i ii, iv, iii, i

Question 2: Decisions that relate to system capacity, geographic location of facilities, the arrangement of departments and placement of equipment are referred to as: A. short-term decisions B. strategic decisions. C. long-term planning. D. planning and control decisions. E. all of the above. Question 3: Service providers generally: A. experience a higher degree of customer contact than goods producing operations. B. have a much higher uniformity of input than do goods producing operations. C. can measure quality much easier than goods producing operations. D. often deliver output that is NOT as uniform as that of goods producing operations. E. Both A and D Question 4: A capability that an organization must have just to compete or be considered as a competitor in a particular market is known as: A. economies of scale B. order qualifier C. competitive priority D. order winner E. strategic plan Question 5:

In operations, the transformation can be A. locational B. informational C. physiological D. psychological E. all of the above