ch1 introduction

Chapter 1Chapter 1

Introduction to Operations Management

Why Are Some Companies Why Are Some Companies More Successful Than Others?More Successful Than Others?

A major reasons is that they do a better job of managing their operations.

Companies that are in trouble often focus their turnaround efforts on beefing up their operations.

Two recent examples are Chrysler Ford

ChryslerChrysler Lost $618 million in 2006. Recently bought by Cerberus. Hired Robert Nardelli, former

CEO of Home Depot, as new CEO (LAT, 8/6/07, C).

No auto experience. Hired for his operational

background at GE and Home Depot.

Cerberus said “His background in operations will provide valuable knowledge as we continue Chrysler’s turnaround. “

However, as the LA Times noted, “Nardelli will not be paid a dime until he turns Chrysler around.”

FordFord Same thing happened at

Ford. Ford hired Alan Mulally

from Boeing who also lacked experience in auto industry but had a strong background in operations, especially manufacturing, customers satisfaction, and supplier relations.

Managing OperationsManaging Operations Involves the

design, evaluation, and improvement

of an organizations operations. An operation is any activity involved in

producing a good or providing a service.

Examples of OperationsExamples of Operations Buying parts and materials Installing a windshield on a car Providing technical support Designing a new product or service Shipping a product Deciding on how many parts to order Estimating future sales Scheduling jobs Preventing customers complaints

Operations Fall into Different Operations Fall into Different Areas of Operations Management Areas of Operations Management

(OM)(OM) Forecasting

Predicting future demand of a product or service

Product or service design Designing new products or services Redesigning existing products

Operations Fall into Different Areas of Operations Fall into Different Areas of Operations Management (OM)Operations Management (OM)

Process design Designing a new production or service process or

redesigning an existing process Design process involves

identifying the inputs and the transformation process that will convert the inputs

into outputs. The outputs can be

Products or Services or both


Supply Chain Management (SCM) All activities required to acquire raw materials

and parts and deliver a product to the customer: Acquiring raw materials and parts Selecting suppliers Getting input from suppliers and customers on

how to design and improve the manufacturing or assembly process

Processing and filling orders Delivering products to the customer


Supply chain includes Suppliers Company Distributors (if any) Customers


Scheduling Assignment problem

What jobs should we assign to what machines to minimize total cost?

Sequencing In what order should jobs be processed on

different machines to minimize total processing time?

Doing the right job or activity, at the right time, and in the right order.


Capacity planning Achieve a match between production or service

capacity of a company, a division, a machine, or a service unit and the predicted level of demand.

Important to plan capacity because of consequences of poor planning: One is ? – Other is ? -


Capacity planning What is one area of capacity planning at CSUN? What are the consequences of poor capacity

planning in this area?


Inventory management To provide enough inventory to satisfy

customer demand while minimizing inventory costs.

Important to manage inventory because of two types of errors: One error – Other error -


Quality management Designing, implementing and managing programs to insure that product and

service quality is continuously improved at every level of an organization.

Operation Area of OMBuying parts and materialsInstalling a windshield on a carProviding technical supportDesigning a new product or service

Into What OM Areas Do Into What OM Areas Do These Operations Fall?These Operations Fall?

SCM

Process Design

Product design

Process Design

Operation Area of OMShipping a productDeciding on how parts to orderEstimating future salesPreventing customers complaints

Into What OM Areas Do Into What OM Areas Do These Operations Fall?These Operations Fall?

Inventory Management

Forecasting

Quality Management

SCM

Recent Business Examples of OM Recent Business Examples of OM IssuesIssues

In the slides that follow, operational issues involving different companies are presented.

Identify the major area(s) of OM into which each issue falls.

PaccarPaccar

“Commercial trucks aremostly commodities,mass produced for bigfleet operators whose major focus is price. ButPaccar, a company thatmakes Kenworth andPeterbit trucks, charges10% more. Customerssay it worth it.” (Business Week, 1/30/06)

Product design Process design Forecasting Scheduling Capacity planning Inventory management Supply chain

management (SCM) Quality management

Paccar custombuilds trucks to theindividual specs. Buyers are offered 1000s of options, from engines and axles to upholstery.



PaccarPaccar

PaccarPaccar

Part by part, Paccar designs the truck on a computer with a dealer. Orders are then zapped to Paccar’s factories, where workers assembly trucks for delivery 6 to 8 weeks later. Its computerized machinery can make parts in hours, not days or weeks.



BoeingBoeingBoeing’s 787 (Deamliner)(LAT, July 9 2007)• Unveiled on July 8, 2007• Already has almost 700

orders• Uses carbon fiber materials

• Lighter• Burns less fuel• More durable• Less prone to corrosion

than aluminum



BoeingBoeing

Two problems surfaced With Boeing’s 787:

3 to 6 month delays in filling orders and

increases in costs due to production problems.



What is Operations Management?What is Operations Management? It is the function responsible for managing all

the activities that transform inputs into outputs.

OM is also responsible for obtaining information about how well the

inputs and the transformation process are performing and

using information to take corrective action to continuously improve the inputs and transformation process.

Classification of Inputs/OutputsClassification of Inputs/Outputs Inputs

Capital Machines Equipment Buildings

Labor Materials

Outputs Product and/or Service

Cake Baking ProcessCake Baking Process

Inputs Sugar Flour

Mixer

Transformationmethods

Milk Cake

Output

Baker

Mix Bake

Oven

See Table 1-1, Page 8

Classification of InputsClassification of Inputs

Inputs Sugar Flour

Mixer Oven

Milk

Baker

Capital

Labor

Materials

Car WashCar WashInputs Transformation Output

Workers

Rags

Soap

Washing machine

Conveyor belt

Blower

Wet car

Apply soapRinse

Dry

Clean car

Service writer

Classification of InputsClassification of Inputs

Labor Capital Materials

•Workers•Service writer

•Washing machine

•Conveyor bet•Blower

•Rags•soap

How Do We Improve a Process?How Do We Improve a Process? If output of the process is not meeting

customers’ expectations, we fix the ???, not the ???. Fixing ??? is proactive. Fixing ??? is reactive.

If process is meeting the customers’ expectations, we practice continuous improvement (CI)—

never-ending efforts to make process and hence the product even better.

A Good Process Should:A Good Process Should: Consist of steps that add value.

Each step in a process should increase the value of the output.

Non-value added steps don’t. Eliminate non-value added steps.

Be efficient Produce product or provide service at lowest

possible cost.

To Improve a ProcessTo Improve a Process We need feedback on how process is

performing. We get feedback from two sources:

The transformation process Customers

Both sources of feedback are used to change the Transformation process and/or The inputs

Process Improvement Model Process Improvement Model

Inputs Transformationprocess

Feedback

Cus

tom

ers

Out

put

Change

Change

Feedback

Action

1

2

1

2

Auto IndustryAuto Industry

U.S. Sales

1980 1st Half 2007 Change

GM 46% 19.2% -58%

Toyota 6.5% 19.9% +206%

All three U.S. automakers (GM, Ford, Chrysler) have been losing market share to Asian rivals.

Auto IndustryAuto Industry Camry is best selling car in U.S. for 8 of the

past 9 years. Toyota-brand cars and trucks, including

Lexus, accounted for 37% of all 2007 second quarter car sales in California, followed by Honda at 12.4%.

Ford was third with 9.6%, followed by GM with 8.2%.

Auto IndustryAuto Industry GM, Ford have red ink GM lost $3.4 billion in last quarter Ford, $254 million Both are closing plants Laying off workers Cutting production

Auto IndustryAuto Industry Due to two operational issues

quality and product line

Quality – later Product line

Buyer’s are turning away from products that have been main source of profit: gas-hungry pickups and SUV’s

What Factors Explain Toyota’s What Factors Explain Toyota’s Success?Success?

Higher manufacturing quality Higher reliability Spends more on hiring best people Spends more on training Spends more on taking care of customers

Implications? Lower prices More fuel efficient vehicles More elegant designs

ToyotaToyota Toyota is not cutting cost by spending less. They spend more on

taking care of customers, training workers, improving quality, etc.

How can they charge lower prices?

Differences between Differences between Manufacturers and Service Manufacturers and Service

OrganizationsOrganizations

Services: Intangible product Product cannot be

inventoried High customer

contact Labor intensive May provide some

products

Manufacturers: Tangible product Product can be

inventoried Low customer contact Capital intensive May provide some

services

Today’s OM EnvironmentToday’s OM Environment

Customers demand better quality, greater speed, and lower prices.

Companies are implementing lean systems concepts Eliminate “waste” Waste is any activity that doesn’t add

value More on above later.

Today’s OM EnvironmentToday’s OM Environment Continuous efforts to better manage

information. Increased cross-functional decision making

Many companies are “Data rich, but information poor.”

Must convert “data” into “useful information.” When is information useful? When it:

Identifies a problem Identifies an opportunity Solves a problem

Better Manage of InformationBetter Manage of Information

Increased Cross-functional Increased Cross-functional Decision MakingDecision Making

Most businesses are supported by 4 major functions: operations, marketing, Finance, HR.

These functional areas must interact. Why?


Marketing must rely on Production for information on Delivery schedules Production capabilities

What products can and can’t be produced Quality levels

R & D (product development) and Production must rely on Marketing for feedback on customers wants and expectations


Production cannot produce new products unless Finance has funds available to acquire inputs.

Finance can’t finance new products unless it get data from production on cost of inputs.

HR cannot hire new workers without feedback from production on what worker skills are required.

Production should consult with HR to determine if local labor pool is sufficient.

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