Operations Management
Week 1
Chapter 1: Operations and Productivity
Define operations management
Operations Management is the set of activities that creates value in the form of goods and services
by transforming inputs into outputs.
Operations is one of the three functions that every organization performs:
1. Marketing, which generates the demand, or at least takes the order for a product or service.
2. Production/operations, which creates, produces, and delivers the product
3. Finance/accounting, which tracks how well the organization is doing, pays the bills and
collects the money
Supply chain is a global network of organizations and activities that supplies a firm with goods and
services.
We study OM for four reasons:
1. How people organize themselves for productive enterprise
2. How goods and services are produced
3. Understand what operations managers do
4. It is a costly part of an organization
Identify the 10 strategic decisions of operations management
1. Design of goods and services
2. Managing quality and statistical process control
3. Process and capacity strategies
, 4. Location strategies
5. Layout strategies
6. Human resources, job design and work measurement
7. Supply chain management
8. Inventory management
9. Scheduling
10. Maintenance
𝑈𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
𝑆𝑖𝑛𝑔𝑙𝑒 − 𝑓𝑎𝑐𝑡𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝐿𝑎𝑏𝑜𝑟 − ℎ𝑜𝑢𝑟𝑠 𝑢𝑠𝑒𝑑
𝑂𝑢𝑡𝑝𝑢𝑡
𝑀𝑢𝑙𝑡𝑖𝑓𝑎𝑐𝑡𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝐿𝑎𝑏𝑜𝑟 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 + 𝐸𝑛𝑒𝑟𝑔𝑦 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑀𝑖𝑠𝑐𝑒𝑙𝑙𝑎𝑛𝑒𝑜𝑢𝑠
Productivity variables:
1. Labor
2. Capital
3. Management
Three key variables for improved labor productivity:
1. Basic education appropriate for an effective labor force
2. Diet of the labor force
3. Social overhead that makes labor available
Chapter 2: Operations Strategy in a Global Environment
6 reasons domestic business operations decide to change to some form of international operation:
1. Improve the supply chain
a. Locating facilities in countries where unique resources are available
2. Reduce costs and exchange rate risk
a. Shifting low-skilled jobs to another country
b. Financial hedging
c. Operations hedging: maintaining excess capacity in different countries and shifting
production levels among those countries as costs and exchange rates change
d. Maquiladoras: Mexican factories located along the US-Mexican border that receive
preferential tariff treatment
e. Trade agreements
3. Improve operations
a. Operations learn from better understanding of management innovations in different
countries
4. Understand markets
a. International operations require interaction with foreign customers, suppliers and
other competitive businesses, therefore, international firms will inevitably learn
about opportunities for new products and services
b. The opportunity to extend the life cycle of an existing product
5. Improve products
6. Attract and retain global talent
Mission: The purpose or rationale for an organization’s existence
Strategy: How an organization expects to achieve its mission and goals
,Competitive advantage: the creation of a unique advantage over competitors.
Differentiation: distinguishing the offerings of an organization in a way that the customer perceives
as adding value.
Three strategic concepts:
1. Differentiation
2. Cost leadership
3. Response
Experience differentiation: engaging a customer with a product through imaginative use of the five
senses, so the customer ‘experiences’ the product.
Low-cost leadership: achieving maximum value, as perceived by the customer.
• It drives down costs whilst meeting customer expectations of value, it does not imply low
value or low quality.
Response: a set of value related to rapid, flexible, and reliable performance.
Flexible response: the ability to match changes in a marketplace where design innovations and
volumes fluctuate substantially.
Five forces model: a method of analysing the five forces in the competitive environment.
SWOT analysis: a method of determining internal strengths and weaknesses and external
opportunities and threats.
Key success factors: activities or factors that are key to achieving competitive advantage.
Core competencies: a set of skills, talents and capabilities in which a firm is particularly strong.
Activity map: a graphical link of competitive advantage, KSFs and supporting activities.
Outsourcing: transferring a firm’s activities that have traditionally ben internal to external suppliers.
The expansion of outsourcing is accelerating due to three global trends:
• Increased technological expertise.
• More reliable and cheaper transportation.
• The rapid development and deployment of advancements in telecommunications and
computers.
Theory of comparative advantage: a theory which states that countries benefit from specializing in
goods and services in which they have relative advantage, and they benefit from importing goods
and services in which they have relative disadvantage.
Risks of outsourcing:
• Failing due to inadequate planning and analysis.
• Underestimation of increases in inventory and logistics costs.
• Loss of local jobs.
• Changes in facility requirements.
• Potential adjustments to quality control systems and manufacturing processes.
• Expanded logistics issues, including insurance, tariffs, customs, and timing.
, Multinational corporation (MNC): a firm that has extensive involvement in international business,
owning or controlling facilities in more than one country.
International strategy: a strategy in which global markets are penetrated using exports and licenses.
Multidomestic strategy: a strategy in which operating decisions are centralized to each country to
enhance local responsiveness.
Global strategy: a strategy in which operating decisions are centralized and headquarters
coordinates the standardization and learning between facilities.
Transnational strategy: a strategy that combines the benefits of global-scale efficiencies with the
benefits of local responsiveness.
Module D: Waiting-Line Models
Queuing theory: a body of knowledge about waiting lines
Three parts of a waiting line:
1. Arrivals or inputs to the system
Three characteristics:
a. Size
Unlimited, or infinite, population: a queue in which a virtually unlimited number of
people request the services, or in which the number of customers or arrivals on hand
at any given moment is a very small portion of the potential arrivals.
Limited, or finite, population: a queue in which there are only a limited number of
potential users of the system.
b. Behavior
Balk: when customers balk, they refuse to join the waiting line because it is too long
to suit their needs or interests.
Reneging: those who enter the queue but then become impatient and leave without
completing their transaction.
c. Pattern
2. Queue discipline, or the waiting line itself
Waiting-Line characteristics:
a. Length of the line
b. Queue discipline
3. The service facility
Service characteristics:
a. Design of the service facility
i. Single server queuing system: one line and one server
ii. Multiple server queuing system: one line and multiple servers
iii. Single phase system: customer receives service from one station and exits
the system
iv. Multiphase system: customer receives services from several stations before
exiting the system
b. Distribution of service times
Poisson distribution: a discrete probability distribution that often describes the arrival rate in
queueing theory.
! !" • $#
P(x) = %!
P(x) = probability of x arrivals
x = number of arrivals per unit of time
𝜆 = average arrival rate
e = 2.7183
