F O U R T H E D I T I O N

Introduction to Operations Management

© The McGraw-Hill Companies, Inc., 2003

chapter 1

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AQUILANO

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byCharlieCook

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–2

Chapter ObjectivesChapter ObjectivesChapter ObjectivesChapter Objectives

• Introduce and define operations management (OM) in terms of its contribution and the activities it involves.

• Describe how operations contributes to the overall betterment of society.

• Present operations as a function that addresses issues in both manufacturing and services.

• Show how operations management is gaining more recognition both internally and externally to an organization.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–3

Chapter Objectives (cont’d)Chapter Objectives (cont’d)Chapter Objectives (cont’d)Chapter Objectives (cont’d)

• Demonstrate how the operations management function interacts with the other functional areas within an organization.

• Present a brief history of operations management as a field and its evolution to its current role in an organization.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–4

Managerial IssuesManagerial IssuesManagerial IssuesManagerial Issues

• Shift in balance of power to consumers–Globalization of business and markets–E-commerce

• Achieving higher levels of productivity–Creating higher quality products–Delivering better customer service–Achieving shorter delivery times–Reducing labor and material costs

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–5

What Is Operations Management?What Is Operations Management?What Is Operations Management?What Is Operations Management?

• Operations Management–Management of the conversion process which

transforms inputs such as raw material and labor into outputs in the form of finished goods and services.

Transformation ProcessTransformation Process(components)(components)

InputsInputs(customers(customers

and/orand/ormaterials)materials)

OutputsOutputs(goods(goods

andandservices)services)

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–6

Role of OM within an OrganizationRole of OM within an OrganizationRole of OM within an OrganizationRole of OM within an Organization

Exhibit 1.1Exhibit 1.1

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–7

Top-down Approach to OM StrategyTop-down Approach to OM StrategyTop-down Approach to OM StrategyTop-down Approach to OM Strategy

• Operations Strategy Decisions–Strategic (long-range)

• Needs of customers(capacity planning)

–Tactical (medium-range)• Efficient scheduling of

resources

–Operational planning and control (short-range)• Immediate tasks and

activities

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–8

An Operational-Level OM PerspectiveAn Operational-Level OM PerspectiveAn Operational-Level OM PerspectiveAn Operational-Level OM Perspective

• OM’s function focuses on adding value through the transformation process (technical core) of converting inputs into outputs.–Physical: manufacturing–Locational: transportation–Exchange:retailing–Storage: warehousing–Physiological: health care–Informational: telecommunications

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–9

The Transformation Process within OMThe Transformation Process within OMThe Transformation Process within OMThe Transformation Process within OM

Exhibit 1.2Exhibit 1.2

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–10

Input-Transformation-OutputInput-Transformation-OutputRelationships for Typical SystemsRelationships for Typical Systems

Input-Transformation-OutputInput-Transformation-OutputRelationships for Typical SystemsRelationships for Typical Systems

Exhibit 1.3Exhibit 1.3

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–11

OM’s Contributions to SocietyOM’s Contributions to SocietyOM’s Contributions to SocietyOM’s Contributions to Society

• Higher Standard of Living–Ability to increase productivity–Lower cost of goods and services

• Better Quality Goods and Services–Competition increases quality

• Concern for the Environment–Recycling and concern for air and water quality

• Improved Working Conditions–Better job design and employee participation

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–12

Annual Change in Productivity in Annual Change in Productivity in the United States (1980-2000)the United States (1980-2000)

Annual Change in Productivity in Annual Change in Productivity in the United States (1980-2000)the United States (1980-2000)

Exhibit 1.4Exhibit 1.4Source: Economic Report of the President, United States Government Printing Office, Washington, DC. January, 2001.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–13

Services as a Percent of Gross Domestic Services as a Percent of Gross Domestic Product (GDP) for Different CountriesProduct (GDP) for Different Countries

Services as a Percent of Gross Domestic Services as a Percent of Gross Domestic Product (GDP) for Different CountriesProduct (GDP) for Different Countries

Exhibit 1.5Exhibit 1.5Source: The World Factbook 2000, Central Intelligence Agency, Washington, DC.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–14

GoodGood

The Emergence of OMThe Emergence of OMThe Emergence of OMThe Emergence of OM

• Application of OM to Service Operations–Batch cooking operations at McDonald’s–Just-in-Time (JIT) at Northern Telecomm, Inc.–Automatic inventory replenishment at Wal-Mart

ServiceService ProductProduct

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–15

1-6

Growth in Services in the United StatesGrowth in Services in the United StatesGrowth in Services in the United StatesGrowth in Services in the United States

Exhibit 1.6Exhibit 1.6Source: Handbook of U.S. Labor Statistics, edited by Eva E. Jacobs, Fifth Edition, Bernan Press, 2001, Table 2-1, pp. 161–164.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–16

1-6

Differences Between Differences Between Goods and ServicesGoods and Services

Differences Between Differences Between Goods and ServicesGoods and Services

• Goods–Tangible–Can be inventoried

–No interaction between customer and process

• Services–Intangible–Cannot be inventoried

–Direct interaction between customer and process

Exhibit 1.7Exhibit 1.7

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–17

Most Products Are a “Bundle” Most Products Are a “Bundle” of Goods and Servicesof Goods and Services

Most Products Are a “Bundle” Most Products Are a “Bundle” of Goods and Servicesof Goods and Services

Exhibit 1.8Exhibit 1.8

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–18

An Expanded Definition of QualityAn Expanded Definition of QualityAn Expanded Definition of QualityAn Expanded Definition of Quality

• Quality is important in all functional areas of an organization.

• Quality is now much more than the technical requirements for manufactured goods.

• Service quality (customer relationships) is equally important.

QualityQuality

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–19

A New Paradigm for OMA New Paradigm for OMA New Paradigm for OMA New Paradigm for OM

• Post-War U.S. Dominance in Manufacturing–Available capacity built to support the war effort–Pent-up demand for consumer goods–Destruction of overseas production capabilities

• Proactive Operations Function (Skinner)–Add value to products, increase profit margins.–Compete on dimensions other than costs:

• Quality

• Speed of delivery

• Process flexibility

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–20

The Ever-Changing World of OMThe Ever-Changing World of OMThe Ever-Changing World of OMThe Ever-Changing World of OM

• Increased Global Competition–Transformation into a global economy–Pressure to excel on multiple competitive

dimensions–Increased emphasis on logistics

• Advances in Technology–Information technology (IT)–Internet email and commerce (B2B)–Automation and robotics

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–21

Ford’s Global Network to SupportFord’s Global Network to Supportthe Manufacturing of the Escortthe Manufacturing of the Escort

Ford’s Global Network to SupportFord’s Global Network to Supportthe Manufacturing of the Escortthe Manufacturing of the Escort

Source: From Joseph E. Stiglitz, Principles of Micro-economics, 2nd ed. (New York: W.W. Norton and Company, 1997), p. 58.

Exhibit 1.9

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–22

Linking OM to Customers and Linking OM to Customers and SuppliersSuppliers

Linking OM to Customers and Linking OM to Customers and SuppliersSuppliers

• Benefits of Buffering the Transformation Process–The process was not disturbed by

environmental interaction.–The process was often more efficient than input

and distribution processes.–Productivity was maximized when processes

operated at continuous rates.–Process management skills were different from

those of other functional activities.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–23

Linking OM to Customers and Linking OM to Customers and SuppliersSuppliers

Linking OM to Customers and Linking OM to Customers and SuppliersSuppliers

• Disadvantages of Buffering the Transformation Process–Information lag in interaction with other

functional activities.–Lack of communication between customers and

the shop floor for problem solving.

• Value Chain–Steps an organization requires to produce a

good or a service regardless of where they are performed.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–24

The Value Chain and Its Support FunctionsThe Value Chain and Its Support FunctionsThe Value Chain and Its Support FunctionsThe Value Chain and Its Support Functions

Exhibit 1.10

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–25

Line and Staff Jobs in OMLine and Staff Jobs in OMLine and Staff Jobs in OMLine and Staff Jobs in OM

Exhibit 1.11

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–26

Inputs Provided by OM toInputs Provided by OM toOther Functional AreasOther Functional Areas

Inputs Provided by OM toInputs Provided by OM toOther Functional AreasOther Functional Areas

ExhibitExhibit 1.12 1.12

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–27

Historical Development of OMHistorical Development of OMHistorical Development of OMHistorical Development of OM

• Prior to 1900–Cottage industry produced custom-made goods.–Watt’s steam engine in 1785.–Whitney’s standardized gun parts in 1801.–Industrial Revolution began at mid-century.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–28

Historical Development of OM (cont.)Historical Development of OM (cont.)Historical Development of OM (cont.)Historical Development of OM (cont.)

• Scientific Management (Frederick W. Taylor)–Systematic approach to increasing worker

productivity through time study, standardization of work, and incentives.

–Viewed workers as an interchangeable asset.

• Other Management Pioneers–Frank and Lillian Gilbreth

• Motion study and industrial psychology

–Henry L. Gantt• Scheduling and the Gantt chart

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–29

Historical Development of OM (cont.)Historical Development of OM (cont.)Historical Development of OM (cont.)Historical Development of OM (cont.)

• Moving Assembly Line (1913)–Labor specialization reduced assembly time.

• Hawthorne Studies–Yielded unexpected results in the productivity of

Western Electric plant workers after changes in their production environment.

–Led to recognition of the importance of work design and employee motivation.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–30

Historical Development of OM (cont.)Historical Development of OM (cont.)Historical Development of OM (cont.)Historical Development of OM (cont.)

• Operations Research (Management Science)–Outgrowth of WWII needs for logistics control

and weapons-systems design.–Seeks to obtain mathematically optimal

(quantitative) solutions to complex problems.

• OM Emerges as a Field–1950–1960, OM moved beyond industrial

engineering and operations research to the view of the production operation as a system.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–31

Historical Development of OM (cont.)Historical Development of OM (cont.)Historical Development of OM (cont.)Historical Development of OM (cont.)

• OM Emerges as a Field–1950–1960, OM moved beyond industrial

engineering and operations research to the view of the production operation as a system.

• The Marriage of OM and IT–Integrated solutions approaches

• Business process reengineering

• Supply chain management

• Systems integration (SAP)

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 1–32

Historical Development of OM (cont.)Historical Development of OM (cont.)Historical Development of OM (cont.)Historical Development of OM (cont.)

• Operations Management in Services–OM concepts can apply to both manufacturing

and service operations.

• Integration of Manufacturing and Services–Conducting world class operations requires

compatible manufacturing and service operations.