©The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin

Chapter 1

Introduction:Why Operations Management?

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Learning Objectives

• Describe the relationships among value, profitability, cost, processes, and capabilities

• Describe the components of value

• Differentiate between the resources that create value

• Describe the changes in the business environment and the impact they have

• Describe the external forces that affect the business

• Explain the differences between service and product outputs

• Explain why B2B and B2C customers may define value differently

• Describe how operations concepts will affect you in your field

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Why Operations Management Is Critical to a Career in Business

• What is operations management? – “The management of resources used to create salable

products and services.”

• Why is it important to all business majors? – Businesses have broadened employee responsibilities

– This creates a need for an “enterprise view”

– College graduates face unpredictable future opportunities

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• Technological progress is moving at a tremendous rate

• There are many new products and services in addition to old ones

• Rapid change is the norm

A New Business Environment

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A New Business Environment

• Businesses try to break down the “silos” that used to define business functions.

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• The Resource/Profit Model serves as an organizational model to put operations in a business context

Exhibit 1.3 The Resource/Profit Model

Overview of the Resource/Profit Model

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Chapter 2 is devoted to Profitability• It is the primary business objective• It measures the long-run productivity of

the business• It is the outcome of effective strategy and

value creation

Chapter 3 focuses on Strategy and Value

• Strategy consists of decisions about the way the firm will try to add value. How will the firm’s resources be aligned?

• Who are the customers? What do they want? How will value be delivered?

• Value is determined by the customer• Value created must exceed the cost

of creating it, or there will be no profitability.

• Value is the basis upon which customers decide to purchase and the basis on which a business competes.

Foundations for Success

•Chapter 4 examines Processes•Processes are used to organize resources so that they create value•Effective Processes give rise to capabilities, which are valued by customers

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Chapter 5 examines Cost• Cost is the amount of scarce resources (usually

money) consumed to achieve an objective• Cost has a huge impact on the customer’s

perception of value.

Chapters 6 and 7 are focused on Quality• Chapter 6 examines quality and its impact on

value, while Chapter 7 presents the commonly-used tools associated with quality improvement.

• The customer determines is a product or service is high quality.

Chapter 8 looks at Timeliness• Timeliness includes when and/or how fast

something happens• Scheduling a project management are key topics• Timeliness has an impact on financial performance• Timeliness is also a part of value for customers

Components of Value

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Chapter 10 examines Demand Forecasting

• A projection of future demand is necessary to determine resource requirements and obtain them in the correct quantities, at the correct time, and at the lowest cost.

Managing Resources to Create Value

Supply Chain Management is the topic of Chapter 9

• SCM recognizes that decisions within one business affect suppliers and customers

Chapter 11 covers Inventory• Materials used to produce

goods and services• Raw, WIP, Finished Goods,

MRO and Supplies

Chapter 13 is devoted to Lean Systems

• A productive system that functions with little waste or excess, usually with low

Logistics is the topic of Chapter 12

• Logistics is the movement and storage of goods in a supply chain.

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Chapter 15 focuses on Constraint Management

• Constraint Management is a framework for managing the constraints of a system in a way that maximizes the system’s accomplishment of its goals.

Managing Resources to Create Value

Chapter 14 is devoted to Capacity

• Capacity is the level of productive output in a specified period of time

Chapter 16 is devoted to Facilities decisions.• Facilities are the land and buildings that house a

business• The decisions include location and layout

decisions

The topic of Chapter 17 is Workforce

• The employees are a critical resource contributing to value creation

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• Environmental forces affect the business– Globalization

– The Internet and Other Technologies

– The Natural Environment

– Regional Pressures

Environmental Forces

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Product Characteristics

• Tangible

• Easy to measure

• Can be stored for later use

• Quality can be assessed prior to customer delivery

• Production processes are relatively unimportant to customers

• Defective products can be repaired or scrapped

Service Characteristics

• Intangible

• Harder to measure

• Cannot be stored for later use

• Quality cannot be checked prior to delivery

• Production processes can be very important to customers

• Producers of defective services must attempt to recover to retain the customer

Business Outputs: Products and Services

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Product Only• Furniture• Paint• Grocery

Products• Steel Mill

Mix of Product and Service

• Retailer

• Computer Manufacturer

• Automobile Manufacturer

• Restaurant

• Car Rental Agency

• Landscaping Firm

• Print Shop

Service Only• Advertising

Firm• Brokerage• Bank• Prison• Tanning Salon• Hair Stylist

Continuum of Product andService Providers

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• B2B = Business-to-Business

• B2C = Business-to-Consumer

• Value differs from customer to customer

Exhibit 1.9 Business Output/Customer Matrix

Insert Exhibit 1.6

The Type of Customer Determines the Value that Must be Created by the Business