Introduction to Operations Management PDF

Final PDF to printer Introduction CHAPTER 1 to Operations Management CHAPTER OUTLINE...

Final PDF to printer Introduction CHAPTER 1 to Operations Management CHAPTER OUTLINE 1.7 Operations Management and Decision Models and Decision Making, 17 Management Science, 23 1.1 Introduction, 3 Models, 18 The Influence of Japanese 1.2 Production of Goods versus Manufacturers, 24 Quantitative Approaches, 19 Providing Services, 7 Performance Metrics, 19 1.9 Operations Today, 24 1.3 Why Learn about Operations Analysis of Trade-Offs, 19 1.10 Key Issues for Today’s Business Management?, 9 Degree of Customization, 20 Operations, 27 1.4 Career Opportunities and Professional Environmental Concerns, 27 Societies, 11 A Systems Approach, 20 Ethical Conduct, 29 1.5 Process Management, 12 Establishing Priorities, 20 The Need to Manage the Supply Chain, 31 Managing a Process to Meet Demand, 13 1.8 The Historical Evolution of Operations Management, 21 Elements of Supply Chain Management, 32 Process Variation, 13 1.6 The Scope of Operations The Industrial Revolution, 21 Operations Tour: Wegmans Food Management, 14 Scientific Management, 21 Markets, 33 Managing the Supply Chain to Achieve The Human Relations Case: Hazel, 37 Schedule, Cost, and Quality Goals, 15 Movement, 23 Problem Solving Guide, 38 LEARNING OBJECTIVES After completing this chapter, you should be able to: LO1.6 Describe the operations function and the nature of the LO1.1 Define the terms operations management and supply chain. operations manager’s job. LO1.2 Identify similarities and differences between production and LO1.7 Explain the key aspects of operations management service operations. decision making. LO1.3 Explain the importance of learning about operations LO1.8 Briefly describe the historical evolution of management. operations management. LO1.4 Identify the three major functional areas of organizations and LO1.9 Describe current issues in business that impact describe how they interrelate. operations management. LO1.5 Summarize the two major aspects of process management. LO1.10 Explain the need to manage the supply chain. 2 ste24102_ch01_002-039.indd 2 11/10/13 4:05 PM  Final PDF to printer This book is about operations management. The subject mat- Recalls of automobiles, foods, toys, and other products; ter is relevant for you regardless of your major. Productivity, major oil spills; and even dysfunctional state and federal quality, e-business, competition, and customer satisfaction are legislatures are all examples of operations failures. They important for every aspect of a business organization. This first underscore the need for effective operations management. chapter presents an introduction and overview of operations Examples of operations successes include the many elec- management. Among the issues it addresses are: What is opera- tronic devices we all use, medical breakthroughs in diag- tions management? Why is it important? What do operations nosing and treating ailments, and high-quality goods and management professionals do? services that are widely available. The chapter also provides an interesting description of the historical evolution of operations management and a discussion of the trends and issues that impact operations management. You will learn about (1) the economic balance that every business organization seeks to achieve; (2) the condition that generally exists that makes achieving the economic balance challenging; (3) the line function that is the core of every business organization; (4) key steps in the history and evolution of operations management; (5) the differences and similarities between producing products and delivering services; (6) what a supply chain is, and why it is essential to manage it; and (7) the key issues for today’s business operations. 1.1 INTRODUCTION Operations is that part of a business organization that is responsible for producing goods and/or services. Goods are physical items that include raw materials, parts, subassemblies Goods Physical items produced such as motherboards that go into computers, and final products such as cell phones and by business organizations. automobiles. Services are activities that provide some combination of time, location, form, Services Activities that or psychological value. Examples of goods and services are found all around you. Every provide some combination book you read, every video you watch, every e-mail or text message you send, every tele- of time, location, form, and phone conversation you have, and every medical treatment you receive involves the opera- psychological value. tions function of one or more organizations. So does everything you wear, eat, travel in, sit on, and access the Internet with. The operations function in business can also be viewed from a more far-reaching perspective: The collective success or failure of companies’ oper- ations functions has an impact on the ability of a nation to compete with other nations, and on the nation’s economy. 3 ste24102_ch01_002-039.indd 3 11/10/13 4:05 PM  Final PDF to printer 4 Chapter One Introduction to Operations Management FIGURE 1.1 The three basic functions of Organization business organizations Finance Operations Marketing The ideal situation for a business organization is to achieve an economic match of sup- ply and demand. Having excess supply or excess capacity is wasteful and costly; having too little means lost opportunity and possible customer dissatisfaction. The key func- tions on the supply side are operations and supply chains, and sales and marketing on the demand side. While the operations function is responsible for producing products and/or delivering ser- vices, it needs the support and input from other areas of the organization. Business organi- zations have three basic functional areas, as depicted in Figure 1.1: finance, marketing, and operations. It doesn’t matter whether the business is a retail store, a hospital, a manufacturing firm, a car wash, or some other type of business; all business organizations have these three basic functions. Finance is responsible for securing financial resources at favorable prices and allocating LO1.1 Define the terms those resources throughout the organization, as well as budgeting, analyzing investment pro- operations management and posals, and providing funds for operations. Marketing is responsible for assessing consumer supply chain. wants and needs, and selling and promoting the organization’s goods or services. Operations is responsible for producing the goods or providing the services offered by the organiza- tion. To put this into perspective, if a business organization were a car, operations would be its engine. And just as the engine is the core of what a car does, in a business organization, operations is the core of what the organization does. Operations management is responsible Operations management for managing that core. Hence, operations management is the management of systems or The management of systems or processes that create goods and/or provide services. processes that create goods and/ Operations and supply chains are intrinsically linked, and no business organization could or provide services. exist without both. A supply chain is the sequence of organizations—their facilities, func- Supply chain A sequence tions, and activities—that are involved in producing and delivering a product or service. The of activities and organizations sequence begins with basic suppliers of raw materials and extends all the way to the final involved in producing and deliv- customer, as seen in Figure 1.2. Facilities might include warehouses, factories, processing ering a good or service. centers, offices, distribution centers, and retail outlets. Functions and activities include fore- casting, purchasing, inventory management, information management, quality assurance, scheduling, production, distribution, delivery, and customer service. Figure 1.3 provides another illustration of a supply chain: a chain that begins with wheat growing on a farm and ends with a customer buying a loaf of bread in a supermarket. Note that the value of the prod- uct increases as it moves through the supply chain. Supply chains are both external and internal to the organization. The external parts of a supply chain provide raw materials, parts, equipment, supplies, and/or other inputs to the organization, and they deliver outputs that are goods to the organization’s customers. The internal parts of a supply chain are part of the operations function itself, supply- ing operations with parts and materials, performing work on products, and/or performing services. FIGURE 1.2 Suppliers’ Direct Final A simple product supply chain Producer Distributor suppliers suppliers customers ste24102_ch01_002-039.indd 4 11/10/13 4:05 PM  Final PDF to printer Chapter One Introduction to Operations Management 5 FIGURE 1.3 A supply chain for bread Suppliers: Equipment suppliers Equipment repair Feed, seed, fertilizers, pesticides Energy/fuel Trucking Farm Mill Suppliers: Equipment suppliers Equipment repair Trucking Energy Suppliers: Equipment suppliers Equipment repair Bakery Other ingredients Energy Supermarket Suppliers: Trucking Fuel Bread Repairs $1.29 Tires Drivers Trucks The creation of goods or services involves transforming or converting inputs into outputs. Various inputs such as capital, labor, and information are used to create goods or services using one or more transformation processes (e.g., storing, transporting, repairing). To ensure that the desired outputs are obtained, an organization takes measurements at various points in the transformation process ( feedback) and then compares them with previously established standards to determine whether corrective action is needed (control). Figure 1.4 depicts the conversion system. Table 1.1 provides some examples of inputs, transformation processes, and outputs. Although goods and services are listed separately in Table 1.1, it is important to note that Value-added FIGURE 1.4 The operations function Inputs Transformation/ Outputs involves the conversion of Land conversion Goods inputs into outputs Labor process Services Capital Information Measurement and Feedback Measurement and Measurement and Feedback Feedback Control ste24102_ch01_002-039.indd 5 11/10/13 4:06 PM  Final PDF to printer 6 Chapter One Introduction to Operations Management TABLE 1.1 Examples of inputs, Inputs Transformation Outputs transformation, and outputs Land Processes High goods percentage Human Cutting, drilling Houses Physical labor Transporting Automobiles Intellectual labor Teaching Clothing Capital Farming Computers Raw materials Mixing Machines Water Packing Televisions Metals Copying, faxing Food products Wood Analyzing Textbooks Equipment Developing CD players Machines Searching High service percentage Computers Researching Health care Trucks Repairing Entertainment Tools Innovating Car repair Facilities Debugging Legal Hospitals Selling Banking Factories Communication Retail stores Energy Other Information Time Legal constraints Government regulations goods and services often occur jointly. For example, having the oil changed in your car is a service, but the oil that is delivered is a good. Similarly, house painting is a service, but the paint is a good. The goods–service combination is a continuum. It can range from primar- ily goods, with little service, to primarily service, with few goods. Figure 1.5 illustrates this continuum. Because there are relatively few pure goods or pure services, companies usually sell product packages, which are a combination of goods and services. There are elements of both goods production and service delivery in these product packages. This makes managing operations more interesting, and also more challenging. FIGURE 1.5 Goods Service The goods–service continuum Surgery, teaching Songwriting, software development Computer repair, restaurant meal Automobile repair, fast food Home remodeling, retail sales Automobile assembly, steelmaking ste24102_ch01_002-039.indd 6 11/10/13 4:06 PM  Final PDF to printer Chapter One Introduction to Operations Management 7 TABLE 1.2 Inputs Processing Output Illustrations of the transformation process Food Processor Raw vegetables Cleaning Canned vegetables Metal sheets Making cans Water Cutting Energy Cooking Labor Packing Building Labeling Equipment Hospital Doctors, nurses Examination Treated patients Hospital Surgery Medical supplies Monitoring Equipment Medication Laboratories Therapy Table 1.2 provides some specific illustrations of the transformation process. The essence of the operations function is to add value during the transformation process: Value-added is the term used to describe the difference between the cost of inputs and the Value-added The difference value or price of outputs. In nonprofit organizations, the value of outputs (e.g., highway con- between the cost of inputs and struction, police and fire protection) is their value to society; the greater the value-added, the the value or price of outputs. greater the effectiveness of these operations. In for-profit organizations, the value of outputs is measured by the prices that customers are willing to pay for those goods or services. Firms use the money generated by value-added for research and development, investment in new facilities and equipment, worker salaries, and profits. Consequently, the greater the value- added, the greater the amount of funds available for these purposes. Value can also be psycho- logical, as in branding. Many factors affect the design and management of operations systems. Among them are the degree of involvement of customers in the process and the degree to which technology is used to produce and/or deliver a product or service. The greater the degree of customer involvement, the more challenging it can be to design and manage the operation. Technology choices can have a major impact on productivity, costs, flexibility, and quality and customer satisfaction. 1.2 PRODUCTION OF GOODS VERSUS PROVIDING SERVICES Although goods and services often go hand in hand, there are some very basic differences LO1.2 Identify the similarities between the two, differences that impact the management of the goods portion versus man- and differences between pro- agement of the service portion. There are also many similarities between the two. duction and service operations. Production of goods results in a tangible output, such as an automobile, eyeglasses, a golf ball, a refrigerator—anything that we can see or touch. It may take place in a factory, but it can occur elsewhere. For example, farming and restaurants produce nonmanufactured goods. Delivery of service, on the other hand, generally implies an act. A physician’s exami- nation, TV and auto repair, lawn care, and the projection of a film in a theater are examples of services. The majority of service jobs fall into these categories: Professional services (e.g., financial, health care, legal). Mass services (e.g., utilities, Internet, communications). Service shops (e.g., tailoring, appliance repair, car wash, auto repair/maintenance). Personal care (e.g., beauty salon, spa, barbershop). ste24102_ch01_002-039.indd 7 11/10/13 4:06 PM  Final PDF to printer 8 Chapter One Introduction to Operations Management Government (e.g., Medicare, mail, social services, police, fire). Education (e.g., schools, universities). Food service (e.g., catering). Services within organizations (e.g., payroll, accounting, maintenance, IT, HR, janitorial). Retailing and wholesaling. Shipping and delivery (e.g., truck, railroad, boat, air). Residential services (e.g., lawn care, painting, general repair, remodeling, interior design). Transportation (e.g., mass transit, taxi, airlines, ambulance). Travel and hospitality (e.g., travel bureaus, hotels, resorts). Miscellaneous services (e.g., copy service, temporary help). Manufacturing and service are often different in terms of what is done but quite similar in terms of how it is done. Consider these points of comparison: Degree of customer contact. Many services involve a high degree of customer con- tact, although services such as Internet providers, utilities, and mail service do not. When there is a high degree of contact, the interaction between server and customer becomes a “moment of truth” that will be judged by the customer every time the ser- vice occurs. Labor content of jobs. Services often have a higher degree of labor content than manu- facturing jobs do, although automated services are an exception. Uniformity of inputs. Service operations are often subject to a higher degree of vari- ability of inputs. Each client, patient, customer, repair job, and so on presents a some- what unique situation that requires assessment and flexibility. Conversely, manufacturing operations often have a greater ability to control the variability of inputs, which leads to more-uniform job requirements. Measurement of productivity. Measurement of productivity can be more difficult for service jobs due largely to the high variations of inputs. Thus, one doctor might have a higher level of routine cases to deal with, while another might have more-difficult cases. Unless a careful analysis is conducted, it may appear that the doctor with the difficult cases has a much lower productivity than the one with the routine cases. Quality assurance. Quality assurance is usually more challenging for services due to the higher variation in input, and because delivery and consumption occur at the same time. Unlike manufacturing, which typically occurs away from the customer and allows mis- takes that are identified to be corrected, services have less opportunity to avoid exposing the customer to mistakes. Inventory. Many services tend to involve less use of inven- tory than manufacturing operations, so the costs of having inventory on hand are lower than they are for manufactur- ing. However, unlike manufactured goods, services cannot be stored. Instead, they must be provided “on demand.” Wages. Manufacturing jobs are often well paid, and have less wage variation than service jobs, which can range from highly paid professional services to minimum-wage workers. Ability to patent. Product designs are often easier to patent than service designs, and some services cannot be patented, making them easier for competitors to copy. There are also many similarities between managing the pro- duction of products and managing services. In fact, most of the ste24102_ch01_002-039.indd 8 11/10/13 4:06 PM  Final PDF to printer Chapter One Introduction to Operations Management 9 TABLE 1.3 Characteristic Goods Services Typical differences between production of goods and Output Tangible Intangible provision of services Customer contact Low High Labor content Low High Uniformity of input High Low Measurement of productivity Easy Difficult Opportunity to correct problems before delivery High Low Inventory Much Little Wages Narrow range Wide range Patentable Usually Not usually topics in this book pertain to both. When there are important service considerations, these are highlighted in separate sections. Here are some of the primary factors for both: a. Forecasting and capacity planning to match supply and demand. b. Process management. c. Managing variations. d. Monitoring and controlling costs and productivity. e. Supply chain management. f. Location planning, inventory management, quality control, and scheduling. Note that many service activities are essential in goods-producing companies. These include training, human resource management, customer service, equipment repair, procurement, and administrative services. Table 1.3 provides an overview of the differences between production of goods and service operations. Remember, though, that most systems involve a blend of goods and services. 1.3 WHY LEARN ABOUT OPERATIONS MANAGEMENT? Whether operations management is your major or not, the skill set you gain studying opera- LO1.3 Explain the importance tions management will serve you well in your career. of learning about operations There are many career-related reasons for wanting to learn about operations management, management. whether you plan to work in the field of operations or not. This is because every aspect of business affects or is affected by operations. Operations and sales are the two line functions in a business organization. All other functions—accounting, finance, marketing, IT, and so on—support the two line functions. Among the service jobs that are closely related to opera- tions are financial services (e.g., stock market analyst, broker, investment banker, and loan officer), marketing services (e.g., market analyst, marketing researcher, advertising manager, and product manager), accounting services (e.g., corporate accountant, public accountant, and budget analyst), and information services (e.g., corporate intelligence, library services, man- agement information systems design services). A common complaint from employers is that college graduates come to them very focused, when employers would prefer them to have more of a general knowledge of how business organizations operate. This book provides some of the breadth that employers are looking for in their new hires. Apart from the career-related reasons is a not so obvious one: Through learning about operations and supply chains, you will have a much better understanding of the world you live in, the global dependencies of companies and nations, some of the reasons that companies succeed or fail, and the importance of working with others. ste24102_ch01_002-039.indd 9 11/10/13 4:06 PM  Final PDF to printer 10 Chapter One Introduction to Operations Management FIGURE 1.6 The three major functions of business organizations overlap Operations Finance Marketing and Sales Working together successfully means that all members of the organization understand not LO1.4 Identify the three major only their own role, but they also understand the roles of others. In practice, there is signifi- functional areas of organiza- cant interfacing and collaboration among the various functional areas, involving exchange of tions and describe how they information and cooperative decision making. For example, although the three primary func- interrelate. tions in business organizations perform different activities, many of their decisions impact the other areas of the organization. Consequently, these functions have numerous interactions, as depicted by the overlapping circles shown in Figure 1.6. Finance and operations management personnel cooperate by exchanging information and expertise in such activities as the following: 1. Budgeting. Budgets must be periodically prepared to plan financial requirements. Budgets must sometimes be adjusted, and performance relative to a budget must be evaluated. 2. Economic analysis of investment proposals. Evaluation of alternative investments in plant and equipment requires inputs from both operations and finance people. 3. Provision of funds. The necessary funding of operations and the amount and timing of funding can be important and even critical when funds are tight. Careful planning can help avoid cash-flow problems. Marketing’s focus is on selling and/or promoting the goods or services of an organization. Marketing is also responsible for assessing customer wants and needs, and for communicat- ing those to operations people (short term) and to design people (long term). That is, opera- tions needs information about demand over the short to intermediate term so that it can plan accordingly (e.g., purchase materials or schedule work), while design people need informa- tion that relates to improving current products and services and designing new ones. Market- ing, design, and production must work closely together to successfully implement design changes and to develop and produce new products. Marketing can provide valuable insight on what competitors are doing. Marketing also can supply information on consumer prefer- ences so that design will know the kinds of products and features needed; operations can supply information about capacities and judge the manufacturability of designs. Operations will also have advance warning if new equipment or skills will be needed for new products or services. Finance people should be included in these exchanges in order to provide informa- tion on what funds might be available (short term) and to learn what funds might be needed for new products or services (intermediate to long term). One important piece of information Lead time The time between marketing needs from operations is the manufacturing or service lead time in order to give ordering a good or service and customers realistic estimates of how long it will take to fill their orders. receiving it. Thus, marketing, operations, and finance must interface on product and process design, forecasting, setting realistic schedules, quality and quantity decisions, and keeping each other informed on the other’s strengths and weaknesses. People in every area of business need to appreciate the importance of managing and coor- dinating operations decisions that affect the supply chain and the matching of supply and demand, and how those decisions impact other functions in an organization. ste24102_ch01_002-039.indd 10 11/10/13 4:06 PM  Final PDF to printer Chapter One Introduction to Operations Management 11 FIGURE 1.7 Public Operations interfaces with a Legal number of supporting functions relations Operations Personnel/ Accounting Human resources MIS Operations also interacts with other functional areas of the organization, including legal, management information systems (MIS), accounting, personnel/human resources, and public relations, as depicted in Figure 1.7. The legal department must be consulted on contracts with employees, customers, suppli- ers, and transporters, as well as on liability and environmental issues. Accounting supplies information to management on costs of labor, materials, and over- head, and may provide reports on items such as scrap, downtime, and inventories. 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 department is concerned with recruitment and training of personnel, labor relations, contract negotiations, wage and salary administration, assisting in manpower projections, and ensuring the health and safety of employees. Public relations has responsibility for building and maintaining a positive public image of the organization. Good public relations provides many potential benefits. An obvious one is in the marketplace. Other potential benefits include public awareness of the organization as a good place to work (labor supply), improved chances of approval of zoning change requests, community acceptance of expansion plans, and instilling a positive attitude among employees. 1.4 CAREER OPPORTUNITIES AND PROFESSIONAL SOCIETIES There are many career opportunities in the operations management and supply chain fields. Among the numerous job titles are operations manager, production analyst, production man- ager, inventory manager, purchasing manager, schedule coordinator, distribution manager, supply chain manager, quality analyst, and quality manager. Other titles include office man- ager, store manager, and service manager. People who work in the operations field should have a skill set that includes both peo- ple skills and knowledge skills. People skills include political awareness; mentoring abil- ity; and collaboration, negotiation, and communication skills. Knowledge skills, necessary for credibility and good decision making, include product and/or service knowledge, process knowledge, industry and global knowledge, financial and accounting skills, and project man- agement skills. See Table 1.4. If you are thinking of a career in operations management, you can benefit by joining one or more of the professional societies. ste24102_ch01_002-039.indd 11 11/10/13 4:06 PM  Final PDF to printer 12 Chapter One Introduction to Operations Management TABLE 1.4 Social Media Product Sample operations management job descriptions Production Supervisor Supply Chain Manager Manager Manage a production staff Have a general knowledge Identify ways to increase consumer of 10–20. of materials management, engagement. Ensure the department information systems, and Analyze the key performance indica- meets daily goals through basic statistics. tors and recommend improvements. the management of Direct, monitor, evaluate, Lead cross-functional teams to productivity. and motivate employee define product specifications. Enforce safety policies. performance. Collaborate with design and Coordinate work between Be knowledgeable about technical to create key product departments. shipping regulations. improvements. Have good problem-solving Manage budgetary accounts Develop requirements for new skills, and good written and Manage projects. Web site enhancements. oral communication skills. Monitor the competition to identify need for changes. APICS, the Association for Operations Management 8430 West Bryn Mawr Avenue, Suite 1000, Chicago, Illinois 60631 www.apics.org American Society for Quality (ASQ) 230 West Wells Street, Milwaukee, Wisconsin 53203 www.asq.org Institute for Supply Management (ISM) 2055 East Centennial Circle, Tempe, Arizona 85284 www.ism.ws Institute for Operations Research and the Management Sciences (INFORMS) 901 Elkridge Landing Road, Linthicum, Maryland 21090-2909 www.informs.org The Production and Operations Management Society (POMS) College of Engineering, Florida International University, EAS 2460, 10555 West Flagler Street, Miami, Florida 33174 www.poms.org The Project Management Institute (PMI) 4 Campus Boulevard, Newtown Square, Pennsylvania 19073-3299 www.pmi.org Council of Supply Chain Management Professionals (CSCMP) 333 East Butterfield Road, Suite 140, Lombard, Illinois 60148 http//cscmp.org APICS, ASQ, ISM, and other professional societies offer a practitioner certification examination that can enhance your qualifications. Information about job opportunities can be obtained from all of these societies as well as from other sources, such as the Decision Sciences Institute (University Plaza, Atlanta, Georgia 30303) and the Institute of Industrial Engineers (25 Technology Park, Norcross, Georgia 30092). 1.5 PROCESS MANAGEMENT Process One or more actions A key aspect of operations management is process management. A process consists of one or that transform inputs into more actions that transform inputs into outputs. In essence, the central role of all management outputs. is process management. Businesses are composed of many interrelated processes. Generally speaking, there are three categories of business processes: 1. Upper-management processes. These govern the operation of the entire organization. Examples include organizational governance and organizational strategy. 2. Operational processes. These are the core processes that make up the value stream. Examples include purchasing, production and/or service, marketing, and sales. 3. Supporting processes. These support the core processes. Examples include accounting, human resources, and IT (information technology). ste24102_ch01_002-039.indd 12 11/10/13 4:06 PM  Final PDF to printer Chapter One Introduction to Operations Management 13 A business FIGURE 1.8 organization, a Business processes form a Supplier(s) Customer(s) department, or an sequence of suppliers and individual operation customers Input(s) from one Transformation Output(s) to one or or more suppliers more customers Business processes, large and small, are composed of a series of supplier–customer rela- tionships, where every business organization, every department, and every individual opera- tion is both a customer of the previous step in the process and a supplier to the next step in the process. Figure 1.8 illustrates this concept. A major process can consist of many subprocesses, each having its own goals that con- tribute to the goals of the overall process. Business organizations and supply chains have many such processes and subprocesses, and they benefit greatly when management is using a process perspective. Business process management (BPM) activities include process design, process execution, and process monitoring. Two basic aspects of this for operations and sup- ply chain management are managing processes to meet demand and dealing with process variability. Managing a Process to Meet Demand Ideally, the capacity of a process will be such that its output just matches demand. Excess LO1.5 Summarize the two capacity is wasteful and costly; too little capacity means dissatisfied customers and lost rev- major aspects of process enue. Having the right capacity requires having accurate forecasts of demand, the ability management. to translate forecasts into capacity requirements, and a process in place capable of meeting expected demand. Even so, process variation and demand variability can make the achieve- ment of a match between process output and demand difficult. Therefore, to be effective, it is also necessary for managers to be able to deal with variation. Process Variation Variation occurs in all business processes. It can be due to variety or variability. For example, random variability is inherent in every process; it is always present. In addition, variation can occur as the result of deliberate management choices to offer customers variety. There are four basic sources of variation: 1. The variety of goods or services being offered. The greater the variety of goods and services, the greater the variation in production or service requirements. 2. Structural variation in demand. These variations, which include trends and sea- sonal variations, are generally predictable. They are particularly important for capacity planning. 3. Random variation. This natural variability is present to some extent in all processes, as well as in demand for services and products, and it cannot generally be influenced by managers. 4. Assignable variation. These variations are caused by defective inputs, incorrect work methods, out-of-adjustment equipment, and so on. This type of variation can be reduced or eliminated by analysis and corrective action. Variations can be disruptive to operations and supply chain processes, interfering with optimal functioning. Variations result in additional cost, delays and shortages, poor quality, and inefficient work systems. Poor quality and product shortages or service delays can lead to dissatisfied customers and can damage an organization’s reputation and image. It is not surprising, then, that the ability to deal with variability is absolutely necessary for managers. Throughout this book, you will learn about some of the tools managers use to deal with variation. An important aspect of being able to deal with variation is to use metrics to describe it. Two widely used metrics are the mean (average) and the standard deviation. The stan- dard deviation quantifies variation around the mean. The mean and standard deviation are used throughout this book in conjunction with variation. So, too, is the normal distribution. ste24102_ch01_002-039.indd 13 11/10/13 4:06 PM  Final PDF to printer 14 Chapter One Introduction to Operations Management Because you will come across many examples of how the normal distribution is used, you may find the overview on working with the normal distribution in the appendix at the end of the book helpful. 1.6 THE SCOPE OF OPERATIONS MANAGEMENT LO1.6 Describe the operations The scope of operations management ranges across the organization. Operations management function and the nature of the people are involved in product and service design, process selection, selection and manage- operations manager’s job. ment of technology, design of work systems, location planning, facilities planning, and qual- ity improvement of the organization’s products or services. The operations function includes many interrelated activities, such as forecasting, capacity planning, scheduling, managing inventories, assuring quality, motivating employees, deciding where to locate facilities, and more. We can use an airline company to illustrate a service organization’s operations system. The system consists of the airplanes, airport facilities, and maintenance facilities, sometimes spread out over a wide territory. The activities include: Forecasting such things as weather and landing conditions, seat demand for flights, and the growth in air travel. Capacity planning, essential for the airline to maintain cash flow and make a reasonable profit. (Too few or too many planes, or even the right number of planes but in the wrong places, will hurt profits.) Locating facilities according to managers’ decisions on which cities to provide ser- vice for, where to locate maintenance facilities, and where to locate major and minor hubs. Facilities and layout, important in achieving effective use of workers and equipment. Scheduling planes, cargo, and flight and ground crews is an operations function for an airline. ste24102_ch01_002-039.indd 14 11/10/13 4:06 PM  Final PDF to printer Chapter One Introduction to Operations Management 15 Scheduling of planes for flights and for routine maintenance; scheduling of pilots and flight attendants; and scheduling of ground crews, counter staff, and baggage handlers. Managing inventories of such items as foods and beverages, first-aid equipment, in- flight magazines, pillows and blankets, and life preservers. Assuring quality, essential in flying and maintenance operations, where the emphasis is on safety, and important in dealing with customers at ticket counters, check-in, telephone and electronic reservations, and curb service, where the emphasis is on efficiency and courtesy. Motivating and training employees in all phases of operations. Managing the Supply Chain to Achieve Schedule, Cost, and Quality Goals Now consider a bicycle factory. This might be primarily an assembly operation: buying com- ponents such as frames, tires, wheels, gears, and other items from suppliers, and then assem- bling bicycles. The factory also might do some of the fabrication work itself, forming frames, making the gears and chains, and it might buy mainly raw materials and a few parts and materials such as paint, nuts and bolts, and tires. Among the key management tasks in either case are scheduling production, deciding which components to make and which to buy, order- ing parts and materials, deciding on the style of bicycle to produce and how many, purchasing new equipment to replace old or worn-out equipment, maintaining equipment, motivating workers, and ensuring that quality standards are met. Obviously, an airline company and a bicycle factory are completely different types of operations. One is primarily a service operation, the other a producer of goods. Nonetheless, these two operations have much in common. Both involve scheduling activities, motivating employees, ordering and managing supplies, selecting and maintaining equipment, satisfying quality standards, and—above all—satisfying customers. And in both businesses, the success of the business depends on short- and long-term planning. A primary function of an operations manager is to guide the system by decision mak- ing. Certain decisions affect the design of the system, and others affect the operation of the system. A worker is making the bottom bracket lug for a Trek OCLV carbon road bike at Trek Bicycle Company in Waterloo, Wisconsin, world headquarters for Trek. Trek is a world leader in bicycle products and accessories, with 1,500 employees worldwide. Designers and engineers incorporate the most advanced technology into Trek products, resulting in award-winning bikes and components. ste24102_ch01_002-039.indd 15 11/10/13 4:06 PM  Final PDF to printer 16 Chapter One Introduction to Operations Management System design involves decisions that relate to system capacity, the geographic loca- tion of facilities, arrangement of departments and placement of equipment within physical structures, product and service planning, and acquisition of equipment. These decisions usually, but not always, require long-term commitments. Moreover, they are typically strategic decisions. System operation involves management of personnel, inventory plan- ning and control, scheduling, project management, and quality assurance. These are generally tactical and operational decisions. Feedback on these decisions involves mea- surement and control. In many instances, the operations manager is more involved in day-to-day operating decisions than with decisions relating to system design. However, the operations manager has a vital stake in system design because system design essen- tially determines many of the parameters of system operation. For example, costs, space, capacities, and quality are directly affected by design decisions. Even though the opera- tions manager is not responsible for making all design decisions, he or she can provide those decision makers with a wide range of information that will have a bearing on their decisions. A number of other areas are part of, or support, the operations function. They include pur- chasing, industrial engineering, distribution, and maintenance. Purchasing has responsibility for procurement of materials, supplies, and equipment. Close contact with operations is necessary to ensure correct quantities and timing of purchases. The purchasing department is often called on to evaluate vendors for quality, reliability, service, price, and ability to adjust to changing demand. Purchasing is also involved in receiving and inspecting the purchased goods. Industrial engineering is often concerned with scheduling, performance standards, work methods, quality control, and material handling. Distribution involves the shipping of goods to warehouses, retail outlets, or final customers. Maintenance is responsible for general upkeep and repair of equipment, buildings and grounds, heating and air-conditioning; removing toxic wastes; parking; and perhaps security. The operations manager is the key figure in the system: He or she has the ultimate responsibil- ity for the creation of goods or provision of services. The kinds of jobs that operations managers oversee vary tremendously from organization to organization largely because of the different products or services involved. Thus, manag- ing a banking operation obviously requires a different kind of expertise than managing a steelmaking operation. However, in a very important respect, the jobs are the same: They are both essentially managerial. The same thing can be said for the job of any operations manager regardless of the kinds of goods or services being created. The service sector and the manufacturing sector are both important to the economy. The service sector now accounts for more than 70 percent of jobs in the United States, and it is growing in other countries as well. Moreover, the number of people working in services is increasing, while the number of people working in manufacturing is not. The reason for the decline in manufacturing jobs is twofold: As the operations function in manufacturing com- panies finds more productive ways of producing goods, the companies are able to maintain or even increase their output using fewer workers. Furthermore, some manufacturing work has been outsourced to more productive companies, many in other countries, that are able to produce goods at lower costs. Outsourcing and productivity will be discussed in more detail in this and other chapters. Many of the concepts presented in this book apply equally to manufacturing and service. Consequently, whether your interest at this time is on manufacturing or on service, these con- cepts will be important, regardless of whether a manufacturing example or service example is used to illustrate the concept. The reading on page 17 gives another reason for the importance of manufacturing jobs. ste24102_ch01_002-039.indd 16 11/10/13 4:06 PM  Final PDF to printer Why Manufacturing Matters READING The U.S. economy is becoming more and more service-based. The per- From a national perspective, not only is work rkk centage of employment in manufacturing continues to decrease while transferred to a foreign country, intellectual knowl- l- the percentage employed in services continues to increase. However, it edge is transferred. Moreover, as time passes, the would be unwise to assume that manufacturing isn’t important to the domestic base of manufacturing skills and know-how is lost. economy, or that service is more important. Let’s see why. There are important consequences for taxes as well. Unemploy- Not only is the percentage of manufacturing jobs decreasing, but ment benefits are costly, and the erosion of federal, state, and local the actual number of manufacturing jobs is also decreasing. There tax bases results in lower tax revenues collected from individuals and are two main reasons for the decline: increases in productivity, which from corporations. means fewer workers are needed to maintain manufacturing output; Lastly, manufacturing is an important source of innovation. It is and outsourcing, especially to countries that have much lower wages, responsible for 70 percent of private-sector R&D and 90 percent of U.S. an attractive option for companies seeking to maintain their competi- patents (Rana Foroohar, “Go Glocal,” Time, August 20, 2012, p. 30). Much tiveness and boost their bottom lines. of the work in getting a product ready for volume production is high-value- However, when companies outsource part (or in some cases, all) of added knowledge work that supports future innovation. And innovation their manufacturing to lower-cost countries, the loss of jobs results in generates jobs. “Intel has invested tens of billions of dollars in its facto- the loss of service jobs as well. Some are lost in the community in retail ries in Oregon, Arizona, and New Mexico so that they are able to produce businesses patronized by the manufacturing workers. Also included in the most advanced semiconductors” (Willy Shih and Gary Pisano,“Why that figure are factory service workers (e.g., workers who do machine Manufacturing Matters for America,” Special to CNN, Sept. 21, 2012). repairs, maintenance, material handling, packaging, and so on). General Questions estimates are that four service jobs are lost for each manufacturing job lost. 1. How important is the loss of manufacturing jobs to the nation? As the manufacturing base shrinks, workers who lose their manu- 2. Can you suggest some actions the government (federal, state, or facturing job are finding it tougher to find another opening in manufac- local) can take to stem the job loss? turing. Instead they join the ranks of the unemployed, or take a service 3. What evidence is there of the importance of manufacturing job, usually at a lower wage rate than what manufacturing paid. innovation? 1.7 OPERATIONS MANAGEMENT AND DECISION MAKING The chief role of an operations manager is that of planner/decision maker. In this capacity, LO1.7 Explain the key aspects the operations manager exerts considerable influence over the degree to which the goals and of operations management objectives of the organization are realized. Most decisions involve many possible alternatives decision making. that can have quite different impacts on costs or profits. Consequently, it is important to make informed decisions. Operations management professionals make a number of key decisions that affect the entire organization. These include the following: What: What resources will be needed, and in what amounts? When: When will each resource be needed? When should the work be scheduled? When should materials and other supplies be ordered? When is corrective action needed? Where: Where will the work be done? How: How will the product or service be designed? How will the work be done (organi- zation, methods, equipment)? How will resources be allocated? Who: Who will do the work? An operations manager’s daily concerns include costs (budget), quality, and schedules (time). Throughout this book, you will encounter the broad range of decisions that operations managers must make, and you will be introduced to the tools necessary to handle those deci- sions. This section describes general approaches to decision making, including the use of 17 ste24102_ch01_002-039.indd 17 11/10/13 4:06 PM  Final PDF to printer 18 Chapter One Introduction to Operations Management models, quantitative methods, analysis of trade-offs, establishing priorities, ethics, and the systems approach. Models are often a key tool used by all decision makers. Models Model An abstraction of reality; A model is an abstraction of reality, a simplified representation of something. For example, a simplified representation of a child’s toy car is a model of a real automobile. It has many of the same visual features something. (shape, relative proportions, wheels) that make it suitable for the child’s learning and play- ing. But the toy does not have a real engine, it cannot transport people, and it does not weigh 2,000 pounds. Other examples of models include automobile test tracks and crash tests; formulas, graphs and charts; balance sheets and income statements; and financial ratios. Common statistical models include descriptive statistics such as the mean, median, mode, range, and standard deviation, as well as random sampling, the normal distribution, and regression equations. Models are sometimes classified as physical, schematic, or mathematical: Physical models look like their real-life counterparts. Examples include miniature cars, trucks, airplanes, toy animals and trains, and scale-model buildings. The advantage of these models is their visual correspondence with reality. Schematic models are more abstract than their physical counterparts; that is, they have less resemblance to the physical reality. Examples include graphs and charts, blue- prints, pictures, and drawings. The advantage of schematic models is that they are often relatively simple to construct and change. Moreover, they have some degree of visual correspondence. Mathematical models are the most abstract: They do not look at all like their real-life counterparts. Examples include numbers, formulas, and symbols. These models are usually the easiest to manipulate, and they are important forms of inputs for computers and calculators. The variety of models in use is enormous. Nonetheless, all have certain common features: They are all decision-making aids and simplifications of more complex real-life phenomena. Real life involves an overwhelming amount of detail, much of which is irrelevant for any par- ticular problem. Models omit unimportant details so that attention can be concentrated on the most important aspects of a situation. Because models play a significant role in operations management decision making, they are heavily integrated into the material of this text. For each model, try to learn (1) its pur- pose, (2) how it is used to generate results, (3) how these results are interpreted and used, and (4) what assumptions and limitations apply. The last point is particularly important because virtually every model has an associated set of assumptions or conditions under which the model is valid. Failure to satisfy all of the assumptions will make the results suspect. Attempts to apply the results to a problem under such circumstances can lead to disastrous consequences. Managers use models in a variety of ways and for a variety of reasons. Models are benefi- cial because they 1. Are generally easy to use and less expensive than dealing directly with the actual situation. 2. Require users to organize and sometimes quantify information and, in the process, often indicate areas where additional information is needed. 3. Increase understanding of the problem. 4. Enable managers to analyze what-if questions. 5. Serve as a consistent tool for evaluation and provide a standardized format for analyzing a problem. 6. Enable users to bring the power of mathematics to bear on a problem. ste24102_ch01_002-039.indd 18 11/10/13 4:06 PM  Final PDF to printer Chapter One Introduction to Operations Management 19 This impressive list of benefits notwithstanding, models have certain limitations of which you should be aware. The following are three of the more important limitations: 1. Quantitative information may be emphasized at the expense of qualitative information. 2. Models may be incorrectly applied and the results misinterpreted. The widespread use of computerized models adds to this risk because highly sophisticated models may be placed in the hands of users who are not sufficiently knowledgeable to appreciate the subtleties of a particular model; thus, they are unable to fully comprehend the circum- stances under which the model can be successfully employed. 3. The use of models does not guarantee good decisions. Quantitative Approaches Quantitative approaches to problem solving often embody an attempt to obtain mathemati- cally optimal solutions to managerial problems. Linear programming and related math- ematical techniques are widely used for optimum allocation of scarce resources. Queuing techniques are useful for analyzing situations in which waiting lines form. Inventory models are widely used to control inventories. Project models such as PERT (program evaluation and review technique) and CPM (critical path method) are useful for planning, coordinating, and controlling large-scale projects. Forecasting techniques are widely used in planning and scheduling. Statistical models are currently used in many areas of decision making. In large measure, quantitative approaches to decision making in operations management (and in other functional business areas) have been accepted because of calculators and com- puters capable of handling the required calculations. Computers have had a major impact on operations management. Moreover, the growing availability of software packages for quanti- tative techniques has greatly increased management’s use of those techniques. Although quantitative approaches are widely used in operations management decision making, it is important to note that managers typically use a combination of qualitative and quantitative approaches, and many important decisions are based on qualitative approaches. Performance Metrics All managers use metrics to manage and control operations. There are many metrics in use, including those related to profits, costs, quality, productivity, flexibility, assets, inventories, schedules, and forecast accuracy. As you read each chapter, note the metrics being used and how they are applied to manage operations. Analysis of Trade-Offs Operations personnel frequently encounter decisions that can be described as trade-off deci- sions. For example, in deciding on the amount of inventory to stock, the decision maker must take into account the trade-off between the increased level of customer service that the addi- tional inventory would yield and the increased costs required to stock that inventory. Throughout this book you will be presented with decision models that reflect these kinds of trade-offs. Decision makers sometimes deal with these decisions by listing the advantages and disadvantages—the pros and cons—of a course of action to better understand the conse- quences of the decisions they must make. In some instances, decision makers add weights to the items on their list that reflect the relative importance of various factors. This can help them “net out” the potential impacts of the trade-offs on their decision. Degree of Customization A major influence on the entire organization is the degree of customization of products or ser- vices being offered to its customers. Providing highly customized products or services such as home remodeling, plastic surgery, and legal counseling tends to be more labor intensive than providing standardized products such as those you would buy “off the shelf” at a mall store ste24102_ch01_002-039.indd 19 11/10/13 4:06 PM  Final PDF to printer Analytics READING Analytics uses descriptive and predictive models to obtain insight from operate transactional online systems that gener- data and then uses that insight to recommend action or to guide deci- ate massive volumes of data. For example, the sion making. McKinsey Global Institute estimates that the U.S. Commercial analytics software is available for the challenges of health care system could save $300 billion from analyzing big data.1 analyzing very large, dynamic data sets, referred to as big data. Analyz- 1 “Big Data: The next frontier for innovation, competition and productivity as ing big data presents opportunities for businesses such as those that reported in Building with Big Data” The Economist, May 26, 2011. or a supermarket or standardized services such as public utilities and Internet services. Fur- thermore, production of customized products or provision of customized services is generally more time consuming, requires more highly skilled people, and involves more flexible equip- ment than what is needed for standardized products or services. Customized processes tend to have a much lower volume of output than standardized processes, and customized output carries a higher price tag. The degree of customization has important implications for process selection and job requirements. The impact goes beyond operations and supply chains. It affects marketing, sales, accounting, finance, and information systems. A Systems Approach A systems viewpoint is almost always beneficial in decision making. Think of it as a “big pic- System A set of interrelated ture” view. A system can be defined as a set of interrelated parts that must work together. In a parts that must work together. business organization, the organization can be thought of as a system composed of subsystems (e.g., marketing subsystem, operations subsystem, finance subsystem), which in turn are com-