Unit 1: Operations Management Overview

1.1: Introduction to Operations Management

Boundless: Business: “Chapter 10, Section 1, Part 1: Operations Management”

Read this section. Operations management is the management of the processes that transforms inputs into the goods and services that add value for the customer. By the end of this reading you should be able to explain the role of operations management within an organization and differentiate between strategy and tactics.

Operations Management

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

LEARNING OBJECTIVE

  • Explain the role of operations management

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.

TERMS

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

Examples

EXAMPLES

  • JetBlue airlines is a successful airline that has an organization strategy of providing high-value air transportation service to travelers. JetBlue strives to provide fun, comfortable, and safe air service to popular destinations at a price that middle-income passengers can afford. Given JetBlue’s organization strategy, the airline features an operations strategy that focuses on low costs, competent and service-oriented employees, and reliable aircraft.
  • JetBlue locates (“location” is an operations decision area) its main transportation hub in New York City, a city of 19 million people that helps ensure that JetBlue’s planes fly at full capacity. In the area of equipment decisions, JetBlue operates only one type of aircraft, the Airbus 320, which has high passenger carrying capacity (to maximize revenue), provides good fuel economy and requires only two pilots (versus three) to operate. Having one type of aircraft reduces training costs for pilots and mechanics, reduces investments in parts inventories, and enables JetBlue to negotiate greater discounts on high-volume purchases from Airbus.

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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.

Blueprint for a commercial operations management solution.

Boundless: Business: “Chapter 10, Section 1, Part 3: Service Operations”

Read this section. Service and manufacturing operations share many similarities. However, there are some important differences. This section provides an overview of those differences.

Service Operations

Although the primary function of both manufacturers and service providers is to satisfy customer needs, there are differences between them.

LEARNING OBJECTIVE

  • Differentiate between the goods sector and the service sector

KEY POINTS

  • Service companies provide intangible products.
  • Manufactured goods are generally standardized. Services, by contrast, are often customized to satisfy the specific needs of a customer.
  • Unlike manufactured goods, many services are bought and consumed at the same time.
  • As the U.S. economy has changed from a goods producer to a service provider, the predominance of the manufacturing sector has declined substantially over the last fifty years.

TERMS

  • tangible: touchable; able to be touched or felt; perceptible by the sense of touch; palpable
  • intangible: incapable of being perceived by the senses; incorporeal

EXAMPLE

  • Examples of service providers include banks and hospitals. Both of these service providers offer customized, high interaction “products” to customers. An automobile company or Pepsi Co. are examples of non-service providers (manufacturers). Their products are tangible, standardized, and offer little to no customization.

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The Rise of the Service Sector

As the U.S. economy changed from a goods producer to a service provider, the predominance of the manufacturing sector has declined substantially over the last fifty years.

Today, only about 12% of U.S. workers are employed in manufacturing. Most now hold jobs in the service sector, which accounts for 77% of U.S. gross domestic product.

Wal-Mart is now America’s largest employer, followed by McDonald’s, and United Parcel Service (UPS). The fourth-largest employer—General Motors—is a manufacturing company.

Service Providers and Manufacturers: The Differences

Though the primary function of both manufacturers and service providers is to satisfy customer needs, there are several important differences between the two types of operations. Let’s focus on three of them:

  • Intangibility: Manufacturers produce tangible products—things that can be touched or handled, such as automobiles and appliances. Service companies provide intangible products, such as banking, entertainment, or education.
  • Customization: Manufactured goods are generally standardized; one twelve-ounce bottle of Pepsi is the same as any other twelve-ounce bottle of Pepsi. Services, by contrast, are often customized to satisfy the specific needs of a customer. When you go to the barber or the hairdresser, you ask for a haircut that looks good on you because of the shape of your face and the texture of your hair.
  • Customer contact: You could spend your entire working life assembling cars in Detroit and never meet a customer who bought a car that you had helped to make. But if you worked as a waitress, you’d interact with customers every day. In fact, their satisfaction with your product would be directly determined in part by the service that you provided. Unlike manufactured goods, many services are bought and consumed at the same time.

Service Operations: Examples

ING Bank demonstrates the strategic importance of the transformation process. ING Bank is a banking company that conducts all banking transactions through theInternet, phone, and mail.

ING maintains no traditional bank facilities, except for the buildings that house the employees that execute remote transactions with ING’s customers. This strategyresults in tremendous cost savings and competitive advantage to ING by not having to spend capital resources on land and buildings that traditional banks must spend. Consequently, ING can offer its customers higher interest rates on savings accounts and lower interest rates on loans.

Consider another example, that of a new hospital:

  • The leaders of the hospital must decide where to locate the facility so that is it accessible to a large number of potential patients.
  • Hospital administrators must evaluate the performance and cost of a wide variety of health equipment.
  • Hospital administrators must assess and purchase information technologies to keep patient records, fulfill government regulations, provide accurate and timelycommunications, and track financial performance.
  • Doctors, nurses, and staff must be hired.
  • Various departments (x-ray, lab, pharmacy, physical therapy, etc. ) must be arranged to maximize both efficiency and effectiveness in patient care.

The leaders of a new hospital must make a variety of decisions both to establish the hospital and to keep it running effectively.

Service Operations: Tactical Decisions

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.

Tactical decisions include:

  • Workforce scheduling
  • Establishing quality assurance procedures
  • Contracting with vendors
  • Managing inventory

In the hospital example, scheduling the workforce to match patient admissions is critical to both providing quality care and controlling costs. Selecting a food service vendor is important to serving both employees and patients. Ensuring that the right drugs and supplies are on hand is achieved by working closely with vendors in the supply chain.

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