CyberSummary

INTRODUCTION

All organizations create products for customers, and they often use similar processes to transform resources into goods, services, and ideas.

THE NATURE OF OPERATIONS MANAGEMENT

Operations management (OM), the development and administration of the activities involved in transforming resources into goods and services, is of critical importance in business. Operations managers oversee the transformation process and the planning and designing of operations systems, managing logistics, quality, and productivity. OM is the "core" of most organizations because it is responsible for the creation of their products. OM has historically been called "production" or "manufacturing" because of the view that it was limited to the manufacture of physical goods. The trend to call it "operations" instead recognizes the growing importance of organizations that provide services and ideas. We use the terms manufacturing and production interchangeably to represent the activities and processes used in making tangible products, whereas we use the broader term operations to describe those processes used in the making of both tangible and intangible products.

The heart of operations management is the transformation process through which inputs (resources such as labor, money, materials, energy) are converted into outputs (goods, services, and ideas). The transformation process combines inputs in predetermined ways using different equipment, administrative procedures, and technology to create a product. Transformation may take place through one or more processes.

Transformation processes occur in all organizations, regardless of their output or objectives. Though manufacturers and service providers often perform similar activities, they also differ in several respects. First, they differ in the nature and consumption of their output: A manufacturer makes tangible products, whereas a service provider produces more intangible outputs. The service provider's product requires a higher degree of customer contact, and the actual performance of the service typically occurs at the point of consumption. Thus, service providers are often more limited in selecting work methods, assigning jobs, scheduling work, and exercising control over operations. A second way to classify differences between manufacturers and service providers has to do with the uniformity of inputs: Manufacturers typically have more control over the variability of the resources they use than do service providers. The products of service organizations tend to be more "customized." Manufacturers and service providers also differ in the uniformity of their output: Because of the human element inherent in providing services, each service tends to be performed differently. A fourth point of difference is the amount of labor required: Service providers are generally more labor-intensive because of the high level of customer contact, perishability of the output, and high degree of variation of inputs and outputs. The final distinction between service providers and manufacturers involves the measurement of productivity for each output produced. For the service provider, variations in demand, variations in service requirements from job to job, and the intangibility of the product make productivity measurement more difficult. In reality, most organizations are a combination of manufacturer and service provider, with both tangible and intangible qualities embodied in what they produce. The level of tangibility greatly influences the nature of the firm's operational processes and procedures.

PLANNING AND DESIGNING OPERATIONS SYSTEMS

The operations planning process usually involves all departments, not just operations management.

Before making any product, a company must first determine what consumers want and then design a product to satisfy that want. Most companies use marketing research to determine the kinds of goods and services to produce and the features they must possess. After developing an idea for a product, the engineering or research and development department converts it into a workable design and determines how best to produce it. Finally, operations managers must plan for the types and quantities of materials needed to produce the product, the skills and quantity of people needed to make the product, as well as the actual transformation processes.

Before a firm can begin production, it must first determine the appropriate method of transforming resources into the desired product. Often, consumer needs dictate the process. Products are typically designed to be manufactured by one of three processes. Standardization is making identical, interchangeable components or even complete products. Standardization speeds up production and quality control and reduces production costs, but customers may not get exactly what they want. Modular design involves building an item in self-contained units, or modules, that can be combined or interchanged to create different products. While this process allows products to be repaired quickly, the components themselves are usually expensive. Customization is making products to meet a particular customer's needs or wants.

Next, planners consider capacity, which basically refers to the maximum load that an organizational unit can carry or operate. Capacity levels that fall short can result in unmet demand, while excessive capacity can drive up operating costs due to unused and often expensive resources.

After determining what process will be used to create its products, the firm can then design and build an appropriate facility in which to make them. Facility location is an important issue because once the decision is made to locate in a specific area, the firm is stuck with the decision. The criteria an organization must consider when making a location decision vary from industry to industry, but all organizations consider proximity to the market; availability of raw materials, transportation power, and labor; climatic influences; community characteristics; and taxes and inducements in their facility-location decision. This complex decision requires the evaluation of many factors, some of which cannot be precisely measured.

Arranging the physical layout of a facility is a complex, highly technical task. Three basic layouts are common, but most firms use a combination of layout designs. A company using a fixed-position layout brings all resources required to create the product to a central location. Such a company may be called a project organization because it is typically involved in large, complex projects such as construction or exploration. Firms that use a process layout organize the transformation process into departments that group related processes. These types of organizations are sometimes called intermittent organizations, which deal with products of a lesser magnitude than do project organizations, and their products not necessarily unique but possess a significant number of differences. The product layout requires that production be broken down into relatively simple tasks assigned to workers, who are usually positioned along an assembly line. Companies that use assembly lines are usually known as continuous manufacturing organizations, so named because once they are set up, they run continuously, creating products with many similar characteristics.

Every industry has a basic, underlying technology that dictates the nature of its transformation process. Two technologies that have strongly influenced the operations of many organizations are computers and robotics. Computer-assisted design (CAD) helps engineers design components, products, and processes on computer instead of paper. Computer-assisted manufacturing (CAM) goes a step further, employing specialized computer systems to actually guide and control the transformation processes. Such systems can monitor the transformation process, gathering information about the equipment used to produce the products and about the product itself as it goes from one stage of the transformation process to the next. In flexible manufacturing, computers can direct machinery to adapt to different versions of similar operations. Robots are also becoming increasingly useful in the transformation process, especially in automobile manufacturing and nuclear waste cleanup. When CAD/CAM, flexible manufacturing, robotics, computer systems, and other technologies are integrated, the result is computer-integrated manufacturing (CIM), a complete system that designs products, manages machines and materials, and controls the operations function.

MANAGING LOGISTICS

Logistics, a major function of operations, refers to all the activities involved in obtaining and managing raw materials and component parts, managing finished products, packaging them, and getting them to customers.

Purchasing, or procurement, is the buying of all the materials needed by the organization. The purchasing department aims to obtain items of the desired quality in the right quantities at the lowest possible cost. The purchasing department locates and evaluates suppliers for the raw materials, parts, components, manufacturing and office supplies, and equipment the firm requires. The purchasing function can be quite complex. Not all organizations purchase all the materials needed to create their products; sometimes they make or lease them.

Every raw material, component, completed or partially completed product, and piece of equipment a firm uses--its inventory--must be accounted for, or controlled. Inventory control is the process of determining how many supplies and goods are needed and keeping track of quantities on hand, where each item is, and who is responsible for it. Managing operations must be closely coordinated with inventory control. Inventory managers spend a great deal of time trying to determine the proper inventory level for each item, considering variables such as the usage rate of the item, the cost of maintaining the item in inventory, the cost of paperwork and other procedures associated with ordering or making the item, and the cost of the item itself. One popular approach is the economic order quantity (EOQ) model, which identifies the optimum number of items to order to minimize the costs of managing (ordering, storing, and using) them. An increasingly popular technique is just-in-time (JIT) inventory management, which eliminates waste by using smaller quantities of materials that arrive "just in time" for use in the transformation process and, therefore, require less storage space and other inventory management expense. Another inventory management technique is material-requirements planning (MRP), a planning system that schedules the precise quantity of materials needed to make the product.

After all materials have been procured and their use determined, managers must then consider the routing, or sequence of operations through which the product must pass. Scheduling then assigns the tasks to be done to departments or even specific machines, workers, or teams. One popular scheduling method is the Program Evaluation and Review Technique (PERT), which identifies all the major activities or events required to complete a project, arranges them in a sequence or path, determines the critical path, and estimates the time required for each event. If any activities on the critical path fall behind schedule, the entire project will be delayed.

MANAGING QUALITY

Controlling quality is another critical element in production and operations management because defective products can harm a firm. Quality reflects the degree to which a good or service meets the demands and requirements of customers. Determining quality can be difficult because it depends on customers' perceptions of how well the product meets or exceeds their expectations. Quality control refers to the processes an organization uses to maintain its established quality standards. Companies employing total quality management (TQM) programs know that quality control must be incorporated throughout the transformation process, from the initial plans to develop a specific product through the facility planning stages to the actual manufacture of the product. One method through which many companies have tried to improve quality is statistical process control, a system in which management collects and analyzes information about the production process to pinpoint quality problems in the production system.

Regardless of whether a company has a TQM program to control quality, it must first determine what standard of quality is desired and then assess whether its products meet that standard. Both manufacturing and service-providing firms must set product specifications and quality standards. ISO 9000 is a series of quality assurance standards designed to ensure consistent product quality under many conditions. Inspection reveals whether a product meets quality standards. Some product characteristics can be discerned by simple inspection techniques, such as weighing or measuring; others are more elaborate. Inspection is made of purchased items, work-in-process and finished items. Whether to inspect 100 percent of the output or to sample only part of it depends on the cost of the inspection process, its destructiveness, and the importance of the item to the safety of consumers or others. Using statistical inference, management can structure sampling techniques to assure a high probability of rejecting a population that does not meet standards and accepting a population that does. Sampling is likely to be used when inspection tests are destructive.