CHAPTER 1.

INTRODUCTION TO the greater the value-added, the greater the effectiveness of

OPERATIONS MANAGEMENT these operations.

1.1 INTRODUCTION In for-profit organizations, the value of outputs is measured by

the prices that customers are willing to pay for those goods or
Operations is that part of a business organization that is services.
responsible for producing goods and/or services.
1.2 PRODUCTION OF GOODS VERSUS
Goods are physical items that include raw materials, parts, PROVIDING SERVICES
subassemblies such as motherboards that go into computers,
and final products such as cell phones and automobiles. COMPARISON BETWEEN PRODUCING GOODS AND
RENDERING SERVICES:
Services are activities that provide some combination of time,
location, form, or psychological value. 1. DEGREE OF CUSTOMER CONTRACT
Manufacturing: does not involve much degree of customer
contract.
Business organizations have three basic functional areas: Services: involves a high degree of customer contract.
finance, marketing, and operations.
2. LABOR CONTENT OF JOBS
Finance is responsible for securing financial resources at
favorable prices and allocating those resources throughout the Manufacturing: lower degree of labor content
organization, as well as budgeting, analyzing investment Services: higher degree of labor content, except automated
proposals, and providing funds for operations. services.
Marketing is responsible for assessing consumer wants and
3. UNIFORMITY OF INPUTS
needs, and selling and promoting the organization’s goods or
services. Manufacturing: more UNIFORM in inputs.
Operations is responsible for producing the goods or providing Services: more VARIABILITY/VARIABLE in inputs.
the services offered by the organization.
4. MEASUREMENT OF PRODUCTIVITY

Manufacturing: much easier

Operations management is the management of systems or Services: much difficult
processes that create goods and/or provide services.
5. QUALITY ASSURANCE
A supply chain is the sequence of organizations—their
facilities, functions, and activities—that are involved in Manufacturing: much easier because there is less opportunity
producing and delivering a product or service. The sequence in making mistakes.
begins with basic suppliers of raw materials and extends all the Services: more challenging due to high variation of inputs.
way to the final customer.
6. INVENTORY

Manufacturing: more use of inventory.

Services: less use of inventory.

7. WAGES
The creation of goods or services involves transforming or
converting inputs into outputs. Various inputs such as capital, Manufacturing: often well-paid and less wage variation.
labor, and information are used to create goods or services Services: wages may vary depending on the service/s
using one or more transformation processes (e.g., storing, rendered.
transporting, repairing).
8. ABILITY TO PATENT
Value-added is the term used to describe the difference
between the cost of inputs and the value or price of outputs. Manufacturing: easier to patent.
Services: some services cannot be patented.
In nonprofit organizations, the value of outputs (e.g., highway
construction, police and fire protection) is their value to society;
SIMILARITIES (PRODUCING GOODS AND RENDERING CAREER OPPORTUNITIES IN OPERATIONS
SERVICES) MANAGEMENT AND SUPPLY CHAIN FIELDS

a. Forecasting and capacity planning to match supply and operations manager, production analyst, production manager,
demand inventory manager, purchasing manager, schedule
b. Process management coordinator, distribution manager, supply chain manager,
c. Managing variations quality analyst, quality manager, office manager, store
d. Monitoring and controlling costs and productivity manager, and service manager.
e. Supply chain management
f. Location planning, inventory management, quality control, 1.5 PROCESS MANAGEMENT
and scheduling
A process consists of one or more actions that transform
1.3 WHY LEARN ABOUT OPERATIONS inputs into outputs. In essence, the central role of all
MANAGEMENT? management is process management.

Finance and operations management personnel cooperate by Businesses are composed of many interrelated processes.
exchanging information and expertise in such activities as the Generally speaking, there are three categories of business
following: processes:

1. Budgeting. Budgets must be periodically prepared to plan 1. Upper-management processes. These govern the operation
financial requirements. Budgets must sometimes be adjusted, of the entire organization. Examples include organizational
and performance relative to a budget must be evaluated. governance and organizational strategy.
2. Economic analysis of investment proposals. Evaluation of 2. Operational processes. These are the core processes that
alternative investments in plant and equipment requires inputs make up the value stream. Examples include purchasing,
from both operations and finance people. production and/or service, marketing, and sales.
3. Provision of funds. The necessary funding of operations and 3. Supporting processes. These support the core processes.
the amount and timing of funding can be important and even Examples include accounting, human resources, and IT
critical when funds are tight. Careful planning can help avoid (information technology).
cash-flow problems.
Business process management (BPM) activities include
Lead time is the time between ordering a good or service and process design, process execution, and process monitoring.
receiving it. One important piece of information marketing Two basic aspects of this for operations and supply chain
needs from operations is the manufacturing or service lead management are managing processes to meet demand and
time in order to give customers realistic estimates of how long dealing with process variability.
it will take to fill their orders.

Management information systems (MIS) is concerned with

providing management with the information it needs to
effectively manage. This occurs mainly through designing
systems to capture relevant information and designing reports.
MIS is also important for managing the control and decision-
making tools used in operations management.

The personnel or human resources (HR) department is

concerned with recruitment and training of personnel, labor PROCESS VARIATION
relations, contract negotiations, wage and salary
administration, assisting in manpower projections, and There are four basic sources of variation:
ensuring the health and safety of employees.
1. The variety of goods or services being offered. The greater
Public relations are responsible for building and maintaining a the variety of goods and services, the greater the variation in
positive public image of the organization. Good public relations production or service requirements.
provide many potential benefits. 2. Structural variation in demand. These variations, which
include trends and seasonal variations, are generally
1.4 CAREER OPPORTUNITIES AND predictable. They are particularly important for capacity
PROFESSIONAL SOCIETIES planning.
3. Random variation. This natural variability is present to some These decisions usually, but not always, require long-term
extent in all processes, as well as in demand for services and commitments. Moreover, they are typically strategic decisions.
products, and it cannot generally be influenced by managers. System operation involves management of personnel,
4. Assignable variation. These variations are caused by inventory planning and control, scheduling, project
defective inputs, incorrect work methods, out-of-adjustment, management, and quality assurance. These are generally
and so on. This type of variation can be reduced or eliminated tactical and operational decisions.
by analysis and corrective action.
A number of other areas are part of, or support, the operations
1.6 THE SCOPE OF OPERATIONS function. They include purchasing, industrial engineering,
MANAGEMENT distribution, and maintenance.

Operations management people are involved in product and 1. Purchasing has responsibility for procurement of materials,
service design, process selection, selection and management supplies, and equipment. Close contact with operations is
of technology, design of work systems, location planning, necessary to ensure correct quantities and timing of
facilities planning, and quality improvement of the purchases. The purchasing department is often called on to
organization’s products or services. evaluate vendors for quality, reliability, service, price, and
ability to adjust to changing demand. Purchasing is also
The operations function includes many interrelated activities, involved in receiving and inspecting the purchased goods.
such as (Airline is used as an illustration) 2. Industrial engineering is often concerned with scheduling,
- Forecasting such things as weather and landing performance standards, work methods, quality control, and
conditions, seat demand for flights, and the growth in material handling.
air travel. 3. Distribution involves the shipping of goods to warehouses,
- Capacity planning, essential for the airline to maintain retail outlets, or final customers.
cash flow and make a reasonable profit. (Too few or 4. Maintenance is responsible for general upkeep and repair of
too many planes, or even the right number of planes equipment, buildings and grounds, heating and air-
but in the wrong places, will hurt profits.) conditioning; removing toxic wastes; parking; and perhaps
- Locating facilities according to managers’ decisions security.
on which cities to provide service for, where to locate
maintenance facilities, and where to locate major and 1.7 OPERATIONS MANAGEMENT AND
minor hubs. DECISION-MAKING
- Facilities and layout, important in achieving effective
use of workers and equipment. Scheduling of planes The chief role of an operations manager is that of planner and
for flights and for routine maintenance; scheduling of decision maker.
pilots and flight attendants; and scheduling of ground
crews, counter staff, and baggage handlers. MODELS
- Managing inventories of such items as foods and A model is an abstraction of reality, a simplified representation
beverages, first-aid equipment, inflight magazines, of something. Models are sometimes classified as physical,
pillows and blankets, and life preservers. schematic, or mathematical.
- Assuring quality, essential in flying and maintenance
operations, where the emphasis is on safety, and 1. Physical models look like their real-life counterparts.
important in dealing with customers at ticket counters, Examples include miniature cars, trucks, airplanes, toy animals
check-in, telephone and electronic reservations, and and trains, and scale-model buildings. The advantage of these
curb service, where the emphasis is on efficiency and models is their visual correspondence with reality.
courtesy. 2. Schematic models are more abstract than their physical
- Motivating and training employees in all phases of counterparts; that is, they have less resemblance to the
operations. physical reality. Examples include graphs and charts,
blueprints, pictures, and drawings. The advantage of
A primary function of an operations manager is to guide the schematic models is that they are often relatively simple to
system by decision making. Certain decisions affect the design construct and change. Moreover, they have some degree of
of the system, and others affect the operation of the system. visual correspondence.
3. Mathematical models are the most abstract: They do not
System design involves decisions that relate to system look at all like their real-life counterparts. Examples include
capacity, the geographic location of facilities, arrangement of numbers, formulas, and symbols. These models are usually
departments and placement of equipment within physical the easiest to manipulate, and they are important forms of
structures, product and service planning, and acquisition of inputs for computers and calculators.
equipment.
Managers use models in a variety of ways and for a variety of - began in 1770s in England and spread to the rest of Europe
reasons. Models are beneficial because they: and to the United States during the 19th century.
1. Are generally easy to use and less expensive than dealing - goods were produced in small shops by craftsmen and their
directly with the actual situation. apprentices.
2. Require users to organize and sometimes quantify - it was common for a person to make the product from start to
information and, in the process, often indicate areas where finish.
additional information is needed. - only simple tools were available.
3. Increase understanding of the problem. - machines were not yet invented.
4. Enable managers to analyze what-if questions. - In the earliest days of manufacturing, goods were produced
5. Serve as a consistent tool for evaluation and provide a using craft production: highly skilled workers using simple,
standardized format for analyzing a problem. flexible tools produced goods according to customer
6. Enable users to bring the power of mathematics to bear on a specifications.
problem. - Craft production is a system in which highly skilled workers
use simple, flexible tools to produce small quantities of
Quantitative approaches to problem solving often embody an customized goods.
attempt to obtain mathematically optimal solutions to - production was slow and costly.
managerial problems.  Quantitative approaches to decision - production costs did not decrease as volume increased.
making in operations management (and in other functional - there were no economies of scale.
business areas) have been accepted because of calculators - A major change occurred that gave the Industrial Revolution
and computers capable of handling the required calculations. a boost: the development of standard gauging systems. This
greatly reduced the need for custom-made goods. Factories
Managers use metrics (performance metrics) to manage and began to spring up and grow rapidly, providing jobs for
control operations. countless people who were attracted in large numbers from
rural areas.
Trade Offs - Decision makers sometimes deal with these
decisions by listing the advantages and disadvantages—the 2. SCIENTIFIC MANAGEMENT
pros and cons—of a course of action to better understand the - brought widespread changes in the management of factories.
consequences of the decisions they must make. - The movement was spearheaded by the efficiency engineer
and inventor Frederick Winslow Taylor, who is often referred to
A major influence on the entire organization is the degree of as the “Father of Scientific Management”. He believed in a
customization of products or services being offered to its “science of management” based on observation,
customers. Customized processes tend to have a much lower measurement, analysis and improvement of work methods,
volume of output than standardized processes, and and economic incentives.
customized output carries a higher price tag. The degree of - The Principle of Scientific Management was published in
customization has important implications for process selection 1911.
and job requirements. The impact goes beyond operations and
supply chains. It affects marketing, sales, accounting, finance, Frank Gilbreth was an industrial engineer who is often referred
and information systems. to as the father of motion study. He developed principles of
motion economy that could be applied to incredibly small
A system can be defined as a set of interrelated parts that portions of a task.
must work together. The systems approach emphasizes
interrelationships among subsystems, but its main theme is Henry Gantt recognized the value of nonmonetary rewards to
that the whole is greater than the sum of its individual parts. motivate workers, and developed a widely used system for
scheduling, called Gantt charts.
Typically, a relatively few issues or items are very important,
so that dealing with those factors will generally have a Harrington Emerson applied Taylor’s ideas to organization
disproportionately large impact on the results achieved. This structure and encouraged the use of experts to improve
well-known effect is referred to as the Pareto phenomenon. organizational efficiency. He testified in a congressional
This is a few factors account for a high percentage of the hearing that railroads could save a million dollars a day by
occurrence of some event(s). applying principles of scientific management.

1.8 THE HISTORICAL EVOLUTION OF Henry Ford, the great industrialist, employed scientific
OPERATIONS MANAGEMENT management techniques in his factories. Ford adopted the
scientific management principles espoused by Frederick
1. THE INDUSTRIAL REVOLUTION Winslow Taylor. He also introduced the moving assembly line,
which had a tremendous impact on production methods in Western approach that features short-term employment,
many industries specialists, and individual decision making and responsibility.

Mass production is a system in which low-skilled workers use DECISION MODELS AND MANAGEMENT SCIENCE
specialized machinery to produce high volumes of
standardized goods.
F. W. Harris developed one of the first models in 1915: a
The key concept that launched mass production was mathematical model for inventory order size.
interchangeable parts, sometimes attributed to Eli Whitney, an
American inventor who applied the concept to assembling
In the 1930s, three coworkers at Bell Telephone Labs—H. F.
muskets in the late 1700s. The basis for interchangeable parts
was to standardize parts so that any part in a batch of parts Dodge, H. G. Romig, and W. Shewhart—developed statistical
would fit any automobile coming down the assembly line. procedures for sampling and quality
control.
Interchangeable parts - parts of a product made to such
precision that they do not have to be custom fitted. In 1935, L.H.C. Tippett conducted studies that provided the
groundwork for statistical sampling theory.

A second concept used by Ford was the division of labor,

During the 1960s and 1970s, management science techniques
which Adam Smith (Father of Economics) wrote about in The
were highly regarded; in the 1980s, they lost some favor.
Wealth of Nations (1776). Division of labor means that an
However, the widespread use of personal computers and user-
operation, such as assembling an automobile, is divided up
into a series of many small tasks, and individual workers are friendly software in the workplace contributed to a resurgence
assigned to one of those tasks. in the popularity of these techniques.

THE HUMAN RELATIONS MOVEMENT

CHAPTER 2. COMPETITIVENESS,
Lillian Gilbreth, a psychologist and the wife of Frank Gilbreth, STRATEGY AND PRODUCTIVITY
worked with her husband, focusing on the human factor in
work. (The Gilbreths were the subject of a classic film, 2.2 COMPETITIVENESS
Cheaper by the Dozen).

Elton Mayo conducted studies at the Hawthorne division of Competitiveness How effectively an organization meets the
Western Electric. His studies revealed that in addition to the
wants and needs of customers relative to others that offer
physical and technical aspects of work, worker motivation is
critical for improving productivity. similar goods or services. It is an important factor in
determining whether a company prospers, barely gets by, or
Abraham Maslow developed motivational theories, which fails.
Frederick Hertzberg refined. Douglas McGregor added Theory
X and Theory Y. These theories represented the two ends of
the spectrum of how employees view work. Marketing influences competitiveness in several ways,
including:
Theory X, on the negative end, assumed that workers do not
like to work, and have to be controlled—rewarded and
punished—to get them to do good work. The Theory X
approach resulted in an adversarial environment 1. Identifying consumer wants and/or needs is a basic input in
an organization’s decision-making process, and central to
Theory Y, on the other end of the spectrum, assumed that competitiveness.
workers enjoy the physical and mental aspects of work and
2. Price and quality are key factors in consumer buying
become committed to work. The Theory Y approach resulted in
empowered workers and a more cooperative spirit. decisions. It is important to understand the trade-off decision
consumers make between price and quality.
William Ouchi added Theory Z, which combined the Japanese
approach with such features as lifetime employment, employee
problem solving, and consensus building, and the traditional
3. Advertising and promotion are ways organizations can 3. Putting too much emphasis on short-term financial
inform potential customers about features of their products or performance at the expense of research and development.
services, and attract buyers.
4. Placing too much emphasis on product and service design
and not enough on process design and improvement.
Operations has a major influence on competitiveness through: 5. Neglecting investments in capital and human resources.
1. Product and service design should reflect joint efforts of 6. Failing to establish good internal communications and
many areas of the firm to achieve a match between financial cooperation among different functional areas.
resources, operations capabilities, supply chain capabilities,
7. Failing to consider customer wants and needs
and consumer wants and needs.
2. Cost of an organization’s output is a key variable that affects
pricing decisions and profits. 2.3 MISSION AND STRATEGIES
3. Location can be important in terms of cost and convenience
for customers. Location near inputs can result in lower input
costs. Location near markets can result in lower transportation Mission The reason for the existence of an organization.
costs and quicker delivery times. Mission statement States the purpose of an organization.
4. Quality refers to materials, workmanship, design, and Goals Provide detail and scope of the mission.
service. Consumers judge quality in terms of how well they
think a product or service will satisfy its intended purpose. Strategies Plans for achieving organizational goals.

5. Quick response can be a competitive advantage. One way

is quickly bringing new or improved products or services to the There are three basic business strategies:
market.
• Low cost
6. Flexibility is the ability to respond to changes.
• Responsiveness
7. Inventory management can be a competitive advantage by
• Differentiation from competitors
effectively matching supplies of goods with demand.
Tactics The methods and actions taken to accomplish
8. Supply chain management involves coordinating internal
strategies.
and external operations (buyers and suppliers) to achieve
timely and cost-effective delivery of goods throughout the
system. Here are some examples of different strategies an organization
might choose from:
9. Service might involve after-sale activities customers
perceive as value-added, such as delivery, setup, warranty Low cost. Outsource operations to third-world countries that
work, and technical support. Service quality can be a key have low labor costs.
differentiator; and it is one that is often sustainable.
Scale-based strategies. Use capital-intensive methods to
10. Managers and workers are the people at the heart and soul achieve high output volume and low unit costs.
of an organization, and if they are competent and motivated,
Specialization. Focus on narrow product lines or limited service
they can provide a distinct competitive edge by their skills and
to achieve higher quality.
the ideas they create.
Newness. Focus on innovation to create new products or
services.
Organizations fail, or perform poorly, for a variety of reasons.
Flexible operations. Focus on quick response and/or
Among the chief reasons are the following:
customization.
1. Neglecting operations strategy.
High quality. Focus on achieving higher quality than
2. Failing to take advantage of strengths and opportunities, competitors.
and/or failing to recognize competitive threats.
Service. Focus on various aspects of service (e.g., helpful, 6. Markets. This includes size, location, brand loyalties, ease
courteous, reliable, etc.). of entry, potential for growth, long-term stability, and
demographics
Sustainability. Focus on environmental-friendly and energy-
efficient operations

The organization also must take into account various internal

factors that relate to possible strengths or weaknesses. Among
Core competencies The special attributes or abilities that give
the key internal factors are the following:
an organization a competitive edge.

SWOT Analysis of strengths, weaknesses, opportunities, 1. Human resources. These include the skills and abilities of
managers and workers, special talents (creativity, designing,
and threats.
problem solving), loyalty to the organization, expertise,
dedication, and experience.

Order qualifiers Characteristics that customers perceive as 2. Facilities and equipment. Capacities, location, age, and cost
minimum standards of acceptability to be considered as a to maintain or replace can have a significant impact on
potential for purchase. operations.

Order winners Characteristics of an organization’s goods or 3. Financial resources. Cash flow, access to additional funding,
services that cause it to be perceived as better than the existing debt burden, and cost of capital are important
competition. considerations.

Environmental scanning The monitoring of events and 4. Customers. Loyalty, existing relationships, and
understanding of wants and needs are important.
trends that present threats or opportunities for a company.
5. Products and services. These include existing products and
services, and the potential for new products and services.
Important factors may be internal or external. The following are 6. Technology. This includes existing technology, the ability to
key external factors: integrate new technology, and the probable impact of
technology on current and future operations.
7. Suppliers. Supplier relationships, dependability of suppliers,
1. Economic conditions. These include the general health and
quality, flexibility, and service are typical considerations.
direction of the economy, inflation and deflation, interest rates,
tax laws, and tariffs. 8. Other. include patents, labor relations, company or product
image, distribution channels, relationships with distributors,
2. Political conditions. These include favorable or unfavorable
maintenance of facilities and equipment, access to resources,
attitudes toward business, political stability or instability, and
and access to markets.
wars.
3. Legal environment. This includes antitrust laws, government
regulations, trade restrictions, minimum wage laws, product 2.4 OPERATIONS STRATEGY
liability laws and recent court experience, labor laws, and
patents.
Operations strategy The approach, consistent with the
4. Technology. This can include the rate at which product
innovations are occurring, current and future process organization strategy, that is used to guide the operations
technology (equipment, materials handling), and design function.
technology.
5. Competition. This includes the number and strength of Quality-based strategies focuses on quality in all phases of an
competitors, the basis of competition (price, quality, special organization.
features), and the ease of market entry. Time-based strategies focuses on reduction of time needed to
accomplish tasks.
2.7 PRODUCTIVITY

Productivity A measure of the effective use of resources,

usually expressed as the ratio of output to input.