Introduction to Operations Management

Operations Management

Operations management is the management of processes that transform inputs into goods and services that add value for the customer.

Learning Objectives

Explain the role of operations management

Key Takeaways

Key Points

  • The goal of operations management is to maximize efficiency while producing goods and services that effectively fulfill customer needs.
  • Operations is one of the three strategic functions of any organization.
  • Operations decisions include decisions that are strategic in nature, meaning that they have long-term consequences and often involve a great deal of expense and resource commitments.

Key Terms

  • strategy: A plan of action intended to accomplish a specific goal.
  • tactic: A maneuver or action calculated to achieve some end.
  • Operations management: Management of processes that transform inputs into goods and services that add value for the customer.

What is Operations Management?

Operations management is the management of processes that transform inputs into goods and services that add value for the customer.

The Goal of Operations Management

The goal of operations management is to maximize efficiency while producing goods and services that effectively fulfill customer needs.

Countless operating decisions must be made that have both long- and short-term impacts on the organization’s ability to produce goods and services that provide added value to customers. If the organization has made mostly good operating decisions in designing and executing its transformation system to meet the needs of customers, its prospects for long-term survival are greatly enhanced.

For example, if an organization makes furniture, some of the operations management decisions involve the following:

  • purchasing wood and fabric,
  • hiring and training workers,
  • location and layout of the furniture factory,
  • purchase cutting tools and other fabrication equipment.

If the organization makes good operations decisions, it will be able to produce affordable, functional, and attractive furniture that customers will purchase at a price that will earn profits for the company.

The Role of Operations Management in the Organization

Operations is one of the three strategic functions of any organization. This means that it is a vital part of accomplishing the organization’s strategy and ensuring its long-term survival. The other two areas of strategic importance to the organization are marketing and finance. The operations strategy should support the overall organization strategy. Many companies prepare a 5-year pro-forma to assist in their operation planning. The pro forma uses information from past and current financial statements in an effort to predict future events such as sales, and capital investments.

Strategic Versus Tactical Operations Decisions

Operations decisions include decisions that are strategic in nature, meaning that they have long-term consequences and often involve a great deal of expense and resource commitments.

Strategic operations decisions include the following:

  • facility location decisions,
  • the type of technologies that the organization will use,
  • determining how labor and equipment are organized,
  • how much long-term capacity the organization will provide to meet customer demand.

Tactical operations decisions have short to medium term impact on the organization, often involve less commitment of resources, and can be changed more easily than strategic decisions. The following are some tactical decisions:

  • workforce scheduling,
  • establishing quality assurance procedures,
  • contracting with vendors,
  • managing inventory.

Strategic and tactical operations decisions determine how well the organization can accomplish its goals. They also provide opportunities for the organization to achieve unique competitive advantages that attract and keep customers.

For example, United Parcel Service (UPS), an international package delivery service, formed a partnership with its customer, Toshiba computers. Toshiba needs to provide a repair service to its laptop computer customers. The old approach of providing this service was cumbersome and time-consuming:

  1. UPS picked up the customer computers.
  2. UPS delivered the computers to Toshiba.
  3. Toshiba repaired the computers.
  4. UPS picked up the repaired computers and delivered them back to the customers.

Under this traditional approach, the total time to get a laptop computer repaired was two weeks—a long time for people to be without their laptop! Then they came up with an innovative idea for Toshiba to provide better service to its customers.

UPS hired, trained, and certified its own employees to repair Toshiba laptop computers. The new repair process is much more efficient:

  1. UPS picks up computers from Toshiba owners.
  2. UPS repairs the computers.
  3. UPS delivers the computers back to their owners.

The total time to get a computer repaired is now about two days.

Most Toshiba customers think that Toshiba is doing a great job of repairing their computers, when in fact Toshiba never touches the computers! The result of this operations innovation is better service to Toshiba customers and a strong and profitable strategic partnership between UPS and its customer, Toshiba.

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Operations Management: Blueprint for a commercial operations management solution.

A Study of Process

Operations management transforms inputs (labor, capital) into outputs (goods and services) that provide added value to customers.

Learning Objectives

Analyze the importance of operations management in protecting an organization’s competitive advantage

Key Takeaways

Key Points

  • Operations management transforms inputs (labor, capital, equipment, land, buildings, materials, and information) into outputs ( goods and services ) that provide added value to customers.
  • All organizations must strive to maximize the quality of their transformation processes to meet customer needs.
  • Controlling the transformation process makes it difficult for competitors to manufacture products of the same quality as the original producer.

Key Terms

  • output: Production; quantity produced, created, or completed.
  • input: Something fed into a process with the intention of it shaping or affecting the outputs of that process.
  • process: A series of events to produce a result, especially as contrasted to product.

Operations Management and the Transformation Process

Operations management transforms inputs (labor, capital, equipment, land, buildings, materials and information) into outputs (goods and services) that provide added value to customers.

Figure 1 summarizes the transformation process. The arrow labeled “Transformation System” is the critical element in the model that will determine how well the organization produces goods and services that meet customer needs. It does not matter whether the organization is a for-profit company, a non-profit organization (religious organizations, hospitals, etc.), or a government agency; all organizations must strive to maximize the quality of their transformation processes to meet customer needs.

Example: Strategic Importance of Operations Management

The 3M Company is a good example of the strategic importance of transforming inputs into outputs that provide competitive advantage in the marketplace.

3M manufactures a top-quality adhesive tape called “Magic Tape”. Magic Tape is used for everyday taping applications, but it offers attractive features that most other tapes do not, including:

  • Smooth removal from the tape roll
  • An adhesive that is sticky enough to hold items in place (but not too sticky that it can not be removed and readjusted if necessary! )
  • A non-reflective surface

For several decades, 3M has enjoyed a substantial profit margin on its Magic Tape product because 3M engineers make the manufacturing equipment and design the manufacturing processes that produce Magic Tape. In other words, 3M enjoys a commanding competitive advantage by controlling the transformation processes that turn raw material inputs into the high value-added Magic Tape product.

Controlling the transformation process makes it extremely difficult for competitors to produce tape of the same quality as Magic Tape, allowing 3M to reap significant profits from this superior product.

An opposite example of the strategic implications of the input/output transformation process is 3M’s decision in the 1980s to stop manufacturing VHS tape for video players and recorders.

In the VHS tape market 3M had no proprietary manufacturing advantage, as there were many Asian competitors that could produce high-quality VHS tape at lower cost. Since 3M had no proprietary control over the transformation process for VHS tape that would allow the company to protect its profit margins for this product, it dropped VHS tape from its offerings.

The two 3M examples of Magic Tape and VHS tape show how important the transformation process and operations management can be to providing and protecting an organization’s competitive advantage.

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Example of a typical transformation process

Service Operations

Services operations often encounter different opportunities and challenges than tangible goods, and thus require unique operational considerations.

Learning Objectives

Identify the key differences between services and other types of goods, and recognize the operational implications of these differences

Key Takeaways

Key Points

  • Service operations are the operational strategies and tactics which go into delivering an intangible good to prospective consumers.
  • Understanding this field of work requires an understanding of what a service constitutes. One useful perspective in differentiating services from other goods is the ‘5 I’s of services’ perspective.
  • As services behave somewhat differently than tangible products, operations managers must take into account different considerations when optimizing their operational strategy.
  • Improving overall quality through measuring consumer satisfaction, planning facilities for optimal use of space, and effective scheduling are a few examples of considerations service operators consider.

Key Terms

  • Intangibility: The state of not being touchable. For example, an idea is real, but not tangible.
  • opportunity costs: The overall cost of something missed; through deciding to do ‘A’, an individual or organization incurs the opportunity cost of doing ‘B’.
  • NPS surveys: Management tools that can be used to gauge the loyalty of a firm’s customer relationships. It serves as an alternative to traditional customer satisfaction research and claims to be correlated with revenue growth.

Service operations are simply the application of operations management to an intangible good (i.e. a service). To understand how service operations function, let’s first take a look at what is considered a service.

This image is a simple line graph, showing at the top industries which are nearly 100% service-related and at the bottom industries which are nearly 100% product-related. It is an illustration of how the service-product continuum is more of a spectrum than a black and white rule.

Service-Goods Continuum: This simple line graph shows industries that are nearly 100% service-related at the top and industries that are nearly 100% product-related at the bottom. It is an illustration of how the service-product continuum is more of a spectrum than a black and white rule.

Services Defined

An easy way to remember what a service is (compared to a product) is through using the ‘5 I’s of Services’:

  1. Intangibility – Services cannot be touched, shipped, handled, or looked at. They are an occurrence, not a tangible good.
  2. Inventory – Services cannot be stored for later use. They occur, or they do not occur.
  3. Inseparability – Services cannot be pulled into different parts or separated (as many tangible goods can be—which makes operations management quite different for products).
  4. Inconsistency – Services tend to be unique. A teacher may teach you a topic, and another teacher may teach you the same topic in another course. Each teacher will deliver this topic somewhat differently. This is a good example of service inconsistency.
  5. Involvement – Consumers are often directly involved in the service delivery. A therapist is a good example of this. The consumer is the center of the service, and thus each instance of the service is unique based on the individual involved.

Managing Service Operations

This definition offers a great deal of insight when applied to the concept of operational management. Without a tangible good to ship, handle and produce, operational managers are instead focused on the execution of an activity to fill a consumer need. This management of an instance is rather different than the management of a product.

Managing operations is just as critical on the service side as it is on the product side. While there are countless considerations to be made, many of which are unique to specific organizations or industries, these core operational decisions are strong indications of the mentality service management specialists consider:

Location

Choosing where to open a facility, how to lay out the facility, what size is appropriate, and overall how efficiently a given space can be used relative to the cost are key considerations. Consider a car mechanic opening a garage. Depending upon how many jobs she anticipates having within a given period of time, and how many employees she expects to be able to manage simultaneously, she may want to open a facility with three garages or five garages. It really depends on how much output she expects she can accomplish, and how much input demand will provide.

Scheduling

Just as a product manufacturing facility will know when a product will be where, so too do service operators need to know when a given service should start and what duration of time is required to complete it. Maximizing output through planning properly can minimize opportunity costs and maximize revenue, and plays an integral role in operational management of services. Take a doctor’s office. If they simply had everyone come in whenever they wanted, there would be times when the staff would have nothing to do (but be obligated to be there, and be paid), and other times when there would be too much to do and capital and customers would be lost.

Quality

As the ‘5 I’s of Services’ indicate, most services tend to be completely unique. A hair dresser rarely gives the same haircut twice and, even if they do, it would be cut to fit a different individual. As a result, managing for high quality output is rather complex. Each execution is measured relative to the specific instance and that specific consumer, making tools like NPS surveys and other measures of individual satisfaction highly useful in optimizing. Following these ratings, operational specialists must consider the comments received and work to find a way to integrate this feedback into future services.