Lecture 1. Operation Management

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Introduction

• Lecture 1. Operation Management

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• Operations Management Introduction
• Definition
• Operations Functions and environment
• Operations Objectives
• Operations Systems
• The life cycle approach
• Historical development of OM
• Productivity and competitiveness

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What is Operation Management?

• Operation management is the set of activities
  that creates value in the form of goods and
  services by transforming inputs into outputs.

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Why OM?

• OM is one of three major functions (marketing,
  finance, and operations) of any organization
• To know how goods and services are produced
• To understand what operations managers do
• OM is a costly part of an organization
• OM presents interesting career opportunities e.g.
  SCM, QA, Process Re-engineering, etc

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Historical Development of OM

• 1910s - Principles of scientific management (time
  study work study concepts- FW Taylor)
  Industrial psychology (motion study), Moving
  assembly line (activity scheduling chart- Henry
  ford), EOQ (inventory control- FW Haris)
• 1930s- Quality control (sampling inspection and
  statistical tables for QC), Hawthorne studies of
  worker motivation (activity sampling for work
  analysis)
• 1940s-Multidisciplinary team approaches to
  complex system problems (Simplex method for liner
  programming- OR groups, Dantzig)
• 1950/60s- Extensive development operations
  research tools (simulation, waiting line theory,
  PERT,CPM)
• 1970s -Widespread use of computers in business
  (shop scheduling, inventory ontrol, MRP) service
  quality and productivity (mass production in
  service sector- MCDonalds)

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Historical Development of OM

•  1980s- Manufacturing strategy paradigm JIT, TQC
  and factory automation (kanban) synchronous
  manufacturing (bottleneck analysis)
• Computer aided design (CAD 1970)
• Flexible manufacturing system (FMS 1975)
• Baldrige Quality Awards (1980)
• Computer integrated manufacturing (1990)
• 1990s- Total quality management (Baldrige quality
  award, ISO 9000,quality function deployment
  etc.), business process reengineering, electronic
  enterprises, supply chain management
• 2000s-E commerce (Internet, World Wide Web)

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Organizational Functions

• Marketing
• Gets customers

• Operations
• creates product or service

• Finance/Accounting
• Obtains funds
• Tracks money

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Functions - Bank
Commercial Bank
Finance/
Operations
Marketing
Accounting
Transactions
Check
Teller
Security
Clearing
Scheduling
Processing
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Functions - Airlines
Airlines
Finance/
Operations
Marketing
Accounting
Facility
Ground
Flight
Catering
Support
Operations
Maintenance
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Functions - Manufacturing
Manufacturing
Finance/
Operations
Marketing
Accounting
Quality
Production
Manufacturing
Purchasing
Control
Control
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Examining the options for increasing contribution

• A firm manager faces with three choices to three
  strategies.
• Strategy 1 (Marketing Option) Increase sales
  revenue by 50. By increasing sales by 50,
  contribution will turn increase 71.
• Strategy2 (Financial Option) Reduce finance cost
  by 50 increases contribution by 21
• Strategy 3 (OM option) Reduce production cost by
  20. It increase contribution by 114

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Options for increasing contribution
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Operation Strategy

• Operation Strategy is concerned with setting
  broad policies and plans for using the resources
  of a firm to best support its long term
  competitive strategy.
• Operation strategy mist be designed to anticipate
  future needs.

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Competitive dimensions of Operation

• Cost factor
• Product differentiation
• Rapid Response- Delivery Speed
• Coping with changes in demand
• Flexibility and New Product Introduction

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Operations Function and its environment
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Operation Objectives
Create product and services of the organization
with a best suited conversion process, minimizing
cost

• Efficiency measurement criteria
• Effective process design
• Cost control of the material
• Cost control on factor of production
• Cost control on facility utilization
• Production as per expected demand
• Efficient process design
• Product or service quality

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Expectations of Management
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Production Management Process
Planning
Organizing
Models Behavior
Controlling
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Planning
Planning is setting a course of action that
determines future decision making. Planning
defines operational policy, program, forecasting,
capacity planning, and scheduling. Product
planning and designing, Facility planning and
layout design for conversion process of inputs
into desired outputs.
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Organizing
Setting authority Establish a structure of
roles and flow of information within the
operation system. Determines tasks and
authorities of each individual as well as work
center Organizing to Achieve operation goals and
objectives.
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Controlling
Control all the activities Comparing actual
performance with the standards for corrective
action. Measuring actual performance in
accordance with planned performance Determine
present status and future course of action.
Controlling concern with cost, quality and
scheduling.
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Behavior
Understand the behavior of workers and
employees. Behavior of workers and employees
are affected by planning, scheduling and
controlling activities of operation managers.
Behavior is affected by leadership, motivation,
communication, inter/intra personal relationship
and finally by their attitude.
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Models
Desired outcome has deviated from the planned
process. Deploy Mathematical and quantitative
techniques in decision making such as network
analysis, linear programming, queuing theory
etc. Types of the model depends upon types of
the problem and affecting variables. As example,
Linear programming technique is used when there
are multiple variable and constraints. Assignment
technique is used for assigning resources to
activities to the particular machine or person.
Similarly, transportation model is used for
minimization of the transportation cost for
delivery of goods and equipments.
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Product/operation Management function
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Production Systems

• Production is creation of goods and services
• Production system uses resources to transform
  inputs into some desired output
• Transformation ProcessInputs Outputs
• Labor Goods and services
• Raw materials
• Customer

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Manufacturing Vs Service

• Manufacturing Operations
• It yields tangible input from conversion process.
• Output can be store as inventory
• Operations are capital intensive as they use less
  labor and more machine.
• No customer contact during conversion process.
• Complex and interrelated processes are followed
  in manufacturing operations

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Manufacturing Vs Service

• Service Operations
• Service Operations produce intangible outputs
• Service cannot be inventoried and consume as soon
  as produced
• Service operation are labor intensive.
• High degree of customer participation in service
  generation.
• Simple service process is applied in service
  operations.

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Life cycle Approach
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Product Life Cycle
Predictable pattern of demand for the product
throughout the product life. Life of products
may vary from product to product and industry to
industry. Time span of each stage varies from
one stage to another. Determines facilities,
labor, capital, management system required for
producing at each stage. Determine the pattern
and process of each stage
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Operation Issues of Product Life Cycle
Product life cycle is concerned with the pattern
of demand for product, its introduction to market
to the point where the product faces the decision
of the customer choice and preference. The study
of the pattern and process of product life cycle
helps in determining facilities, labor, capital
and management system etc. The concern for the
operation manager is to determine the pattern of
the product life cycle and then forecast the
resources required for producing the product.
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• CONCERNS for Operation manager for Product Life
  Cycle
• When various states of product life cycle occur
  for our product?
• What management, facilities and resources are
  needed on various stages of life cycle?
• What should be done with existing facilities and
  conversion process, when product proceeds through
  these various stages?
• What and when new product should be introduced to
  sustain the existing system?

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Product Life Cycle
Growth
Maturity
Decline
Introduction
Touch screen
Time
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Product Life Cycle, Sales, Cost, and Profit
Cost of Development Manufacture
Sales Revenue
Sales, Cost Profit .
Profit
Cash flow
Loss
Time
Introduction
Maturity
Decline
Growth
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Product Life CycleIntroduction

• Low volume production
• Research
• Industry structure is small
• process modification and enhancement
• Product verities

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Introduction Phase strategy
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Product Life CycleGrowth

• Product design begins to stabilize
• Effective forecasting of capacity becomes
  necessary, as competition increase
• Adding or enhancing capacity may be necessary
• Focus on standardization

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Growth phase strategies
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Product Life CycleMaturity

• Competitors now established
• High volume, innovative production may be needed
• Emergence of dominant design
• Improved cost control, reduction in options,
  paring down of product line

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Maturity phase strategy
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Decline phase strategy
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Product Life CycleDecline

• Unless product makes a special contribution, must
  plan to terminate offering

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Exciting New Trends In operation Management
Operation manager are confronted with ever
changing world. These dynamics are the result of
a variety of forces, from globalization of world
trade to the transfer of ideas, products, and
money at electronic speeds.
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Exciting New Trends In operation Management

• The challenges of the Operation Management in
  this era are as follow
• Global Focus
• Just in time Performance
• Supply chain partnering
• Rapid Product Development
• Mass Customization
• Empowered Employees
• Environmentally sensitive production
• Business Ethics

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Productivity and Competitiveness
The creation of goods and services requires
changing resources into goods and
services. Productivity is the ration of outputs
(goods and services) divided by the inputs
(resources, such as labor and capital)
. Operation Managers job is to enhance
(improve) this outputs to inputs . Improving
productivity means improving efficiency.
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Productivity Measurement
Productivity is a common measure of how well a
country, industry or business unit is using its
resources (or factor of production).
Productivity is a relative measure. In other
words, to be meaningful, it needs to be compared
with something else.
Productivity comparison can be done in two ways.
First a company can compare itself with similar
operations within its industry, or it can use
industry data when such data are available (e.g
comparing productivity among different stores in
a franchise) Another approach is to measure
productivity over time within the same operation.
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Productivity Measurement
Productivity can be expressed as partial
measures, multifactor measures or total
measures. The use of just one resource input to
measure productivity is known as single factor
productivity or Partial productivity. E.g
A broader view of productivity is multifactor
productivity. It is also term as total factor
productivity. Multifactor productivity is
calculated as follow
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Example 1

• A light bulb production company has a staff of
  4, each working 8 hours per day (for a payroll
  cost of 640/day) and overhead expense of 400
  per day. The company processes a closes on 8 Led
  bulbs each day. The company recently purchased a
  computerized system for Led bulb-search system
  that will allow the processing of 14 Led bulbs
  per day. Although the staff, their work hours,
  and pay are the same, the overhead expenses are
  now 800 per day.
• Based on above data, calculate
• Labor productivity with old system (Ans. 0.25
  bulbs per labor-hour)
• Labor producitvity with the new system (Ans.
  0.437 bulbs per labor-hour)
• Multifactor productivity with the old system
  (Ans. 0.0077 bulbs per dollar)
• Multifactor productivity with the new system
  (Ans. 0.0097 bulbs per dollar)

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• Calculate the productivity for the following
  operations
• Three Employees process 600 insurance policies in
  a week. They work 8 hours per day, 5 days per
  week. Calculate their productivity. (Ans. 5
  Policies/hr)
• A team of workers makes 400 units of a product,
  which is valued by its standard cost of 10 each
  (before markeups for other expense and profit).
  The accounting department reports that for this
  job the actual costs are 400 for labor, 1000
  for materials, and 300 for overhead. Calculate
  multifactor productivity. (Ans. 2.35)

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• Apple new Iphone 4S are produced on an automated
  assembly line process. The standard cost of
  Iphone 4S is 150 ( labor, 30 materials,70
  and overhead, 50). The sales price is 300 per
  unit.
• To achieve a 10 multifactor productivity
  improvement by reducing material cost only, by
  what percentage must those costs be reduced?
  (19.4)
• To achieve a 10 multifactor productivity
  improvement by reducing labor costs only, by what
  percentage must those costs be reduced? (45.43)

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1. Define Operation Management and discuss its
   relationship with various management functions.
   Explain the role of operation management in an
   organization to achieve competitive advantage.
   (15) PU2007
2. Define operation management? Why is operation
   Management important to any orgnanization? (7)
3. What are the objectives of operation Management?
   Discuss the various environments under which
   production operation manager has to work.
4. Define productivity. What is the relationship
   between production and productivity?
5. What is operation management? How can operations
   be used as a competitive weapon?
6. Describe the recent trends in operation
   management.
7. Define operation. Why do you think it is
   necessary for management students to study
   operation management?
8. How are service organizations different from
   manufacturing organizations? Explain with
   suitable expample.
9. Define operation function with two suitable
   examples? Why study of operation management is
   important for business students?
10. Define operation management.Explain the
    importance of operation management. How can
    manager benefit from it?

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End of Lecture