Topic: Operations Management



Topic: Operations Management

Sub-topic: Introduction

• Operations Management is the management of any aspect of the production system that transforms inputs into finished goods and services (outputs).

• A production system is the system that an organization uses to acquire inputs, converts input into outputs, and dispose of the outputs.

• The job of operations managers is (a) to manage these three stages of production and (b) to determine where operating improvements might be made in order to enhance quality, efficiency, and responsiveness to customers, and so gives an organization a competitive advantage.

• Companies may also please the customer by providing high quality goods.

• Quality refers to goods and services that are reliable or psychologically satisfying. In other words, they do the job that they were designed to do or they have some qualities that give their users something they value.

• Efficiency refers to the use of minimum resources/inputs to produce goods/services.

• Responsiveness to customers refers to actions taken to meet the demands and needs of customers.

• Companies that offer low prices, high quality goods, and are responsive to customers gain customer loyalty or allegiance. Customer allegiance leads the company to have competitive advantage,

• Competitive advantage refers to the ability of one organization to outperform other organizations because it produces desired goods or services more efficiently and effectively than its competitors.

• In addition to Quality, efficiency, responsiveness to customers, competitive advantage also requires speed (i.e., how fast new products can be brought to market), flexibility, (i.e., how easily to respond to the actions of competitors), and innovation (i.e., the process of creating new or improved goods and services that customers want or developing better ways to produce or provide goods and services).

• Competitive advantage is critical for corporate survival and success due to increasing competition generated by globalization (i.e., the movement of goods, services, capital, technology, people, ideas, finance, etc. across countries).

The Ethical Dimension in Operations Management:

• Competitive pressure can be healthy for organization because it causes managers to strive for competitive advantage. Due to tough competition, businesses try to undercut their competitors by offering prices. To do this, businesses must be efficient (i.e., minimize their costs). Minimizing costs may lead businesses to use unethical and illegal means.

Example: The Case of Wal-Mart

Wal-Mart was successful because they offered very low prices. However, the store’s operations managers used unethical and illegal means. They used the following:

a. child labor

b. Exploitation of illegal immigrants. They paid below minimum wages to illegal workers.

c. Discrimination against woman employees. Wal-Mart female employees got much less wages than their male counterparts.

In sum, Wal-Mart did all things to cut production costs in order to offer lower prices.

• Another Case: six global pharmaceutical companies (including, Swiss giant Hoffman La Roche and German BASF) admitted that they conspired to artificially raise the prices of Vitamins A, B2, C, E and eliminate competition on a global basis. In several meetings around the world, senior managers from the six companies worked out the details of the plot which went undiscovered for several years. One manager, Kuno Summer, former director of worldwide marketing was jailed six years.

What is the morale or the lesson that we learn from this?

Corporate ethical/social responsibility has become very important in the age globalization or hypercompetition. At present, many companies have ethics officers. Also many companies encourage whistle-blowing. Whistle-blowing happens when an employee sees some wrong-doing in the company and tells the government or someone outside about it.

Operations: This is a function or system that transforms inputs into outputs of greater value.

Operations can be physical (e.g., manufacturing operations), locational (e.g., transportation or warehouse operations, exchange as in retail operations, physiological (e.g., health care), psychological (e.g., counseling), and informational (e.g., communication).

Subject Matter of OM:

• Strategy: Operations strategy is a series of consistent, achievable action plans to achieve corporate vision.

• Products and Services: This deals with designing the product or service.

• Process and Technology: Once the product or service has been designed, the physical process that will produce the product or deliver the service must be constructed. The technology and equipment required will be determined at this stage.

• Facilities: The production process that has been designed must be physically housed in a facility and laid out in an effective manner so that the product can be produced or service delivered as efficiently as possible.

• Project Management: Each one of the preceding is a project (i.e., designing a product, building a facility, etc.) Project management is a technique that breaks down complex processes, schedules activities, and ensures that the project is completed on time and on budget.

• Supply Chain Management: Once the production process and facilities have been designed, decisions must be made regarding which materials to outsource and from whom. A supply Chain includes all the facilities and activities involved in producing and delivering a product or service from the suppliers (and their suppliers) to the customer (and their customers).

• Forecasting Demand for Products and Services: Once the physical facility and the production process are in place to produce a product or deliver a service planning decisions are required to determine how to produce and when to produce it. These decisions are based on customer demand which has to be forecast.

• Production planning and Scheduling: Once management has determined how much product or service is needed to meet the demand, production schedules are determined. Decisions here include: how much materials to use, when materials should be ordered, how many workers to hire, how they should be scheduled on jobs and machines, etc. Decisions also have to be made about current and future inventory to make sure that there are enough inventories to meet current and future demand.

• Ensuring Quality: Quality runs through all operations. Ensuring quality requires the establishment of a quality control system, improving customer service, and managing human resources wisely.

Summary:

• The basic purpose of OM, in an increasingly globalized world, is to please the customer, how? We have to give the customer what he/she wants: high quality of the service/good, service (sense of human) products.

• These are essential for enhancing customer satisfaction. When this is high, the company making the goods or delivering service gain customer allegiance. This will enable the company to increase its market share.

• All this becomes necessary because of competition. Under monopoly (which is a market structure where there are one or a few sellers or suppliers) we do not have to worry about pleasing the customer or customer satisfaction, why? This is so because under this market structure, customers have no choice but to buy the goods/service offered by the monopolist (supplier, seller, service provider).

Topic: Operations Management

Sub-Topic: Evolution (History)

There are several milestones in the evolution of OM:

a. The Industrial Revolution (1760 – 1860) which began in England. Machines were used to produce standardized goods for mass consumption. The use of machines to produce standardized goods reduced variability found in craft production. The use of machines brought about control of production processes.

b. The Advent of Scientific Management (SM):

SM developed in the United States in 1911. It began as studies on how much time was needed to complete tasks and how workers would need to move to carry out tasks (Time and Motion Studies).

Taylor was the founder of scientific management. He came up with the one best way to organize workers to optimize (maximize) efficiency or productivity.

• Fordism: Henry Ford applied SM when he produced the Model T in 1913 in mass production using assembly line for the first time in history. This was a significant development in production process and technology. The Ford Motor Company was able to reduce the time of assembling a car from 728 hours to one and half hours.

The application of SM in factories led to a phenomenal increase in production process efficiency. This is a milestone in OM.

c. The Hawthorne Experiments: The experiments highlighted the importance of human feelings in affecting productivity. The experiments led to the rise of human resources management and also to the rise of the Human Relations School of Thought in Business Administration.

The lesson learnt from the experiments is that workers need to be motivated by both monetary and non-monetary means.

d. Operations Research: This came during WW2.

What is Operations Research? It is the use of mathematical and scientific models to optimize or maximize solutions to complex problems.

We use it when we have complex operations.

e. The Quality Revolution:

This revolution in the 1970s.

Background: The most important factor here is dissatisfaction with mass production. This type of production prizes quantity over quality. Hence, it is not customer-oriented and responsive. It is also inflexible.

The Japanese (Toyota Company) introduced Lean Production which focuses on changing production process technology to enhance quality. This is known as TPS (Toyota Production System) or Toyotism. The essence of this system is more value for less work. This system seeks to eliminate waste in the production and delivery processes.

f. Globalization: This phenomenon has revolutionized Supply Chain Management (SCM).

g. The Internet

The Internet has (e.g.) reduced a lot of transaction costs by eliminating intermediaries.

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