Using Operations

to Create Value

Introduction to
Operations Management
Copyright ©2016 Pearson Education, Limited. © Pearson Education, Inc. publishing as Prentice Hall
Key operations questions

❑ What is operations management?

❑ What is the input-transformation-output process?

❑ How do operations processes have different
characteristics?
Operations are everywhere

The best way to start understanding the nature of

‘Operations’ is to look around you.

Everything you can see around you (except the flesh and
blood) has been produced by an operation.

Every service you consumed today (radio station, bus

service, lecture, etc.) has also been produced by an
operation.

Operations managers create everything you buy, sit on,

wear, eat, throw at people and throw away.
They are all operations

Retail operation Kitchen unit Take-out/restaurant operation

manufacturing operation

Source: Nigel Slack

Operations management in all types of organization

Automobile assembly factory – operations

management uses machines to efficiently
assemble products that satisfy current
customer demands

Source: Nataliya Hora /Shutterstock.com

Operations management in all types of organization
(Continued)
Advertising agency – operations
management uses our staff’s knowledge
and experience to creatively present
ideas that delight clients and address
their real needs

Source: Shutterstock/Luciano Mortula

What is Operations Management?
Operations management (OM) is
the set of activities that create
value in the form of goods and
services by transforming inputs
into outputs
Organizing to Produce Goods and
Services
Essential functions:
1. Marketing – generates demand
2. Production/operations – creates the
product
3. Finance/accounting – tracks how well
the organization is doing, pays bills,
collects the money
General model of operations management

Transformed Direct
resources Steering
•Materials operations and
•Information processes
•Customers

Operations
Design Develop
management Output
Shaping Improving the Value-
Input processes, products
resources operation’s added for
products and and
capabilities customers
services services
Deliver
Transforming Planning and
resources
controlling
•Facilities ongoing
operations
•Staff
 The Supply Chain
Through the three functions - marketing, operations, and
finance – value for customer is created. However, firms
seldom create this value by themselves. Instead, they rely
on a variety of suppliers who provide everything from raw
materials to accounting services. These suppliers, when
taken together, can be thought of as a supply chain.
A Supply Chain is a global network of organizations and
activities that supply a firm with goods and services.

Supplier Manufacturer Distributor Retailer Customer

 Why Study OM?
1. OM is one of three major functions of any
organization; we want to study how people organize
themselves for productive enterprise
2. We want (and need) to know how goods and
services are produced
3. We want to understand what operations managers
do
4. OM is such a costly part of an organization
Role of Operations in an Organization
Operations and supply chain management underlie all
departments and functions in a business. Whether you
aspire to manage a department or a particular process
within it, or you just want to understand how the process
you are a part of fits into the overall fabric of the business,
you need to understand the principles of operations and
supply chain management.
Role of Operations in an Organization
Operations is one of the key functions within an organization.
Each function is unique and has its own knowledge and skills areas, primary
responsibilities, processes, and decision domains.
From an external perspective, finance generates resources, capital, and funds from
investors and sales of its goods and services in the marketplace. Based on business
strategy, the finance and operations functions then decide how to invest these resources
and convert them into physical assets and material inputs. Operations subsequently
transforms these material and service inputs into product and service outputs. These
outputs must match the characteristics that can be sold in the selected markets by
marketing. Marketing is responsible for producing sales revenue of outputs, which
becomes returns to investors and capital for supporting operations.
Functions such as accounting, information systems, human resources, and engineering
make the firm complete by providing essential information, services, and other
managerial support.
These relationships provide direction for the business as a whole and are aligned to the
same strategic intend. It is important to understand the entire circle, and not just the
individual functional areas. How well these functions work together determines the
effectiveness of the organization. Functions should be integrated and should pursue a
common strategy. Success depend on how well they are able to do so. No part of this
circle can be dismissed or minimized without loss of effectiveness, and regardless of how
departments and functions are individually managed. They are always linked together
through processes.
Role of Operations in an Organization
A firm competes not only by offering new services and
products, creative marketing, and skillful finance, but also
through its unique competencies in operations and sound
management of core processes.
Role of Operations in an Organization

Integration
between
Different
Functional
Areas of a
Business

Figure 1.1
Interfunctional relationships
Engineering/ Product/service
technical Understanding of development
the capabilities and
function constraints of the function
operations process
Analysis of new
technology options Understanding of
process technology
needs New product and
Accounting service ideas
and finance Provision Understanding of the
of relevant capabilities and
function data
Operations constraints of the
Financial analysis function operations process
for performance
and decisions Market
requirements Marketing
Understanding of human function
resource needs Understanding Provision of systems for
of infrastructural design, planning and
Recruitment and system control and improvement
development needs
and training
Human Information
resources technology
function (IT) function

The relationship between the operations function and other core and support functions of the organization
 Ten Decision Areas
1. Design of goods and services
2. Managing quality
3. Process and capacity design
4. Location strategy
5. Layout strategy
6. Human resources and job design
7. Supply-chain management
8. Inventory, MRP, JIT
9. Scheduling
10.Maintenance

© 2011 Pearson Education, Inc. publishing as

Prentice Hall
 The Critical Decisions
1. Design of goods and services
– What good or service should we offer?
– How should we design these products
and services?
2. Managing quality
– How do we define quality?
– Who is responsible for quality?

© 2011 Pearson Education, Inc. publishing as

Prentice Hall
 The Critical Decisions
3. Process and capacity design
– What process and what capacity will
these products require?
– What equipment and technology is
necessary for these processes?
4. Location strategy
– Where should we put the facility?
– On what criteria should we base the
location decision?

© 2011 Pearson Education, Inc. publishing as

Prentice Hall
 The Critical Decisions
5. Layout strategy
– How should we arrange the facility?
– How large must the facility be to meet
our plan?
6. Human resources and job design
– How do we provide a reasonable work
environment?
– How much can we expect our
employees to produce?

© 2011 Pearson Education, Inc. publishing as

Prentice Hall
 The Critical Decisions
7. Supply-chain management
– Should we make or buy this component?
– Who should be our suppliers and how can
we integrate them into our strategy?
8. Inventory, material requirements
planning, and JIT
– How much inventory of each item should
we have?
– When do we re-order?

© 2011 Pearson Education, Inc. publishing as

Prentice Hall
 The Critical Decisions
9. Intermediate and short–term
scheduling
– Are we better off keeping people on the
payroll during slowdowns?
– Which jobs do we perform next?
10. Maintenance
– How do we build reliability into our
processes?
– Who is responsible for maintenance?

© 2011 Pearson Education, Inc. publishing as

Prentice Hall
 A Process View
A process view of a firm provides much more relevant picture of the way firms
actually work. Departments typically have their own set of objectives, asset of
resources with capabilities to achieve those objectives, and managers and
employees responsible for performance.
The concept of a process, however, can be much broader. A process can have
its own set of objectives, involve a workflow that is that cuts across
departmental boundaries, and require resources from several departments.
The key success in many organizations is a keen understanding of of how their
processes work, since an organization is is only as effective as its processes.
 How Processes Work

Figure 1.2
 How Processes Work

• Every process and every person in the

organization has customers
– External customers
– Internal customers

• Every process and every person in the

organization relies on suppliers
– External suppliers
– Internal suppliers
 How Processes Work
Any process has inputs and outputs. Inputs can can include a combination of
human resources (workers and managers), capital (equipment and facilities),
purchased materials and services, land, and energy.
Process provides outputs to customers. These outputs may often be services
or tangible products. Every product and every person in an organization has
customers, internal or external.
In a similar fashion, every process and every person in an organization relies
on suppliers, internal or external.
Inputs and outputs vary depending on the service or product provided.
 Examples of dominant transformed resource inputs
Predominantly Predominantly Predominantly
processing inputs of processing inputs of processing inputs of
materials information customers
• All manufacturing • Accountants • Hairdressers
operations
• Bank headquarters • Hotels
• Mining companies
• Market research • Hospitals
• Retail operations company
• Mass rapid
• Warehouses • Financial analysts transports
• Postal services • News service • Theatres
• Container shipping • University research • Theme parks
line unit
• Dentists
• Trucking companies • Telecoms company
Some operations described in terms of their processes
Operation Some of the operation’s Some of the operation’s Some of the operation’s
inputs processes outputs
Airline Aircraft Check passengers in Transported passengers
Pilots and air crew Board passengers and freight

Ground crew Fly passengers and freight around

Passengers and freight the world
Care for passengers
Department Products for sale Source and store products Customers and products
store Sales staff Display products ‘assembled’ together

Information systems Give sales advice

Customers Sell products
Police Police officers Crime prevention Lawful society, public with
Computer systems Crime detection a feeling of security
Information systems
Public (law-abiding and Information gathering
criminals) Detaining suspects
Frozen food Fresh food Source raw materials Frozen food
manufacturer Operators Prepare food
Processing technology Freeze food
Cold storage facilities Pack and freeze food
Service and Manufacturing Processes
Differ Across Nature of Output and Degree of
Customer Contact

More like a More like

manufacturing a service
process process

• Physical, durable output • Intangible, perishable output

• Output can be inventoried • Output cannot be inventoried
• Low customer contact • High customer contact
• Long response time • Short response time
• Capital intensive • Labor intensive
• Quality easily measured • Quality not easily measured
Service and Manufacturing Processes
Two major types of processes are (1) service and (2) manufacturing.

Differences
Why do we distinguish between service and manufacturing processes? The answer lies at the hearth
of the design of competitive processes.
The two key differences are (1) the nature of their output and (2) the degree of customer contact.
In general, manufacturing processes have longer response times, are more capital intensive, and their
quality can be measured more easily than those of service processes.
Manufacturing processes convert materials into goods that have a physical form we call products. The
transformation processes change the materials on one or more of the following dimensions:
1. Physical properties
2. Shape
3. Size
4. Surface finish
5. Joining parts and materials
The outputs from manufacturing processes can be produced, stored, and transported in anticipation of
future demand.
If a process does not change the properties of materials on at least one of these five dimensions, it is
considered a service process. Service processes tend to produce intangible, perishable outputs.
Service and Manufacturing Processes
A second key difference between service processes and manufacturing processes is degree of
customer contact. Service processes tend to have a higher degree of customer contact. Customers
may take an active role in the process itself.

Similarities
Even though service processes do not keep finished goods inventories, they do inventory their inputs.
Some manufacturing processes, on the other hand, do not inventory their outputs because they are
too costly.

At the level of the firm, service providers do not just offer services and manufacturers do not just offer
products.
When you look at what is being done at the process level, it is much easier to see whether the process
is providing a service or manufacturing a product. However, this clarity is lost when the whole
company is classified as either a manufacturer or a service provider because it often performs both
types of processes.
How do operations processes have different characteristics?
All operations are input-transformation-output processes

Inputs Transformation process Outputs

Operations input resources and outputs

Transformed
resources
•Materials
•Information
•Customers

Input Output
resources
Transformation process products and Customers
services

Transforming
resources
•Facilities
Outputs are products and services
•Staff
that add value for customers

All operations are input–transformation–output processes

A typology of operations and processes
The four Vs...

Low Volume High

High

High Variety Low

High Variation in demand Low

High Visibility Low

A typology of operations and processes (Continued)
The implications of high and low Volume in operations and
processes...

Implications Implications

• Low repetition • High repeatability

• Each staff member Low Volume High • Specialization
performs more of • Capital intensive
each task
• Low unit costs
• Less systemization
• High unit costs
A typology of operations and processes (Continued)

The implications of high and low Variety in operations and

processes...

Implications Implications

• Flexible • Well defined

• Complex
High Variety High
Low • Routine
• Match customer • Standardized
needs • Regular
• High unit costs • Low unit costs
A typology of operations and processes (Continued)

The implications of high and low Variation in operations and

processes...

Implications Implications

• Changing capacity
•
Variation in • Stable
Anticipation High High
Low • Routine
• Flexibility demand
• Predictable
• In touch with
demand • High utilization
• High unit costs • Low unit costs
A typology of operations and processes (Continued)
The implications of high and low Visibility in operations and
processes...

Implications Implications
• Short waiting • Time lag between
tolerance production and
• Satisfaction governed High Visibility High
Low consumption
by customer • Standardization
perception • Low contact skills
• Customer contact • High staff utilization
skills needed
• Received variety is • Centralization
high • Low unit costs
• High unit costs