Operations Management Class 1: Introduction to OM 2024 PDF

Operations Management Class 1: Introduction to OM Bachelor 2 course 1 IÉSEG - School of Management 1 Introduction to Operations Management 2 Facility Location Decisions 3 Capacity and Theory of Constraints 4...

Operations Management Class 1: Introduction to OM Bachelor 2 course 1 IÉSEG - School of Management 1 Introduction to Operations Management 2 Facility Location Decisions 3 Capacity and Theory of Constraints 4 Optimization and Excel Solver 5 Inventory Management 6 Process Organization and Scheduling Operations in today’s context + recap of the 7 course 2 Operations Management 3 What is a Supply Chain? A SC involves a variety of stages Manu- Supplier Distributor Retailer Customer facturer ▪ SC consists of all parties involved, directly or indirectly, in fulfilling a customer request. ▪ The SC includes not only the manufacturer and suppliers, but also the customers. ▪ Flow of (1) products, (2) Funds, (3) Information CONTENT: link the topics and articles Topics Articles are available on MyCourses D 1) Introduction to and are part of the course material Operations Management 2) Facility Location Decisions A E 3) Capacity and Theory of Constraints 4) Optimization and Excel Solver B F 5) Inventory management Nurses protest Ronald Reagan UCLA 6) Process Organization Medical Center’s proposed schedule and Scheduling changes C G 7) Supply Chain Management 1 Introduction to Operations Management 2 Facility Location Decisions 3 Capacity and Theory of Constraints 4 Optimization and Excel Solver 5 Inventory Management 6 Process Organization and Scheduling Operations in today’s context + recap of the 7 course 6 Similarities/differences between these companies? 7 Operations Management Definition These companies Produce So that the goods and/or services are Goods By transforming inputs (raw Deliver delivered when and where the and/or materials, investments, …) Design customer wants, at a right price and Services into outputs (end products) … high quality OM is not only relevant in manufacturing companies OM (Operations Management) is the set of all activities that creates value in the form of goods and services by transforming inputs into outputs 8 Goods versus services 9 GOODS AND SERVICES OM (Operations Management) is the set of all activities that creates value in the form of goods and services by transforming inputs into outputs ▪ Manufacturing industry (good) versus Service industry (service) ▪ Good: car, cell phone, umbrella, … ▪ Service: Education, entertainment, maintenance, haircut, transportation, flight experience, … ▪ A service is ▪ Intangible ▪ Unique, customized, less standardised, hard to automate ▪ Not kept in inventory (produced and consumed at the same time) ▪ Services are becoming increasingly important ▪ A lot of products are a combination of a good and service ▪ E.g., leasing of a car, buying a machine with a maintenance contract, … 10 Keys to creating value 11 Improving CONTRIBUTION OM (Operations Management) is the set of all activities that creates value in the form of goods and services by transforming inputs into outputs Sales ▪ Create value for the customer - Costs of goods Gross margin ▪ Quality, in-time delivery, … - Finance costs Subtotal ▪ Create value for the company - Taxes ▪ Profitability (contribution) Contribution CONTRIBUTION: Marketing, operations and finance ▪ There are 3 functions that every organization performs and that can improve contribution MARKETING OPERATIONS ▪ Marketing is responsible for sales ▪ Operations creates, produces and delivers the product ▪ Finance pays the bills and collects money FINANCE 13 Enterprise value Tesla ▪ Below, you see information on Tesla for the years 2021, 2022 and 2023 Fiscal year 2021 2022 2023 Number of cars sold (in units) 93 6172 1 313 851 1 808 581 Revenue (in USD Millions) 53 823 81 462 96 773 Cost of Goods Sold (COGS) (in USD Millions) 40 217 60 609 79 113 Gross Income (in USD Millions) 13 606 20 853 17 660 ▪ Which option do you like the most for 2024? MARKETING MANAGER OPERATIONS MANAGER Increase the number of cars Reduce production cost per sold with 50% in 2024 car with 25% in 2024 assume the selling assume the selling price per car and price per car and the COGS per car number of cars sold remain unchanged remain unchanged compared to 2023 compared to 2023 14 Enterprise value Tesla Option 1 Option 2 (Marketing) (Operations) Fiscal year 2023 Sales 2023 COGS per increase with car decrease 2022 50% with 25% Revenue (in USD Millions) 96 773 145 159.5 96 773 Cost of Goods Sold (COGS) (in USD Millions) 79 113 118 669.5 59 334.75 Gross Income (in USD Millions) 17 660 26 490 37 438.25 The OM option gives the greatest improvement Extra question: How much does the operations costs need to decrease (while revenues remain the same) to obtain a similar improvement of contribution as doubling the number of products sold? 15 Tesla Tesla Factory 16 Resource utilization & productivity 17 PRODUCTIVITY ▪ More efficient operations (transformation of inputs to outputs) lead to higher productivity 𝑂𝑢𝑡𝑝𝑢𝑡𝑠 (𝑔𝑜𝑜𝑑𝑠 𝑎𝑛𝑑 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠) 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = 𝐼𝑛𝑝𝑢𝑡𝑠 (𝑙𝑎𝑏𝑜𝑟,𝑐𝑎𝑝𝑖𝑡𝑎𝑙,𝑒𝑛𝑒𝑟𝑦,𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙,… ) More products with the resources you have The same number of products with less resources Higher production is different from higher productivity 18 PRODUCTIVITY 19 PRODUCTIVITY: Measurement 𝑂𝑢𝑡𝑝𝑢𝑡𝑠 (𝑔𝑜𝑜𝑑𝑠 𝑎𝑛𝑑 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠) 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = 𝐼𝑛𝑝𝑢𝑡𝑠 (𝑙𝑎𝑏𝑜𝑟,𝑐𝑎𝑝𝑖𝑡𝑎𝑙,𝑒𝑛𝑒𝑟𝑦,𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙,… ) Single-factor Multifactor productivity productivity 𝑈𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 ▪ 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = ▪ 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = 𝑂𝑢𝑡𝑝𝑢𝑡 (𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑) 𝐼𝑛𝑝𝑢𝑡 𝑢𝑠𝑒𝑑 𝐿𝑎𝑏𝑜𝑟+𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙+𝐸𝑛𝑒𝑟𝑔𝑦+𝐶𝑎𝑝𝑖𝑡𝑎𝑙 (𝑎𝑙𝑙 𝑒𝑥𝑝𝑟𝑒𝑠𝑠𝑒𝑑 𝑖𝑛 € 𝑜𝑟 $) ▪ If 1000 units are produced per month and ▪ If 1000 units are produced per month and per month, 250 labor-hours 250 labor-hours are used per month. are used at a cost of 10 €/hour and the capital invested is 500 € ▪ (Labor) Productivity = 1000/250 = 4 units ▪ Multifactor Productivity= 1000/(250*10+500)=0,33 units per € per labor-hour 20 PRODUCTIVITY: exercise ▪ A IESEG professor has to correct the exams (mainly MCQ questions) of 200 students. ▪ The school has the option to buy a one-year license for a digital correction software that automatically corrects MCQ questions (the software costs 3600 euro). ▪ It takes the professor 10 days to finish the corrections without the software, and 2 days with the software. ▪ Note that a professor costs around 200 euro a day. What is the labor and multifactor productivity without and with the new software? Should IESEG buy the software? No software With software Labor productivity 200/10= 200/2= Units per time 20 exams per day 100 exams per day Exams per day Multifactor 200/(10*200)= 200/(2*200 + 3600)= Units per money productivity 0.1 exams per euro 0.05 exams per euro Exams per euro Labor productivity increased, but multifactor productivity decreased ▪ Extra: What is the maximum software license cost for multifactor productivity to increase with the software? 21 PRODUCTIVITY: drawbacks ▪ Quality is not considered 𝑈𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 ▪ 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = ▪ Quality may change while the quantity of 𝐼𝑛𝑝𝑢𝑡 𝑢𝑠𝑒𝑑 inputs and outputs remain the same ▪ External elements ▪ Electric power service may greatly improve production ▪ Comparison among different product types ▪ Not all products require the same inputs 22 Why Operations Management 23 Why to study OM ▪ OM relates to all other business functions in an organization MARKETING OPERATIONS ▪ Everyone is confronted with OM through the products they use ▪ OM has a high impact on contribution/profit FINANCE Operations was the functional starting point for most of the Forbes 100 CEOs, with 25% beginning their careers in an operational role. 24 Why to study OM ▪ OM is impacted by the new challenges of today: ▪ Globalization (supply chain partnering, outsourcing, markets, resources, … have become more global) ▪ Sustainability (environmentally friendly products) (E.g., production, recycling an remanufacturing) ▪ Rapid development of more customized products (need for more responsive, efficient and effective OM) ▪ Supply chain crises ▪ Raw material shortage ▪ Ethics (E.g., sharing of personal customer information) ▪ Digitization and Artificial Intelligence 25 This class and next class ▪ Before next class, revise the following material: ▪ Supporting videos on MyCourses on Class 1 ▪ Newspaper articles on MyCourses on Class 1 ▪ At home exercises on MyCourses on Class 1 ▪ Next Class: Facility Location Decisions 26