OPERATIONS MANAGEMENT

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Photo by: kentoh

Do you drive a car, write checks, have a savings accounts, or get medical treatment? If so, you are directly affected by operations and operations management. Operations are the processes within organizations that transform inputs (labor, capital, materials, and energy) into outputs (services and goods) consumed by the public. Services are intangible products, and goods are physical products. According to the classification scheme used by the U.S. Department of Commerce and the U.S. Department of Labor, services include transportation, utilities, lodging, entertainment, health care, legal services, education, communications, wholesale and retail trade, banking and finance, public administration, insurance, real estate, and other miscellaneous services. Goods are described as articles of trade, merchandise, or wares. Manufacturing is a specific term referring to the production of goods.

Operations employ people, build facilities, and purchase equipment in order to provide services such as automobile insurance or to change materials—such as glass, plastic, and electrical components—into finished goods, such as computer hardware. Hospitals, banks, and fire departments, as well as steelmakers and oil refiners, have operations that engage in these transformation processes. The operating arms of these organizations produce the billions of banking transactions, thousands of fire runs, and millions of gallons of gasoline consumed each day, and they do so very efficiently.

The people working in operations are capable of much greater output than they would be working alone because organizations have developed sophisticated facilities and equipment that greatly increase worker productivity. Firms also provide education and training to their workforces to increase their knowledge and improve their capabilities. As a result of these productivity improvements and training enhancements, more outputs are produced and the standard of living increases for everyone.

Operations management (which is also known as production management and as production and operations management) is a multidiscipline field that focuses on managing an organization's operations. The scope of operations management includes decision making about the design, planning, and management of the many factors that affect operations. Decisions include: what products to produce, how large a facility to build, where to locate the facility with respect to customers and suppliers, what techniques and equipment to use to make the goods or to provide the services, how many units to produce next month, how employees should be trained, and what methods to use to enhance product quality. Operations managers apply ideas and technologies to increase productivity and reduce costs, improve flexibility to meet rapidly changing customer needs, shorten delivery time, enhance product quality, and improve customer service.

KEY ISSUES IN OPERATIONS

As an organization develops plans and strategies to deal with threats and opportunities present in its environment, it should consider issues related to: designing a system that is capable of producing the services and goods in the demanded quantities, planning how to use the system effectively, and managing key elements of the operations. Each of these topics is described briefly in the following sections.

DESIGNING THE SYSTEM.

Designing the system begins with product development. Product development involves determining the characteristics and features of a product. For example, should a bank offer fund transfers via a touch-tone phone? Should a car be equipped with side air bags? Product development begins with an assessment of customer needs and includes a detailed product design. The facilities and equipment that will produce the service or good, as well as the information systems needed to monitor and control performance, should be designed. Product development is a cross-functional decision-making process that requires teamwork to design and implement the marketing, financial, and operating plans needed to successfully launch a product.

Product design is a critical activity because it determines the characteristics, features, and functionality of the product. Product design determines a product's cost and quality as well as its features and performance, and these are important factors on which customers make purchasing decisions. Techniques such as design for manufacturing and assembly are being implemented to improve product quality and lower costs by focusing on operating issues during product design. This is critical even though design costs are a small part of the total cost of a product because design may determine up to 90 percent of the total production costs. For example, when a police department designs a procedure for booking a suspect, the procedure dictates the amount of time spent by the police officers, clerical staff, and management each time a booking takes place. A procedure that wastes time and duplicates effort will substantially affect the department's costs.

Quality functional deployment (QFD) can be an important method for improving product design because it focuses design efforts on customer needs. QFD is a set of planning and communication routines that focuses attention on customer wants and describes design constraints that affect these wants. QFD procedures provide a framework for product design that enhances learning and coordinates actions.

Process design describes how the product will be made. The process design decision has two major components: a technical or engineering component and a scale economy or business component. The technical component includes selecting equipment and sequences for production. For example, a fast food restaurant should decide whether its hamburgers will be flame-broiled or fried. A decision to flamebroil would affect the equipment design and selection decision. Decisions are made about the sequence of operations. For example, should a car rental agency immediately inspect a car that has been returned by the customer, or first send it to be cleaned and washed by maintenance? Most likely, the car should be inspected first so that damage that might occur in the cleaning process would not be counted against the customer.

The scale economy or business component involves applying the proper amount of mechanization (tools and equipment) to make the organization's workforce more productive. This includes determining: (1) if the demand for a product is large enough to justify mass production, such as a fast food restaurant that purchases specialized equipment to make a large volume quickly; (2) if there is sufficient variety in customer demand so that flexible production systems are required, such as a full-service restaurant that purchases general-purpose equipment to produce its diverse menu; or (3) if demand for a product is so small that it cannot support a dedicated production facility, such as demand for the handmade luges used in the Olympics.

Mass customization is a process alternative to mass producing standardized products. Customers are demanding both greater product variety and lower prices for goods and services. To enhance value to their customers, firms are searching for ways to realize these apparently conflicting objectives. Mass customization enables firms to quickly design, produce, and deliver a high volume of differentiated products that meet specific customer needs at mass production prices. Mass customization provides an impressive return on investments by producing products for many small market segments on the same equipment and facilities.

Facility design involves determining the capacity, location, and layout for the facility. Capacity is a measure of an organization's ability to provide the demanded services or goods in the quantity requested by the customer and in a timely manner. Capacity planning involves estimating demand, determining the capacity of facilities, and deciding how to change the organization's capacity to respond to demand.

Facility location is the placement of a facility with respect to its customers and suppliers. Facility location is a strategic decision because it is a longterm commitment of resources that cannot easily or inexpensively be changed. When evaluating a location, management should consider: customer convenience, initial investment for land and facilities, government incentives, operating costs, and transportation costs. In addition, qualitative factors, such as recreational activities for employees, adequate transportation infrastructure , and a favorable labor environment may be important.

Facility layout is the arrangement of the work space within a facility. It considers which departments or work areas should be adjacent to one another so that the flow of product, information, and people can move quickly and efficiently through the production system.

Job design specifies the tasks, responsibilities, and methods used in performing a job. For example, the job design for a word processing specialist at a publishing company would describe the equipment needed and would explain the standard operating procedures.

PLANNING THE SYSTEM.

Planning the system describes how management expects to use the existing resource base that was created during the original design of the production system. One of the outcomes of this planning process may be to change the system design to cope with changes in the environment. For example, management may decide to increase or decrease capacity to cope with changing demand, or rearrange layout to enhance efficiency.

Decisions made by production planners depend on the time horizon. Long-range decisions could include the number of facilities required to meet customer needs, how facilities could be altered to produce new products, or how technological change might affect the methods used to produce services and goods. The time horizon for long-term planning varies with the industry and depends on how long it would take an organization to build new facilities or make major technological changes. For example, in the aircraft industry it may take five to ten years to design a new aircraft and build a facility to produce it. So management must plan at least that far into the future. A car rental agency, on the other hand, would need a much shorter time horizon for production planning because it can make changes more quickly.

In medium-range production planning, which is normally about one year, organizations find it difficult to make major changes in facilities. At most, modest expansion may be achieved or some new equipment installed. Here, production planning may involve determining workforce size, developing training programs, working with suppliers to improve product quality and improve delivery, and determining how much material to order on an aggregate basis.

Scheduling has the shortest planning horizon. As production planning proceeds from long range to short range, the decisions become more detailed. In scheduling, management decides what products will be made, who will do the work, what equipment will be used, which materials will be consumed, when the work will begin, and what will happen to the product when it is complete. All aspects of production come together to make the product a reality. Think of the many factors that must be coordinated to prepare a schedule of classes at a college or university: faculty availability and knowledge, student demands based on graduation requirements, availability of appropriate classrooms, and other resources such as audiovisual equipment.

MANAGING THE SYSTEM.

Managing the system involves working with people to encourage participation and improve organizational performance. Participative management and teamwork are becoming essential parts of successful operations. Motivation, leadership , and training are receiving new impetus. In addition, material management and quality are two key areas of concern.

Material management includes decisions regarding the procurement, control, handling, storage, and distribution of materials. Materials management is becoming increasingly important because in many organizations the costs of purchased materials are more than 50 percent of the total product cost. How much material should be ordered, when should it be ordered, and which supplier should it be ordered from are some of the important questions.

Quality management programs and high product quality are essential to compete in today's business environment. Quality has progressed from an era of inspection in the 1960s to one of building quality at the source today. Quality is increasingly becoming customer-driven with emphasis put on obtaining a product design that builds quality into the product. Then, the process is designed to transform the product design into a quality product and the employees are trained to execute it. The role of inspection is not to enhance quality but to determine if the designs are effective.

BUILDING SUCCESS WITH OPERATIONS

To understand operations and how they contribute to the success of an organization, it is important to understand the strategic nature of operations, the emerging supply chain management ideas, the value-added nature of operations, the impact technology can have on performance, and the globally competitive marketplace.

Organizations can use operations as an important way to gain an advantage on the competition . What factors influence the buying decision? For most services and goods, price, quality, product performance and features, product variety, and availability of the product are critical. All these factors are substantially influenced by actions taken in operations. When productivity increases, product costs decline and product price can be reduced. As better production methods are developed, quality and variety may increase.

By linking operations and operating strategies with the overall strategy of the organization (including engineering, financial, marketing, and information system strategies) synergy can result. Operations become a positive factor when facilities, equipment, and employee training are viewed as a means to achieve organizational objectives, rather than suboptimal departmental objectives. The criteria for judging operations is changing from cost control, which is a narrowly defined operating objective, to more global performance measures such as product performance and variety, product quality, delivery time, and customer service. When flexibility is designed into operations, an organization is able to rapidly and inexpensively respond to changing customer needs.

The application of supply chain management is an essential ingredient for competition in the 21st century. Organizations are focusing on their core competencies and relying more heavily on their suppliers for the design and production of services and goods. As a result, organizations are managing their supply chains as an extension of their production system. Progressive organizations have recognized that competition is not between individual firms such as Ford and Honda, rather, it is between their supply chains. The development, design, production, marketing, and delivery of a new car is a team effort that begins with extracting raw materials from the earth; continues through design, fabrication, and assembly; and ends with fit and finish in the dealer's showroom. When a customer buys a car from Ford, the customer chooses the output of the entire supply chain and pays all of the participants, including Ford. Ford's success depends on developing methods to manage the supply chain from its roots in basic material (such as iron ore, sand, and crude oil) to the dealer network. This does not mean ownership or even direct control of the entire supply chain, but it does imply putting mechanisms in place that influence decision making and affect performance.

Operations should always be a value-added activity. This means that customers should be willing to pay more for the finished product than the total costs of the inputs. In the private sector, the difference between the price consumers pay and the cost of production is profit; profit can be reinvested to build new and better products, thus creating wealth for society. In the public sector, the benefits added by designing and producing a new product should always be greater than the costs. This added value, once again, represents an increase in wealth for society. For example, effective fire protection should reduce fire insurance premiums, decrease the number of fires because of successful fire prevention programs, and cut the losses from fires because of rapid response and better fire-fighting techniques and equipment. Valueadded fire protection would have more benefits to society than the sum of the costs of providing it. Training firefighters, purchasing equipment, and selecting a new location for a fire station should all be undertaken with this value-added approach in mind. All operating decisions, indeed all the decisions made by the organization, should consider how customers or potential customers will value the outcome of the decision.

Technology is the application of knowledge—usually in the form of recently developed tools, processes, and procedures—to solve problems. Advances in technology make it possible to build better products using fewer resources. As technology fundamentally changes a product, its performance and quality can increase dramatically. For example, an electronic watch is cheaper, more reliable, and takes less care than a mechanical watch.

It is impossible to ignore the impact that the emerging global marketplace and free trade are having on organizations and their operations. The North American Free Trade Agreement and the General Agreement on Tariffs and Trade are increasing the opportunities for countries to focus on areas of trade and commerce in which they have a relative advantage. It will be increasingly common for finished products to have component parts from many different countries. Global sourcing and production of goods and services will become more common.

Over time, operations management has grown in scope and increased in importance. Today, it has elements that are strategic; it relies on behavioral and engineering concepts; and it utilizes management science /operations research tools and techniques for systematic decision making and problem solving. As operations management continues to develop, it will increasingly interact with other functional areas within the organization to develop integrated answers to complex interdisciplinary problems.