Operations Management Defined
- Defining Operations Management
- Organizational Decision Levels
- Key Terminology
- Critical Processes
- Measuring Productivity Levels
- Inventory Determination
- Inventory Policy Choices
- Inventory Policy in a Fixed-Order Quantity System
- Independent Versus Dependent Demand
- ABC Inventory Classification
- Vendor Managed Inventory (VMI)
- Challenges Facing the Modern Operations Manager
- Discussion Questions
Defining Operations Management
Every business is managed through multiple business functions each responsible for managing certain aspects of the business. Figure 1-1 illustrates this by showing that the vice president of each of these functions reports directly to the president or CEO of the company. Marketing is responsible for sales, generating customer demand, and understanding customer wants and needs. Finance is responsible for managing cash flow, current assets, and capital investments. MIS is responsible for managing flows of information. Most of us have some idea of what finance and marketing are about, but what does operations management do?
Figure 1-1 Organizational chart
Operations management (OM) is the business function responsible for managing the process of creation of goods and services. It involves planning, organizing, coordinating, and controlling all the resources needed to produce a company’s goods and services. Because operations management is a management function, it involves managing people, equipment, technology, information, and all the other resources needed in the production of goods and services. Operations management is the central core function of every company. This is true regardless of the size of the company, the industry it is in, whether it is manufacturing or service, or is for-profit or not-for-profit.
Consider a pharmaceutical company such as Merck. The marketing function of Merck is responsible for promoting new pharmaceuticals to target customers and bringing customer feedback to the organization. Marketing is essentially the window to customers. The finance function of Merck makes sure that they have needed capital for different processes including R&D. However, it is the operations function that plans and coordinates all the resources needed to design, produce, and deliver the various pharmaceuticals to hospitals, pharmacies, and other locations where needed. Without operations, there would be no products to sell to customers.
The Transformation Role of Operations Management
We say that operations management performs a transformation role in the process of converting inputs such as raw materials into finished goods and services. These inputs include human resources, such as workers, staff, and managers; facilities and processes, such as buildings and equipment; they also include materials, technology, and information. In the traditional transformation model outputs are the goods and services a company produces. This is shown in Figure 1-2.
Figure 1-2 The transformation role of operations management
At a manufacturing plant the transformation is the physical change of raw materials into products, such as transforming steel into automobiles, cloth into jackets, or plastic into toys. This is equally true of service organizations. At a university OM is involved in organizing resources, such as faculty, curriculum, and facilities, to transform high school students into college graduates. At an airline it involves transporting passengers and their luggage from one location to another.
The transformation role of OM makes this function the “engine room” of the organization. As a result it is directly responsible for many decisions and activities that give rise to product design and delivery problems. The design and management of operations strongly influence how much material resources are consumed to manufacture goods or deliver a service, making sure that there is enough inventory to produce the quantities that need to be delivered to the customer, and ensuring that what is made is in fact what the customer wants. Many of these decisions can be costly. It is for this reason that OM is a function companies go to in order to improve performance and the financial bottom line.
Differences in Manufacturing Versus Service Operations
All organizations can be broadly divided into two categories: manufacturing organizations and service organizations. Although both categories have an OM function, these differences pose unique challenges for the operations function as the nature of what is being produced is different. There are two primary distinctions between these categories of organizations. First, manufacturing organizations produce a physical or tangible product that can be stored in inventory before it is needed by the customer. Service organizations, on the other hand, produce intangible products that cannot be produced ahead of time. Second, in manufacturing organizations customers typically have no direct contact with the process of production. Customer contact occurs through distributors or retailers. For example, a customer buying a computer never comes in contact with the factory where the computer is produced. However, in service organizations the customers are typically present during the creation of the service. Customers here usually come in contact with some aspect of the operation. Consider a restaurant or a barber shop, where the customer is present during the creation of the service.
The differences between manufacturing organizations and service organizations are typically not as clear-cut as they might appear in the preceding example. Usually there is much overlap between them, and their distinctions are increasingly becoming murky. Most manufacturers provide services as part of their business, and many service firms manufacture physical goods they use during service delivery. For example, a manufacturer of jet engines, such as Rolls Royce, not only produces engines but services them. A barber shop may sell its own line of hair care products.
We can further divide a service operation into high contact and low contact segments. High contact segments are those parts of the operation where the customer is present, such as the service area of the post office or the dining area of a restaurant. However, these services also have a low contact segment. These can be thought of as “back room” or “behind the scenes” segments. Examples would include the kitchen segment at a fast-food restaurant or the laboratory for specimen analysis at a hospital.
Finally, in addition to pure manufacturing and pure service, there are companies that have some characteristics of each type of organization. It is difficult to tell whether these companies are actually manufacturing or service organizations. An excellent example is an automated warehouse or a mail-order catalog business. These businesses have low customer contact and are capital intensive. They are most like manufacturing organizations yet they provide a service. We call these companies quasi-manufacturing organizations.
The operational requirements of these two types of organizations are different, from labor to inventory issues. These differences are shown in Table 1-1. As a result, it is important to understand how to manage both service and manufacturing operations.
Table 1-1 Comparing Manufacturing and Service Operations
Product can be inventoried.
Product cannot be inventoried.
Low customer contact.
High customer contact.
Longer response time.
Short response time.
The Role of Manufacturing and Service Operations in the Organization and Supply Chain
Operations management plays a critical role in the organization and supply chain. Without OM there would be no products to sell. However, operations cannot work in isolation from other business functions. Recall that each business function manages unique aspects of the business, and they all must work together. For example, operations must work with marketing to understand the exact wants of a particular group of customers. It can then design the exact products customers want and create the production processes to efficiently produce these products. Marketing, on the other hand, must understand operations’ capabilities, including the types of products it can produce and the limitations of the production process. Without communication between marketing and operations, the company may find itself in a situation where it is producing products the customers don’t want.
Operations must also work closely with purchasing to understand availability of materials, cost and quality issues, availability of sources of supply, and lead times. Operations links marketing—with its ties to customers—to sourcing—with links to sources of supply. Operations must understand exactly what customers want and be able to ensure that sourcing can get the materials needed at the right price and at the right time to support product designs, or offer alternative material options.
Ensuring that OM fits in with the other organizational functions is necessary but not sufficient. The reason is that each company depends on other members of its supply chain to be able to deliver the right products to its customers in a timely and cost-effective manner. In the upstream part of a company’s supply chain, a company depends on its suppliers for the delivery of raw materials and components in time to meet production needs. If deliveries of these materials are late, or are of poor quality, production will be delayed, regardless of how efficient a company’s operations process is. On the downstream side, a company depends on its distributors and retailers for the delivery of the product to the final customer. If these are not delivered on time, are damaged in the transportation process, or are poorly displayed at the retail location, sales will suffer. Also, if the operations function of other members of the supply chain is not managed properly, excess costs will result, which will be passed down to other members of the supply chain in the form of higher prices.
The bottom line is that companies that comprise a supply chain need to coordinate and link their operations functions so that the entire chain is operating in a seamless and efficient manner. Just consider the fact that most of the components Dell uses are warehoused within a 15-minute radius of its assembly plant, and Dell is in constant communications with its suppliers. Dell considers this to be essential to produce and deliver components in a timely fashion.