OPMG 3000

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Defining Operations
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Diego Rivera, Detroit Industry, 1933 Front Wall
Mural, Detroit Institute of Art
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Diego Rivera, Detroit Industry, 1933 South Wall
Mural, Detroit Institute of Art
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Goals for Course?
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What is Operations?
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How is Wealth Created?
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OPERATIONS
Operations is all about adding value, and
creating wealth
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Operations 80-90 Hidden
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Definitions

• Transformation definition
• Organizational definition
• Economic definition
• Transaction cost definition
• Added-value definition

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What is Operations?Transformation Definition

• The design, control, and management of processes
  that transform inputs into finished goods and
  services for sale to customers

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What is Operations?Transformation Definition
INPUTS
OUTPUTS
Materials
Goods
Labor
Transformation Processes
Capital
Services
Knowledge
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Who are operations managers?
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Who are operations managers?

• Managers transform inputs into outputs
• Example Accounting Manager
• Inputs data, information, labor
• Transformation application of accounting
  principles and knowledge
• Outputs accounting reports, knowledge of
  performance, ...
• All managers have an operation to run
• Therefore
• All managers are Operations Managers!

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Manufacturing and Services Continuum of
Characteristics
Service Orientation
Mining (coal)
Automobiles
Fast Food
Banking
Consulting
Manufacturing Orientation
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What is Operations?Organizational Definition
Corporate Strategy
Strategy Business C
Strategy Business A
Strategy Business B
Marketing
Finance
Accounting
OPERATIONS
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What is Operations?Economic Definition
Operations is responsible for improving
the production function of the firm.
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ExampleBicycle Manufacturing
Lots of automation Lots of labor / unit
Huffy
Capital Used (equipment) per unit produced
Serotta
Automated equipment Little labor per unit
Little automation Lots of skilled labor
Moderate AutomationModerate Labor
Trek
Labor Used per unit produced
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ExampleBicycle Manufacturing
Desirable
Undesirable!
Capital Used (equipment) per unit produced
Efficient Frontier
Desirable
Desirable
Labor Used per unit produced
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What is Operations?Economic Definition
Capital Used (equipment) per unit produced
Labor Used per unit produced
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Why Do Firms Exist?
The assumptions of micro-economics, when applied
to the question of why there are firms, suggest
that firms should not exist at all.
Barney and Ouchi (eds), Organizational Economics,
1986.
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What is Operations? Transaction-Cost Definition
Firms exist because it is difficult to use the
price system to coordinate all economic
activity. The question always is, will it pay
to bring an extra exchange transaction under the
organizing authority? At the margin, the costs
of organizing within the firm will be equal
either to the costs of organizing in another firm
or to the costs involved in leaving the
transaction to be organized by the price
mechanism.
Coase, The nature of the firm, Economica 4,
1937.

• General approach to economic organization
• Markets and firms are alternative instruments for
  completing a related set of transactions
• The relative efficiency of each determines which
  mode is used
• The costs of writing and executing complex
  contracts vary with the properties of the market
  and the characteristics of the human decision
  makers involved
• The same human and environmental factors apply to
  both transactions between firms and within a firm

Williamson, Markets and Hierarchies, 1975
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What is Operations?Added-Value Definition

• Value is the customers subjective evaluation,
  adjusted for cost, of how well a good or service
  meets or exceeds expectations.
• Note that
• Value is defined in terms of a singular customer
• It is a subjective evaluation
• The evaluation is compared with an expectation
• Expectations can be influenced and do change

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Added Value Model
Finance
Accounting
Profit!
Loss!
Information Systems
People and Organization
adapted from Porter, Competitive Advantage, Free
Press, 1985
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Added Value Model
BusinessEnvironment
The Firm
Value Chain
Suppliers
Customers
Competitors
adapted from Porter, Competitive Advantage, Free
Press, 1985
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Adding Value withMarketing and Operations

• Inputs
• Materials
• Labor
• Ideas
• Technology

• Outputs
• Goods
• Services
• Products

How?
Marketing and Operations touch the product
Marketing
Operations
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What is Operations?Added-Value Definition
Operations is the fundamental means by which
firms
Add Value!
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What is Operations? How do Firms Add Value?
Suppose you are in the market for a new
automobile? What attributes are you most
interested in? What would cause you to purchase
one car versus another?
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What is Operations?How do Firms Add Value?

• Greater Flexibility
• Greater variety
• Customization for customer needs / desires
• Useful Innovation
• Features, technology
• Better performance
• New capabilities
• Often unrecognized

• Greater Productivity
• Lower costs and expenses
• Lower prices for the customer
• Higher Quality
• Better performance
• Greater durability, reliability, aesthetics, ...
• Better Timeliness
• Faster response and turnaround
• On-time delivery, meet promises

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The Value Equation
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Defining Operations