Operations Management (Encyclopedia of Business and Finance)
An important element of any business system is management, whether an individual or a team performs it. In our society, we no longer think of company management in terms of one person acting as the entrepreneur, but rather as a team effort. Each member possesses specialized knowledge and understanding of one functional area of the business system and is by temperament and training able to work cooperatively with other members of the team toward a common goal.
Whatever the system or organization, the functions of management are always the same: (1) designing, (2) planning, (3) organizing, (4) directing, and (5) controlling. Management establishes the goals and objectives of the firm or organization and plans how to attain them. It is management that organizes the system and directs it so that its goals can be reached. Finally, management must be able to analyze the working of the system in order to control it and to correct any variations from the planned procedures in order to reach the predetermined goals. These functions interact with one another and managers must be skilled in these coordinating processes and functions if they are to accomplish their goals through the efforts of other people.
The concepts of managerial functions has some hidden difficulties when one attempts to apply them to a specific managerial job. First, one cannot tell which functions are most important and how much time must be allocated to each. All functions are important parts of a manager's job, but the significance attached to each one may vary at different times, such as at different stages of a product life cycle. Furthermore, the significance of each function varies at different management levels in the same organization. Operations management, for example, is more focused on directing and controlling than on planning or organizing.
All organizations have operations. Operation management, or technical management, is comprised of department managers and persons with professional technical competence. This level is oriented downward to basic operations, such as producing goods and moving them out the door. Amanufacturing company may conduct operation in a mill or factory. The driving force in operations management must be an overriding goal of continually improving service to customers, where "customer" means the next process as well as the final, external user. Since there is an operations element in every function of the enterprise, all people in all jobs in every department of the organization should work together for the improvement of their own operations management elements. It is important to note that the technical expert often seeks recognition from peers and colleagues rather than from managers at the administrative level.
The input of a system depends on its specific objective. What raw materials will yield the desired output? If one were to visually illustrate a system, the input would be shown as the components vital to it. A television repairperson needs a diagram of a TV set in order to repair it, or an auditor might need a flowchart of a company's accounting system to check for possible diversion of funds. If a system is designed to maintain a state, the input is information or feedback concerning the essential variable that must be maintained. If the purpose of a system is to make a decision, the input is relevant information about the problem. In a production system, the input consists of raw material, labor, and other manufacturing costs that are combined in the final product.
After input is established the input, it is necessary to transform it into a desirable output. In business, the transformation operation is extremely important. Manufacturing, marketing, and distribution must be studied and known in detail. However, there are some areas in which little is known. In a business system, for example, one must consider the way people act and react. Often behavior is placed in this gray area because so little is known about what motivates it. Also, for some people in an organization it may not matter how something works, while others may be vitally interested. A manager may not care how a report gets to him or her, but an accountant would be concerned with all the steps in gathering data, preparing the report, and communicating it to the manager. Thus, in studying any transformation operation, it is important to know the reliability of the process and who is interested in it. This system will vary depending on the output.
In one sense, output is the quality and quantity of the services and goods produced. In another sense, output may be thought of as the payments made for all the factors of production used. In the first sense, the entire system of the firm is designed to produce something that is desired in a market. Consumers want and seek out goods and services that will make their lives happier, more comfortable, healthier, longer, and so on. In order to produce those goods and services, the firm needs inputs. What may be output for one business may be input for another.
In the second sense, output is converted into revenue for the firm that is used to compensate the owners for the risks they have taken, management for its role in producing the revenue, and employees for their role in producing the good or service; it is also used to pay interest for the use of borrowed capital and wages for labor. Rent must be paid for the use of land; goods and materials used in production must be paid for; and taxes must be paid to the government. The output is the result of the system and is closely related to its objective. Output will accomplish or help to accomplish the specific objective if the system has been designed correctly.
All systems should include feedback. When an input is received in the system and undergoes a transformation operation, the result or output is then monitored and transmitted for comparison with a standard. If there is variation between the output and the standard, suitable action can be taken to correct the variation.
A business organization with many systems that range from very simple to very complex requires a much more complicated feedback network. Information must be communicated from person to person and from one part of the organization to another. In fact, the original data may be transformed many times before it reaches its final destination. Each of these transformations is subject to feedback.
Feedback can be defined as knowledge of results. Three basic types of feedback are needed: informational feedback, corrective feedback, and reinforcing feedback. The flow of information in an organization should be two-wayrom managers to workers as well as vice versa. In contrast to informational feedback, corrective feedback is evaluative and judgmental. An effective manager will not only point out mistakes but also get the individual worker headed in the right direction by means of corrective feedback. Positive consequences or reinforcements are one key to desired performance. In other words, reinforcing feedback is a prime means of achieving growth in job performance.
Products can be classified in many ways and their distribution can take many forms. But the essence of production management is that the factors of productionand, labor, and capitalare transformed by management from raw materials into something finished, something to be used, or something to be sold profitably in order to keep the business in operation.
Before production can be started, the firm must determine what kind of product it can profitably produce. Management must decide what markets the product will satisfy, what materials it will contain, what processes will be required to form it, by what means it can be transported, and what quality and quantity of labor will be needed to produce it. Knowledge of all this provides direction to the planning and organization of manufacturing.
Once the firm has decided on the basic product or service to produce, design and development can begin. Planning the product involves all parts of the business system. The marketing department may discover the need for a new or improved product, and the production department may then determine whether it can manufacture the product for sale at a given price. The finance department then decides whether the venture will be profitable and whether financing is available to cover the costs of development, manufacturing, and distribution. Such product planning determines whether development and design will go forward.
The process of refining a product to a finished form sheds further light on the problems of manufacture: the equipment, raw materials, and fabricated parts that will be required, as well as the flow of production. Planning for production actually starts as soon as the decision is made to develop and design a product.
Production management makes suggestions for manufacturing that will save time, effort, and money without impairing the design of the product. Production management is very complex. Decisions must be made about labors, money, machinery, and materials. Inventories of parts must be maintained, and proper machinery and equipment must be combined with labor. All these activities, although performed within the production system, must be closely coordinated with the overall system of the firm.
Production managers are involved in many diverse areas. They are concerned with all the peripheral aspects of production and must be able to manage workers, materials, and machines in a changing environment.
Why is productivity so important? The basic reason is that productivity is a measure of the efficiency with which a person, business, or entire economy produces goods and services. It is a key indicator of a nation's economic strength. In general, the concept of productivity refers to a comparison of the output of a production process with one or more of its inputs. Thus, productivity may mean different things in different situations.
Manufacturing is simply a special form of production by which raw and semifinished materials are processed and converted into finished products needed by consumers. In a broader and more basic sense, production is the transformation of inputs from human and physical resources into outputs desired by consumers. These outputs may be either goods or services. The production of services is often called operations management.
We are now entering an era in which production and corporate management are becoming recommitted to one of the basics of business: making a better product faster and cheaper. This effort is important because the great bulk of assets used in manufacturing companiescapital invested, people employed, and management timere allotted to the production function of the business rather than to marketing or finance. This situation is also true in service firms.
The organization for manufacturing depends on the complexity of the products manufactured and the size of the company. In a large company the manufacturing organization has divisions such as engineering, production control, inspection, and purchasing. The success of a product depends on the proper development and management of the product.
Management is universal. When more than one person is concerned with a goal, there is need for a process by which this goal can be attained. Management is active in every part of business and at every level. Its functions are performed in every department and in every function of the business. The practice of operations management is a continuous process of problem solving and decision making. The functions of management are based on the ability to make decisions and then to carry out all the implications of those decisions.
Kusiak, Andrew. (1999). "Engineering Design: Products, Processes, and Systems." San Diego: Academic Press.
Moody, Patricia E. (1999). "The Technology Machine: How Manufacturing Will Work in the Year 2020." New York: Free Press.
Williams, Blair R. (1996). "Manufacturing for Survival: The How-to Guide for Practitioners and Managers." Reading, MA: Addison-Wesley.
Operations Management (Encyclopedia of Management)
One may generally consider that there are three distinct areas inherent in any business: marketing, finance, and operations; all other business disciplines fit somewhere under one or more of these areas. For example, finance could include investing, real estate, insurance or banking. While management is considered an academic discipline unto itself it is actually a part of all three areas: financial management, marketing management, and operations management. Operations management is the area concerned with the efficiency and effectiveness of the operation in support and development of the firm's strategic goals. Other areas of concern to operations management include the design and operations of systems to provide goods and services. To put it succinctly, operations management is the planning, scheduling, and control of the activities that transform inputs (raw materials and labor) into outputs (finished goods and services). A set of recognized and well-developed concepts, tools, and techniques belong within the framework considered operations management. While the term operations management conjures up views of manufacturing environments, many of these concepts have been applied in service settings, with some of them actually developed specifically for service organizations.
Operations management is also an academic field of study that focuses on the effective planning, scheduling, use, and control of a manufacturing or service firm and their operations. The field is a synthesis of concepts derived from design engineering, industrial engineering, management information systems, quality management, production management, inventory management, accounting, and other functions.
The field of operations management has been gaining increased recognition over the last two decades. One major reason for this is public awareness of the success of Japanese manufacturers and the perception that the quality of many Japanese products is superior to that of American manufacturers. As a result, many businesses have come to realize that the operations function is just as important to their firm as finance and marketing. In concert with this, firms now realize that in order to effectively compete in a global market they must have an operations strategy to support the mission of the firm and its overall corporate strategy.
Another reason for greater awareness of operations management is the increased application of operations management concepts and techniques to service operations. Finally, operations management concepts are being applied to other functional areas such as marketing and human resources. The term marketing/operations interface is often used.
HISTORY OF OPERATIONS MANAGEMENT
Until the end of the 18th century, agriculture was the predominant industry in every country. The advent of the steam engine and Eli Whitney's concept of standardized parts paved the way for the Industrial Revolution with its large manufacturing facilities powered by steam or water. A number of countries (the United States included) evolved from an agricultural economy to an industrial economy. But for a time, manufacturing was more of an art than a science. This changed with the introduction of Frederick W. Taylor's systematic approach to scientific management at the beginning of the twentieth century. The introduction of Taylor's method of scientific management and Henry Ford's moving assembly line brought the world into an age where management was predominantly centered around the production of goods.
In the late 1950s and early 1960s scholars moved from writing about industrial engineering and operations research into writing about production management. Production management had itself become a professional field as well as an academic discipline. As the U.S. economy evolved into a service economy and operations techniques began to be incorporated into services the term production/operations management came into use. Today, services are such a pervasive part of our life that the term operations management is used almost exclusively.
WHAT DO OPERATIONS MANAGERS DO?
At the strategic level (long term), operations managers are responsible for or associated with making decisions about product development (what shall we make?), process and layout decisions (how shall we make it?), site location (where will we make it?), and capacity (how much do we need?).
At the tactical level (intermediate term), operations management addresses the issues relevant to efficiently scheduling material and labor within the constraints of the firm's strategy and making aggregate planning decisions. Operations managers have a hand in deciding employee levels (how many workers do we need and when do we need them?), inventory levels (when should we have materials delivered and should we use a chase strategy or a level strategy?), and capacity (how many shifts do we need? Do we need to work overtime or subcontract some work?).
At the operational level, operations management is concerned with lower-level (daily/weekly/monthly) planning and control. Operations managers and their subordinates must make decisions regarding scheduling (what should we process and when should we process it?), sequencing (in what order should we process the orders?), loading (what order to we put on what machine?), and work assignments (to whom do we assign individual machines or processes?).
Today's operations manager must have knowledge of advanced operations technology and technical knowledge relevant to his/her industry, as well as interpersonal skills and knowledge of other functional areas within the firm. Operations managers must also have the ability to communicate effectively, to motivate other people, manage projects, and work on multidisciplinary teams. Sunil Chopra, William Lovejoy, and Candace Yano describe the scope of operations management as encompassing these multi-disciplinary areas:
- Supply Chainsanagement of all aspects of providing goods to a consumer from extraction of raw materials to end-of-life disposal.
- Operations Management/Marketing Interfaceetermining what customers' value prior to product development.
- Operations Management/Finance Interfaceapital equipment and inventories comprise a sizable portion of many firms' assets.
- Service Operationsoping with inherent service characteristics such as simultaneous delivery/consumption, performance measurements, etc.
- Operations Strategyonsistent and aligned with firm's other functional strategies.
- Process Design and Improvementsanaging the innovation process.
Mark Davis, Nicolas Aquilano and Richard Chase (1999) have suggested that the major issues for operations management today are:
- reducing the development and manufacturing time for new goods and services
- achieving and sustaining high quality while controlling cost
- integrating new technologies and control systems into existing processes
- obtaining, training, and keeping qualified workers and managers
- working effectively with other functions of the business to accomplish the goals of the firm
- integrating production and service activities at multiple sites in decentralized organizations
- working effectively with suppliers at being user-friendly for customers
- working effectively with new partners formed by strategic alliances
As one can see, all these are critical issues to any firm. No longer is operations management considered subservient to marketing and finance; rather, it is a legitimate functional area within most organizations. Also, operations management can no longer focus on isolated tasks and processes but must be one of the architects of the firm's overall business model.
Anupindi, Ravi, Sunil Chopra, Sudhakar D. Deshmukh, Jan A. Van Mieghem, and Eitan Zemel. Managing Business Process Flows: Principles of Operations Management. Upper Saddle River, NJ: Pearson Prentice Hall, 2006.
Davis, Mark M., Nicholas J. Aquilano, and Richard B. Chase. Fundamentals of Operations Management. 3rd ed. Boston: Irwin McGraw-Hill, 1999.
Finch, Byron. Operations Now. 2nd ed., Boston: McGraw-Hill Irwin, 2006.
Rainbird, Mark. "A Framework for Operations Management: The Value Chain." International Journal of Operations and Production Management 34, no. 3/4 (2004): 33745.
Raturi, Amitabh, and James R. Evans. Principles of Operations Management. Mason, OH: Thomson Southwestern, 2005.
Operations Management (Encyclopedia of Small Business)
Operations management is a multi-disciplinary field that focuses on managing all aspects of an organization's operations. "The typical organization consists of the integration of many different functions, " wrote Howard J. Weiss and Mark E. Gershon in Production and Operations Management. "The two most obvious functions are to provide the product or service and to sell the product or service. Operations management focuses on the function of providing the product or service. It is concerned with the planning and controlling of all activities necessary for the provision of the firm's product or service." Aspects of operations management, then, include products or services to emphasize; facility size and location with respect to customers and suppliers; marketing strategies to attract clients/custmers; techniques and equipment to use to make the goods or to provide the services; work force management and training; and measurements of quality assurance. Operations managers apply ideas and technologies to increase productivity and reduce costs, improve flexibility to meet rapidly changing customer needs, enhance product quality, and improve customer service.
KEY ISSUES IN OPERATIONS
As an organization develops plans and strategies to deal with the opportunities and challenges that arise in its particular operating environment, it should design a system that is capable of producing quality services and goods in demanded quantities in acceptable time frames.
DESIGNING THE SYSTEM Designing the system begins with product development. Product development involves determining the characteristics and features of the good (or service if engaged in a service-oriented industry) to be sold. It should begin with an assessment of customer needs and eventually grow into a detailed product design. The facilities and equipment that will produce the product, as well as the information systems needed to monitor and control performance, are part of this system design process. In fact, manufacturing process decisions are integral to a system's ultimate success or failure. "Of all the structural decisions that the operations manager faces, the one with the greatest impact on the manufacturing operation's success is the process/technology choice, " said Thomas S. Bateman and Carl P. Zeithaml in Management: Function and Strategy. "This decision addresses the question 'How will the product be made?' " Product development should be a cross-functional decisionmaking process that relies on teamwork and communication to install the marketing, financial, and operating plans needed to successfully launch a product.
Product design is a critical task because it determines the characteristics and features of the product, as well as how the product functions. Product design determines a product's cost and quality, as well as its features and performance. These are important factors on which customers make purchasing decisions. In recent years, new design models such as Design for Manufacturing and Assembly (DFMA) have been implemented to improve product quality and lower costs.
DFMA focuses on operating issues during product design. This can be critical even though design costs are a small part of the total cost of a product, because, procedures that waste raw materials or duplicate effort can have a substantial negative impact on a business's operating profitability. Another innovation similar to DFMA in its emphasis on design is Quality Functional Deployment (QFD). QFD is a set of planning and communication routines that are used to improve product design by focusing design efforts on customer needs.
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 selecting a sequence for various phases of operational production.
The scale economy or business component involves applying the proper amount of mechanization (tools and equipment) to make the organization's work force more productive. This includes determining: 1) If the demand for a product is large enough to justify mass production; 2) If there is sufficient variety in customer demand so that flexible production systems are required; and 3) If demand for a product is so small or seasonal that it cannot support a dedicated production facility.
Facility design involves determining the capacity, location, and layout for the production acility. Capacity is a measure of an organization's ability to provide the demanded services or goods in the quantity requested by the customer 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 long-term commitment of resources that cannot easily or inexpensively be changed. When evaluating a location, management should consider customer convenience, initial investment necessary to secure land and facilities, government incentives, and operating transportation costs. In addition, qualitative factors such as quality of life for employees, transportation infrastructure, and labor environment should also be taken under consideration.
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.
PLANNING THE SYSTEM Planning the system describes how management expects to utilize the existing resource base created as a result of the production system design. One of the outcomes of this planning process may be to change the system design to cope with environmental changes. 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 or studying 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 is dependent on both complexity and size of proposed changes. Typically, however, long-term planning may involve determining work force size, developing training programs, working with suppliers to improve product quality and improve delivery systems, and determining the amount of material to order on an aggregate basis. Short-term scheduling, on the other hand, is concerned with production planning for specific job orders (who will do the work, what equipment will be used, which materials will be consumed, when the work will begin and end, and what mode of transportation will be used to deliver the product when the order is completed).
MANAGING THE SYSTEM Managing the system involves working with people to encourage participation and improve organizational performance. Participative management and teamwork are an essential part of successful operations, as are leadership, training, and culture. 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. Material management is becoming more important because, in many organizations, the costs of purchased materials comprise more than 50 percent of the total production cost. Questions regarding quantities and timing of material orders need to be addressed here as well when companies weigh the qualities of various suppliers.
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 value-added nature of operations, the impact technology can have on performance, and the globally competitive marketplace.
Efficient organization operations are a vital tool in achieving competitive advantage in the daily contest for customers/clients. What factors influence buying decisions for these entities? 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. For example, when productivity increases, product costs decline and product price can be reduced. Similarly, 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 strategy) 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 as narrowly focused departmental objectives. In recognition of this evolving viewpoint, the criteria for judging operations is changing from cost control (a narrowly defined operating objective) to global performance measurements in such areas as product performance and variety, product quality, delivery time, customer service, and operational flexibility.
In today's business environment, a key component of operational flexibility in many industries is technological knowledge. Advances in technology make it possible to build better products using fewer resources. As technology fundamentally changes a product, its performance and quality often increases dramatically, making it a more highly valued commodity in the marketplace. But the growth in high-tech business applications has created new competitiors as well, making it important for businesses to try to register advantages in any and all areas of operations management.
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 decisionmaking 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. Indeed, such interaction is widely regarded as essential to long-term business success for small business establishments and multinational corporations alike.
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Operations Management (Encyclopedia of Business)
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 materialsuch as glass, plastic, and electrical componentsnto 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 knowledgesually in the form of recently developed tools, processes, and procedureso 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.
SEE ALSO: Costing Methods (Manufacturing); Facility Management; Quality Control
[Mark A. Vonderembse]
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