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Operations Management Exam #1

Organizations Have 3 Basic Functions
What is Operations?
The part of a business organization that is responsible for producing goods or services

Influences all of the rest of the organization

The actual doing part of the business process

What is Operations Management?
The management of systems or processes that create goods and/or provide services
Operations Management affects:
Companies’ ability to compete
Why study OM?
Why study OM?
Every aspect of business affects or is affected by operations

There is a significant amount of interaction and collaboration amongst the functional areas

The Operations Function
The Operations Function
The creation of goods and services through the transformation of inputs into outputs
measurements taken at various points in the transformation process
The comparison of feedback against previously established standards to determine if corrective action is needed.
Value Added
value/price of output – cost of input
Processes (Managing to Meet Demand)
Operations & Supply Chains vs Sales and marketing

Supply ? Demand is wastefully costly

Supply < Demand causes Opportunity Loss/Customer Dissatisfaction Supply = Demand is Ideal

Processes (Variation)
Processes (Variation)
Variations can be disruptive to operations and processes.

They may result in additional costs, delays and shortages, poor quality, and inefficient work systems.

goods-oriented (tangible things)

physical items that include raw materials, parts, subassemblies, and final products.


activities that provide some combination of time, location, form or psychological value.
Air travel
Legal counsel

Goods-service Continuum
Goods-service Continuum
Products are typically neither purely service- or purely goods-based.
Products Package
combinations of goods and services
Key Differences
Key Differences
Scope of Operations Management
The operations function includes many interrelated activities such as:
Forecasting (we won’t cover, but important)
Capacity planning
Facilities and layout
Managing inventories
Assuring quality
Motivating employees
Deciding where to locate facilities
And more . . .
Role of the Operations Manager
The Operations Function consists of all activities directly related to producing goods or providing services.

A primary role of the operations manager is to guide the system by decision making.
-System Design Decisions
-System Operation Decisions

System Design Decisions
-Facility location
-Facility layout
-Product and service planning

These are typically strategic decisions
-usually require long-term commitment of resources
-determine parameters of system operation

System Operation Decisions
These are generally tactical decisions
-Management of personnel
-Inventory management and control
-Project management
-Quality assurance
Decision Making
Most operations decisions involve many alternatives that may have different impacts on costs or profits

Typical operations decisions include:

What: What resources are 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?

Where: Where will the work be done?

How: How will he product or service be designed? How will the work be done? How will resources be allocated?

Who: Who will do the work?

Modeling is a key tool used by decision makers
an abstraction of reality; a simplified representation of something
Types of Models
Physical Models
-Look like their real-life counterparts

Schematic Models
-Graphs, Charts, Blueprints, Drawings, etc.

Mathematical Models

Common Features of Models
simplifications of real-life phenomena

Focus on the most important aspects of the real-life system & omit unimportant details

Benefits of Models
Models are generally easier to use and less expensive than dealing with the real system

Serve as a consistent tool for evaluation and provide a standardized format for analyzing a problem

Require users to organize and sometimes quantify information

Increase understanding of the problem

Enable managers to analyze “What if?” questions

Limitations of Models
Important variables may be missed

Quantitative information may be emphasized over qualitative

Models may be incorrectly applied and results misinterpreted

Nonqualified users may use the model incorrectly

Quantitative Methods
A decision making approach that seeks to obtain a mathematically optimal solution
-Linear programming
-Queuing techniques
-Inventory models
-Project models
-Forecasting techniques
-Statistical models
Historical Evolution of OM
Industrial Revolution
Scientific Management
Decision Models and Management Science
Influence of Japanese Manufacturers
Pre-Industrial Revolution
Craft production – highly skilled workers use simple, flexible tools to produce small quantities of customized goods
Industrial Revolution
The Industrial Revolution (late 18th century)
-Began in England in the 1770s
-Division of labor – Adam Smith, 1776
-Application of the steam engine, 1780s
-Cotton Gin and Interchangeable parts – Eli Whitney, 1792

Substituting machine power for human power.

Management theory and practice did not advance appreciably during this period

Scientific Management (Early 20th century)
“Science of Management” based on observation, measurement, analysis and improvement of work methods, and economic incentives

Management is responsible for:
-planning, carefully selecting and training workers
-finding the best way to perform each job

Emphasis was on maximizing output
-Ford Model-T, 1908-1927
-Modern-Times, 1936

Decision Models & Management Science (Mid 20th century)
OR applications in warfare – Operations Research (OR) Groups

Mathematical model for inventory management (F.W. Harris, 1915)

Statistical procedures for sampling and quality control (Dodge, Romig & Shewart , 1930s)

Statistical sampling theory (Tippett, 1935)

Linear programming (George Dantzig , 1947)

Influence of Japanese Manufacturers
Late 20th century

Refined and developed management practices that increased productivity
-Credited for the “quality revolution”
-continual improvement
-employee empowerment
-Lean Operations / Just-in-Time production

Key Issues for Operations Managers Today
Economic conditions
Quality problems
Management technology
The Internet, e-commerce, e-business
Supply chain management
Risk management
Revenue management
Competing in a global economy
Globalization, Outsourcing
Environmental concerns
Ethical behavior
requires more resources and effort than more standardized products and services
Theory X
Workers do not like work and must be induced to do it
Theory Y
Workers enjoy work and are committed to doing it
Components of the Supply Chain
Forecasting, purchasing, inventory management, information management, quality assurance, scheduling, production, distribution, delivery, and customer service

Doesn’t include marketing or finance because those are the two other functions of an organization next to operations

a standard behavior that guides how we should act in various situations
Business Sustainability
refers to economic, environmental, and social sustainability
Division of Labor
allows employers to employ less-skilled workers than would have been needed in craft production
Which of the following are reasons organizations fail?
Not investing enough in necessary capital or human resources

Underestimating the importance of internal communication and cooperation between functional areas

Putting too much emphasis on short term financial performance

Not focusing enough on process design and improvement

Failure to correctly focus on customer wants and needs

Three separate, but related concepts that are vitally important to business organizations:
How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services

Organizations compete over:
-Price (Cost)
-Variety (Flexibility)

Operations' Influence on Competitiveness
Operations’ Influence on Competitiveness
Quality Based Strategies
may be apart of another strategy
3 Basic Business Strategies
Low cost, responsiveness, differentiation
Planning and Decision Making
Planning and Decision Making
Start at the top with a mission (vision)
Order Qualifiers
Characteristics that customers perceive as minimum standards of acceptability for a product or service to be considered as a potential for purchase
Order Winners
Characteristics of an organization’s goods or services that cause it to be perceived as better than the competition
Price, delivery reliability, delivery speed and quality
can be qualifiers or order winners
and may change over time.
The reason for an organization’s existence that serves as the basis for organizational goals

Mission statement
-States the purpose of the organization
-Answer the question: “What business are we in?”

Supply Chain Strategy
should align with overall business strategy
Example Strategies an Organization Might Choose From
Low Price

-narrow product lines or limited services

-e.g., customization

-innovation to create new products or services

-various aspects of service (e.g., helpful, reliable, etc.)

-environmentally friendly and energy efficient operations


Responsiveness (time-based strategies)
-reduction of time needed to complete products or perform services

Provide detail and the scope of the mission
Goals can be viewed as organizational destinations
The basis for organizational strategies
A plan for achieving organizational goals

Serves as a roadmap for reaching the organizational destinations

Strategy Formulation
1. Core Competencies
2. Environmental Scanning (SWOT)
3. Order Qualifiers & Order Winners
Core Competencies
The special attributes or abilities that give an
organization a competitive edge

To be effective core competencies and strategies need to be aligned

Environmental Scanning – SWOT
Environmental Scanning is necessary to identify:
Internal Factors (Strengths and Weaknesses)
External Factors (Opportunities and Threats)
Key Internal Factors
Human Resources
Skills of workforce, expertise, experience, loyalty to the organization

Facilities and equipment
Capacities, locations, age, maintenance costs

Financial resources
Cash flow, access to additional funding, debt, cost of capital

Loyalty, wants and needs

Products and services
Existing, potential for new ones

Existing, ability to integrate new and its impact on current and future operations

Relationships, dependency, quality, flexibility, service

Labor relations, company image, distribution channels etc.

Key External Factors
Economic conditions
Health and directions of the economy, inflation, deflation, interest rates, taxes, tariffs.

Political conditions
Attitude towards business, political stability, wars

Legal environment
Antitrust laws, regulations, trade restrictions, minimum wages
laws, liability laws, labor laws, patents

Innovations rate, future process technology, design technology

Number and strength of competitors, basis of competitions (price, quality etc.)

Size, location, brand loyalty, ease of entry, growth potential, long term stability, demographics.

Organizational Strategies
Overall strategies that relate to the entire organization and support the achievement of organizational goals and mission
Functional level strategies
Strategies that relate to each of the functional areas and that support achievement of the organizational strategy
Operations Strategy
Operations Strategy
The approach, consistent with organization strategy, that is used to guide the operations function.

But… Organization Strategy should take into account the realities of operations strengths and weaknesses

The methods, actions, or implementations taken to accomplish strategies, which ultimately achieve goals

The “how to” part of the process

Mission, Organizational strategy, Operations strategy
Mission, Organizational strategy, Operations strategy
A measure of the effective use of resources usually expressed as the ratio of output to input

Productivity measures are useful for:
-Tracking an operating unit’s performance over time
-Planning workforce requirements
-Scheduling equipment
-Financial analysis

Why does Productivity Matter?
Higher productivity relative to the competition leads to competitive advantage in the marketplace.

High productivity is linked to higher standards of living -> Have more, work less.

Manufacturing multiplier (1.6-16): manufacturing has beneficial side effect -> service jobs.

Manufacturing incorporates R&D -> competitive edge.

Measures of Productivity
Measures of Productivity
Partial measures:
output/(single input)

Multi-factor measures:
output/(multiple inputs)

Total measure:
output/(total inputs)

Examples of 
Partial Productivity Measures
Examples of
Partial Productivity Measures
Productivity Calculation Example
Units produced: 5,000 
Standard price: $30/unit
Labor input: 500 hours
Cost of labor: $25/hour
Cost of materials: $5,000
Cost of overhead: 2x labor cost
Productivity Calculation Example

Units produced: 5,000
Standard price: $30/unit
Labor input: 500 hours
Cost of labor: $25/hour
Cost of materials: $5,000
Cost of overhead: 2x labor cost

larger than 1, but is it good enough?

The higher the better

Productivity Growth
Productivity Growth
Productivity Growth Example
Productivity Growth Example
Labor productivity on the ABC assembly line was 25 units per hour in 2009. In 2010, labor productivity was 23 units per hour. What was the productivity growth from 2009 to 2010?
Service Sector Productivity
difficult to measure and manage
involves intellectual activities
has a high degree of variability
Factors Affecting Productivity



-INCREASE: Calculators, Computers, Faxes, copiers, Internet search engines, Voice mail, cell phones, email
-REDUCE: inflexibility, high costs, mismatched operations, non-work activities


Improving Productivity
1. Develop productivity measures for all operations
2. Determine critical (bottleneck) operations
3. Develop methods for productivity improvements
4. Establish (reasonable) goals
5. Make it clear that management supports and encourages productivity improvement
6. Measure and publicize improvements
7. Don’t confuse productivity with efficiency
Efficiency = getting the most out of a fixed set of resources
Productivity = effective use of overall resources (e.g., upgrading equipment)
OM Incorporates
What is the first step in creating a new operation
design of product and process to produce it
What might cause a business to change?
changes in the market
Start of Chapter 4 Notes:

Product and Service Design

The essence of an organization is the goods and services it offers

Every aspect of the organization is structured around them

Product and Service design (or redesign) should be closely tied to an organization’s strategy

Reasons for Design or Re-Design
Market Opportunities or Threats drive product and service design (or redesign):

-Low demand, need to reduce costs, quality problems

Social and Demographic
-Aging populations, population shifts

Political, Liability, or Legal
-Regulations, safety issues

-New or changed products and services

Cost or Availability
-Raw materials, components, labor, energy

-Product components, processes

Idea Generation Supply-Chain Based
Ideas can come from anywhere in the supply-chain:
Idea Generation Competitor-Based
Studying how a competitor operates and its products and services
Reverse engineering
Dismantling and inspecting a competitor’s product to discover product improvements
Idea Generation Research Based
Research and Development (R&D)
-Organized efforts to increase (scientific) knowledge or product innovation

Basic research
-Objective: advancing the state of knowledge about a subject without any near-term expectation of commercial applications

Applied research
-Objective: achieving commercial applications

-Converts the results of applied research into useful commercial applications.

Quality Function Deployment
An approach that integrates the “voice of the customer” into product and service development

The purpose is to ensure that customer requirements are factored into every aspect of the process

Key Questions for the Organization
Key Questions for the Organization
Phases in Products Design & Development
1. Feasibility analysis
-Demand, development and production cost, potential profit, technical analysis, capacity req., skills needed, fit with mission.

2. Product specifications
-What’s needed to meet customer wants

3. Process specifications
-Weigh alternative processes in terms of cost, resources, profit, quality

4. Prototype development
-Few units are made to find problems with the product or process

5. Design review
-Changes are made or project is abandoned

6. Market test
-Determine customer acceptance. If unsuccessful return to Design-review.

7. Product introduction

8. Follow-up evaluation
-Based on feedback changes may be made.

Product/Service Life-Stages
Product/Service Life-Stages
Extent to which there is an absence of variety in a product, service, or process

Products are made in large quantities of identical items

Every unit [customer] processed goes through the same process [receives essentially the same service]

Standardization Advantages
Fewer parts to deal with in inventory and in manufacturing
Reduced training costs and time
More routine purchasing, handling, and inspection procedures
Orders fillable from inventory
Opportunities for long production runs and automation
Standardization Disadvantages
High cost of design changes increases resistance to improvements: designs may be frozen with too many imperfections remaining

Decreased variety results in less consumer appeal

Mass Customization
A strategy of producing basically standardized goods or services, but incorporating some degree of customization in the final product or service

-Delayed differentiation
-Modular design

Delayed Differentiation
The process of producing, but not quite completing, a product until customer preferences are known

e.g., Produce a piece of furniture, but do not stain it; the customer will choose the stain or personalized M&Ms

Modular Design
A form of standardization in which components are grouped into modules that are easily replaced or interchanged

e.g., PC

-simplification of manufacturing and assembly
-relatively low training costs
-easier diagnosis and remedy of failures
-easier repair and replacement

-Limited number of possible product configurations
-Limited ability to repair a faulty module; the entire module must often be scrapped

Different phases of a products life cycle require different strategies
in all cases, accurate forecasts of demand and cash flow are critical
Designing (products) for Production
1. Concurrent engineering
2. Computer-Assisted Design (CAD)
3. Production requirements
4. Component commonality
Concurrent Engineering
Bringing design and manufacturing engineers together early in the design phase
-manufacturing personnel, marketing and purchasing personnel in loosely integrated cross-functional teams
-Views of suppliers and customers may also be sought

The purpose:
-achieve product designs that reflect customer wants as well as manufacturing capabilities

Computer Aided Design (CAD)
Increases designers’ productivity.

Directly provides information to manufacturing (dimensions, material – BOM).

Perform analysis: engineering ,cost.

Shortens time-to-market

SolidWorks, AutoCad

Production Requirements
Designers must take into account production capabilities
-Types of materials
-Special abilities

When Opportunities and Capabilities do not match management must consider expanding or changing capabilities.

Related concepts:
a. Design For Manufacturing (DFM)
b. Manufacturability
c. Design For Assembly (DFA)

Design for Manufacturing (DFM)
-designing products that are compatible with an organization’s abilities

-Ease of fabrication and/or assembly
-Has important implications for cost, productivity and quality

Design for Assembly (DFA)
-reducing the number of parts in a product and on assembly methods and sequence.

Component Commonality
When products have a high degree of similarity in features and components, a part can be used in multiple products

-Savings in design time
-Standard training for assembly and installation
-Opportunities to buy in bulk from suppliers
-Commonality of parts for repair
-Fewer inventory items must be handled

Service Design
Begins with a choice of service strategy, which determines the nature and focus of the service, and the target market

Key issues in service design
-Degree of variation in service requirements
-Degree of customer contact and involvement

Differences between Service & Product Design
1. Services are created and delivered at the same time. Less opportunity to correct errors. Training, process design more important.

2. Services cannot be inventoried -> capacity issues.

3. Services are highly visible to consumers. Importance of process design.

4. Service systems range from those with little or no customer contact (similar to product design) to those that have a very high degree of customer contact

5. Location is often important to service design, with convenience as a major factor.

6. Demand variability – time & requirements – alternately creates waiting lines or idle service resources. Cost and efficiency perspective vs. customer perspective.
-Standardizing at the risk of eliminating features that customers value – reduce customer choices (e.g., cable channels bundle)
-Increase flexibility by employing temporary workers

Challenges to Service Design

Services cannot be stored.
Balancing supply and demand:
possible (e.g., doctor’s appointments)
impossible (e.g., emergency room).
Disney’s FastPass

Difficult to predict customer requirements
especially when there is direct contact with the customer.

Service Blueprint
Service Blueprint
a method to design and analyze a service.

1. Establish boundaries and decide the level of detail needed.

2. Identify and determine the sequence of customer and service actions and interactions. Picture the service from the customer’s perspective.

3. Develop time estimates for each phase of the process, as well as time variability.

4. Identify potential failure points and develop a plan to prevent or minimize them, as well as a response plan.

The ability of a product, part, or system to perform its intended function under a prescribed set of conditions

Reliability is expressed as a probability:
-The probability that the product or system will function when activated
-The probability that the product or system will function for a given length of time

The central feature of Taguchi’s approach is parameter design.
It focuses on a much smaller subset of possible production environments of standard design of experiments. This can lead to a near optimal solution.
Reliability- When Activated
Finding the probability under the assumption that the system consists of a number of independent components

Requires the use of probabilities for independent events

Independent event
Events whose occurrence or non-occurrence do not influence one another

Reliability Rule 1
Reliability Rule 1
If two or more events are independent and success is defined as the probability that all of the events occur, then
the probability of success is
equal to the product of the probabilities of the
(#1 works AND #2 works)

Overall reliability is less than the least reliable component. Though individual system components may have high reliabilities, the system’s reliability may be considerably lower because all components that are in series must function

One way to enhance reliability is to utilize redundancy, the use of backup components to increase reliability
Rule 2
Rule 2
If two events are independent and success is defined as the probability that at least one of the events will occur, the probability of success is equal to the probability that (either) one occurs (it works)
plus (OR)
1.00 minus that probability (it fails…)
multiplied by the probability the other occurs
Rule 3
Rule 3
If two or more events are involved and success is defined as the probability that at least one of them occurs, the probability of success is 1 – P(all fail).
1 – (#1 fails AND #2 fails AND #3 fails)

Can also be calculated by using Rule 2 multiple times.

What is this system's reliability?
What is this system’s reliability?
Reliability Over Time
Reliabilities are determined relative to a specified length of time.
Improving Reliability
Component design
System design
Production/assembly techniques
Preventive maintenance procedures
User education

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