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Operation Management

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Operation Management

  1. 1. Three Functions in a Business • Marketing • Marketing people are responsible to assess the needs and wants of customers and communicates these needs to operations and design people • Operations • Operations people can supply information about the capacity and judge the manufacturing or service lead time • Finance • Must cooperate in budgeting, economic analysis of investment proposals and provisions of funds
  2. 2. The Key functions of a business • In general marketing, operations and finance people interface on: – Product and service design – Forecasting – Setting realistic schedules – Decisions of quality and quantity and so on
  3. 3. What is Operations Management? • OM is composed of two words: –Operations – Management • Production/Operations –is an intentional act of producing something in an organized manner. – is the creation of goods and services – is the act of transformation i.e. inputs are processed and transformed into some outputs.
  4. 4. Cont’d … • Management – is the art and science concerned with planning, directing and controlling the work of human beings towards a common aim. • Combining these two concepts we can say that ‘the management of the transformation process of the inputs into outputs is operation or production management
  5. 5. Cont’d… • Operations management is about getting the day to day work done quickly, efficiently , without errors and at lowest cost. • The primary objectives of Operations management: – Make a process work right – Improve customer service – Reduce wastage/cost
  6. 6. Cont’d … In a more comprehensive manner - operations management is the activity whereby resources in a defined system, are combined and transformed in a controlled manner to add value in accordance with policies communicated by management. • Key concepts in the above definition: – Resources – Systems – Transformation – Managerial policy
  7. 7. The first key element is resources • There are two types of resources • Transforming resources – like staff and facility • Transformed resources - which give the operation system its purpose or goal like – Physical – manufacturing – By location – transportation – By ownership- Retail – By physiological state – health services – By psychological state – entertainment – Information with ppty- accountant
  8. 8. The second Key element is System • What is a system? • A system is arrangement of interdependent, interactive and interrelated components designed to achieve an objective according to the plan. • What are the two major working principles of a system? • Synergy • Entropy
  9. 9. The third key element is value addition • Add value/Tramsformation • The essence of operations function is to add value during the transformation process
  10. 10. 12 OM’s Transformation Process
  11. 11. Discussion Question • Some managers view operations function as a “black box” which takes raw materials and transform into goods and services without considering the need to consider the external environment.
  12. 12. Role of Operations Manager • Operations manager should: –Understand the overall objectives of the organization –Develop the operation plan of the organization and control the function –Assume responsibility in the design of goods/services and jobs –Explain their own plans to the other functions –Improve the Operation
  13. 13. Discussion Question Why study operations management?
  14. 14. Why Study OM? • Why you need to study operations management? –Operations management activities are at the core of all business organizations. –More of all jobs are in operations management related areas. –Activities in all of the other areas of business organizations are all interrelated with operations management activities. –Operations management has been recognized as an important factor in a country’s well being.
  15. 15. Cont’d …  It plays an important role in the society in which we live:  Higher standard of living  Better quality goods and services  Concern for the environment  Improved working conditions
  16. 16. HISTORICAL EVOLUTION OF OPERATIONS MANAGEMENT • Systems for production have existed since ancient times: – The Great Wall of China – The Egyptian Pyramids and – The ships of Spanish empire – The Aksumit Obelisks – The rock- hewn churches of Lalibela – The Palace of Emperor Faciledes – The well of Harrer • Major indicators for the prevalence of well organized production
  17. 17. Cont’d • The evolution of operations management can be classified into three periods: – Before 1930’s – manufacturing management – From 1930’s-1950’s- Production management – Since 1970’s – Operations management • The name of the evolution of operations management and its evolution as a discipline is parallel
  18. 18. Cont’d … • Before 1930’s – – The traditional view of manufacturing management began in the eighteenth century when Adam Smith recognized the economic benefits of specialization of labor. – He recommended breaking jobs down into subtasks and reassigning workers to specialized tasks then they would become highly skilled and efficient. – Objective- narrowing the scope of work a worker need to be assigned – Interchangeable parts (Eli Whitney, 1970s)
  19. 19. Cont’d … -Efficiency school of thought • The belief that rationality on the part of management will yield economic efficiency. –To determine how efficient labor is in a given situation, management sets a standard –scientific analysis of work tasks –Application of techniques to work tasks – Physical aspects of work environment
  20. 20. Historical Evolution of OM… • From the school of efficiency – Henry Gant introduced the concept of task and bonus plan and Scheduling – The Gilbreth’s introduced the principles of motion economy that could be applied to incredibly small portion of tasks • The school of process management (1900s)- according to this school management is viewed as a continuous process of planning, organizing and controlling
  21. 21. Historical Evolution of OM… • Production Management becomes the acceptable term from 1930s to 1950s. – At this time, however, management also began discovering that workers have multiple needs, not just economic needs – Henry Ford – introduced the concept of Mass production and Assembly line – The different types of quality control tools like inspection, SQC and DOE were introduced – The school of decision making analysis with different mathematical tools were emerged during this time.
  22. 22. Historical evolution of OM… • After 1970s the name production management was transformed into operations management. During this era two distinct changes were occurred: – The Service Revolution – An emphasis on synthesis, rather than just analysis, in management practices.
  23. 23. Summary of the HDOM Date Contribution Contributor 1776 Specialization of labor in manufacturing Adam Smith 1799 Interchangeable parts, cost accounting Eli Whitney and others 1832 Division of labor by skill; assignment of jobs by skill; basics of time study Charles Babbage 1900 Scientific management; time study and work study developed; dividing planning and doing of work Frederick W. Taylor 1900 Motion study of jobs Frank B. Gilbreth
  24. 24. Summary of the HDOM .. cont 1901 Scheduling techniques for employees, machines, jobs in manufacturing Henry L. Gantt 1915 Economic lot sizes for inventory control F. W. Harris 1927 Human relations; the Hawthorne studies Elton Mayo 1931 Statistical inference applied to product quality; quality control charts Walter A. Shewhart 1935 Statistical sampling applied to quality control; inspection sampling plans H. F. Dodge and H. G. Romig
  25. 25. Summary of the HDOM … cont 1940 Operations research applications in World War II P. M. S. Blacket and others 1946 Digital computer John Mauchly and J. P. Eckert 1947 Linear programming George B. Dantzig, William Orchard Hays, and others 1950 Mathematical programming, nonlinear and stochastic processes A. Charnes, W. W. Cooper, H. Raiffa, and others 1951 Commercial digital computer; large-scale computations available Sperry Univac
  26. 26. Summary of the HDOM … cont 1960 Organizational behavior; continued study of people at work L. Cummings, L. Porter, and others 1970 Integrating operations into overall strategy and policy Computer applications to manufacturing, scheduling, and control, material and O. Wright requirements planning (MRP) W. Skinner J. Orlicky and O. Wright 1980 Quality and productivity applications from Japan; robotics, computer-aided design and manufacturing (CAD/CAM) W. E. Deming and J. Juran
  27. 27. Factors driving the Continued dev.t OM… Globalization of the Economy – markets and companies are becoming global in nature - Being a global, multinational or transnational company may largely require efficiency and Effectiveness. - Due to fierce Competition, importance of manufacturing for the domestic economy is declining - The current battle ground for market place dominance is speed objective Empowerment – cost- effective- operation But requires good Knowledge and skill of operation workers
  28. 28. Factors driving the Continued dev.t OM… Rapid expansion of advanced technologies Scarcity of operations resources Social responsibility issues Total Quality Management The necessity for Operations manager to have external orientation Requires the involvement of every personnel Continued growth of the service sector
  29. 29. Discussion Question 1. Can there be any difference between public and business organizations in the application of operations management? 2. What basic differences and similarities can exist between the operations system of goods and services?
  30. 30. Production of goods Vs Delivery of Services • Manufacturing and service are often different in terms of what is done but quite similar in terms of how it is done? • Both involve design and operation decisions – What size factory is needed? For Manufacturing – What size building is needed? For service – Location, Scheduling, control operation and allocate resources
  31. 31. Difference between the operations system of a service and manufacturing … • Quality Assurance is more challenging in services • Measurement of productivity is more challenging in service operations • Service operations are much more slow and awkward • Manufacturing systems have more inventory on hand than service firms • Higher labor content in services due to on site consumption and variability of inputs • Product designs are often easier to patent than service design • Service by nature involves higher degree of customer contact. Performance of a service typically occurs at the point of consumption
  32. 32. 34 Goods & Services • Services – Intangible product – Product cannot be inventoried – High customer contact – Labor intensive • Manufacturing – Tangible product – Product can be inventoried – Low customer contact – Capital intensive
  33. 33. PRODUCTION Vs PRODUCTIVITY • Production is an organized activity of transforming raw materials into finished products which have higher value. • Production in an industry can be increased by: – Employing more labor – Installing more machinery, and – Putting in more materials, regardless of the cost of production. • But increase of production does not necessarily mean increase in productivity
  34. 34. Cont’d …  Higher productivity results when we put in a production system an element of efficiency with which the resources are employed. Productivity The reduction in wastage of resources such as labor, machines, materials, power, space, time, capital, etc. It implies development of an attitude of mind and a constant urge to find better, cheaper, easier, quicker, and safer means of doing a job, manufacturing a product and providing service
  35. 35. Cont’d … • Higher productivity leads to: –a reduction in cost of production –reduces the sales price of an item –expands markets and –enables the goods to compete effectively in the world market.
  36. 36. Cont’d … • In general by enabling an increase in the output of goods or services for existing resources: – productivity decreases the cost of goods per unit, and – makes it possible to sell them at lower prices, thus benefiting the consumers – while at the same time leaving a margin for increase in the wages of the workers.
  37. 37. Cont’d … • The strength of a country • Prosperity of its economy • Standard of living of the people and • The wealth of the nation are very largely determined by the extent and measure of its production and productivity. • Thus due to their poor productivity some countries lose their market position
  38. 38. Discussion question • Why does some countries achieve the highest productivity and others not?
  39. 39. Negative Impact on Productivity • A low propensity to save and high propensity to consume, which affects capital formation and attract foreign goods • An increasing demand for service • An emphasis for short term objectives • Need for increasing government regulations which adds the administrative burden of the countries • Management • Technology
  40. 40. Example • Productivity growth in USA in1970’s and 1980’s lagged behind other leading countries most notably Japan, Korea, UK and West Germany. Although US productivity was among the highest, it was losing the ground to other nations.
  41. 41. Causes for lagging productivity gain • Management problems – foreign managers were in a better position to deal with quality and productivity improvements • Difficulty to measure the productivity of white collar workers • Weakness in technological practices • Quality differences
  42. 42. Discussion question • Now a days researchers conclude that the American economy is losing its competitive edge due to low productivity? Thus it requires manufacturing renaissance. Do you agree with this issues?
  43. 43. Improving productivity • Develop productivity measures to all operations. • Look at the system as a whole • Develop methods for achieving productivity improvements • Make it clear that management supports and encourages productivity improvement • Measure improvements and publicize them • Do not confuse efficiency with productivity
  44. 44. How do we measure Productivity? • The ratio between output and one of these factors of input is usually known as productivity of the factor considered. • Productivity may also be considered as a measure of performance of the economy as a whole. Mathematically, – Productivity = Output Value/Input Value – Factor Productivity = Output due to the factor/Input factor employed
  45. 45. Cont’d … • In order to assure that productivity measurement captures what the company is trying to do with respect to customer satisfaction and quality, some firms redefined productivity as: – Productivity = Effectiveness or value to customer/Efficiency or cost to producer
  46. 46. Cont’d … • Productivity measurement is the ratio of organizational outputs to organizational inputs. Thus productivity ratios can be: —Partial productivity measurement —Multi-factor productivity measurement —Total productivity measurement
  47. 47. Cont’d … 1. Partial Productivity Measurement –Partial productivity measurement is used when the firm is interested in the productivity of a selected input factor. It is the ratio of output values to one class of input. –PPM = outputs/labor input or Outputs/Material Input or Outputs/Capital
  48. 48. Cont’d … 2. Multi-factor Productivity Measurement –This productivity measurement technique is used when the firm is interested to know the productivity of a group of input factors but not all input factors. –MFPM =Outputs/Labor + Capital or Outputs/Labor + Material
  49. 49. Cont’d … 3. Total (Composite) Productivity Measures –A firm deals about composite productivity when it is interested to know about the overall productivity of all input factors. –This technique will give us the productivity of an entire organization or even a nation. –TPM =Outputs/Inputs or Goods and services provide/All resources Used
  50. 50. Chapter Two Operations strategy and Competitiveness
  51. 51. What is Strategy? • Strategy is the direction and scope of an organization over the long-term, which achieves advantage in a changing environment through its configuration of resources with the aim of fulfilling stakeholder expectations. • Strategy involves the interplay of three elements: external environment, resources and objectives
  52. 52. Levels of strategy • There are three levels of strategy: –The corporate level strategy –Business level strategy –Functional strategy
  53. 53. Strategy development • The business strategy of a company can be developed after considering factors like: –Mission of the company –Environmental scanning –Core competencies
  54. 54. Operations strategy • Operations strategy is the plan that specifies the design and use of resources to support the business strategy. • Operations strategy can be truly effective if it is linked with organizational strategy • Operations strategy deals with: – Products, processes, methods, operating resources, quality, costs, lead times and scheduling
  55. 55. Importance of operations strategy • Operations strategy did not come into the forefront until 1970 due to few factors: – Mass production – Had no series competitors – Were selling what they wanted • But in 1970 and 1980’s the Japanese companies began offering products with superior quality with lowest cost and US companies lost their market share to Japanese counter parts.
  56. 56. Example • For instance in 1950’s the total market share of US based automobile industries accounts 50% whereas the Japan’s firms accounts only 1% of the world automobile market. In 1960’s the Japan’s firm market share increased to 24% whereas the US companies’ market share went down to 22%.
  57. 57. Productivity, competitiveness and strategy • Productivity relates to how effective an organization is in use of its resources • Competitiveness relates to how effective an organization in the market place compared with other organizations that offer similar products or services • Strategy shapes the plans that determine the direction an organization takes I pursuing goals.
  58. 58. Causes of US companies poor competitiveness • Decision making was based on short term horizon • Certain strategic weaknesses that failed to recognize the threats posed by foreign competitors : – neglected manufacturing functions – underinvestment in physical and human capital • Lack of cooperation among departments
  59. 59. Competitive Priorities • There are four major groups of competitive priorities: cost, quality, time and flexibility 1. Cost - the role of operation strategy is to develop a plan for the use of resources to support such kind of competition
  60. 60. Cont’d … • The Operation function must focus on: – Cutting costs on the system such as materials, labor and facilities –Study the operation system carefully to eliminate waste –Offering training to employees to maximize productivity and minimize scrap –Automating the operations system of the company so that productivity will be increased
  61. 61. Example - the south west airline compete on cost • Its operation function is designed to support cost strategy – Facilities are streamlined – Only one type of airplane is used – Short flight routs – All unnecessary costs are eliminated – Employees are trained to perform many functions • Because of this strategy south west has been a model for the airline industry for many years
  62. 62. Cont’d … 2. Quality - as a competitive priority has two dimensions: – High performance design – Product and service consistency • A company that competes on this dimension needs to implement quality in every area of the organization – Product design – Process Design
  63. 63. Cont’d … 3. Time - Companies in all industries are competing to deliver high-quality products in as short a time as possible. –The job of the operations function is to critically analyze the system and combine or eliminate processes in order to save time. –Use technology to speed up processes and flexible work forces to meet peak demands
  64. 64. Cont’d … 4. Flexibility- the ability of a company to readily accommodate the changes in the environment can be a winning strategy. • There are two dimensions of flexibility. – Product mix flexibility – Volume flexibility • To carry out this strategy, flexible companies tend to have – More general-purpose equipment – Skilled and semiskilled workers
  65. 65. Cont’d … • Since it is difficult to focus on all priorities. It is advisable to distinguish between order winners and order qualifiers. • Order qualifiers • Order winners • Translating competitive priorities into operations requirement • Structure • Infrastructure
  66. 66. Case 1: A bank manager • The managing director of a bank believes that improved customer service is the best way for us to differentiate ourselves from competitors and attract new customers. We can offer our customers better service by reducing waiting time in teller lines from an average of six minutes to an average of three. By opening for business at 8:30 instead of 9:00, and by remaining open for an additional hour beyond our current closing time, we will be better able to accommodate the busy schedules of our customers. These changes will enhance our bank’s image as the most customer-friendly bank in town and give us the edge over our competition. • Critically evaluate the argument of the bank manager.

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