Operations Management in Today’s Business Environment
Operations management is the business discipline that focuses on getting things done: converting inputs to outputs through some transformation process. Those transformation processes occur in factories that produce goods and in organizations that produce services. Operations managers measure process performance in terms of both effectiveness (meeting the organization’s objectives) and efficiency (using resources well).
Decisions about processes, however, cannot be made in a vacuum. In order for any process to be effective, it must align with the overall strategy and objectives of the organization—and in particular, must be aligned with the organization’s competitive priorities. Operations managers make decisions that relate to both structural bricks-and-mortar issues as well as infrastructural/procedural issues. Those decisions need to be made in light of the strategy of the organization.
While operations managers use their own measures of effectiveness and efficiency to evaluate process performance, they also need to understand the financial implications of operations decisions. Similarly, operations managers want to assure that their decisions align with not only the organization’s overall strategy, but also with the decisions made in other functional areas within the organization.
In the past decade, dramatic advances in technology have enabled managers to integrate functions not only within their organizations but also among the organizations that make up their supply chain. Accurate and detailed information can be rapidly shared with suppliers and customers so that all organizations in the supply chain can more readily anticipate and satisfy end-user customer needs.
Technological advancements have also affected the way both goods and services are produced. Better processes produce better output for customers and result in stronger marketplace performance.
Introduction to Operations Management
CHAPTER OBJECTIVES
• Introduce and define operations management (OM) in terms of its contribution to an organization and the activities it involves.
• Describe how operations management contributes to the overall betterment of society.
• Present operations management as a function that addresses issues in both manufacturing and services.
• Show how operations management is gaining more recognition both internally and externally to an organization.
• Demonstrate how the operations management function interacts with the other functional areas within an organization.
• Present a brief history of operations management as a field and its evolution to its current role in an organization.
OSCAR WINNER AVID TECHNOLOGY, INC. CONDUCTS DAILY PERFORMANCE REVIEW MEETING TO PROVIDE FORUM FOR ESTABLISHING PRIORITIES
At 8:30 AM sharp, the gavel comes down on the conference room table calling the daily operational performance review meeting to order at Avid Technology’s main manufacturing plant and headquarters in Tewksbury, Massachusetts. Avid designs and manufactures software and hardware that enable professionals in the video, film, audio, animation, special effects, and streaming media industries to digitally manipulate media content. Avid is an industry leader, in terms of both sales and quality, and has even won an Oscar® award for the special effects its equipment produced, which is proudly displayed at its Tewksbury headquarters.
Managerial Issues
Operations managers, those responsible for producing and delivering the goods and services that we use every day, face a wide variety of challenges as we enter the twenty-first century. The current highly competitive business environment, caused in large part by the globalization of the world’s economies in conjunction with the growth in e-commerce, has shifted the balance of power from the producers to the consumers. Consumers are now demanding increased value for their money. To put it simply, they want more for less.
What Is Operations Management?
An Organizational Perspective
Like every functional area within an organization, operations management can be defined from more than one perspective: first, with respect to its overall role and contribution within an organization, and second, focusing more on the day-to-day activities that fall within its area of responsibility. From an organizational perspective, operations management may be defined as the management of the direct resources that are required to produce and deliver an organization’s goods and services.
OPERATIONS MANAGEMENT PLAYS AN IMPORTANT ROLE AS AMAZON.COM CONTINUES TO INCREASE PRODUCTIVITY
AND REDUCE COSTS
Amazon.com provides a good example of a firm that has continued to apply many of the operations management concepts that are presented in this book:
• In 2001, Amazon increased worker productivity, which resulted in 35 percent more units being shipped with the same number of workers.
• Between 2000 and 2002, Amazon’s revenues increased from $2.7 billion to $3.9 billion (a 44 percent increase) while its workforce decreased from 9,000 to 7,500 workers (a 17 percent decrease). This resulted in a 73 percent increase in worker productivity, from $300,000 in sales per employee in 2000 to $520,000 in sales per employee in 2002.
• Using new software, Amazon increased the forecasting accuracy of customer purchases, which resulted in a $31 million reduction in inventory in the fourth quarter of 2001.
• In 2003, Amazon’s six computerized warehouses handled three times the volume they did in 1999. This increase was attributed in part to the fact that inventory turns have steadily increased, from 11.7 per year in 2000 to more than 20 in 2003.
• Shipping costs in 2001 were reduced by millions of dollars by consolidating 40 percent of its shipments into full truckloads (as compared to zero consolidations in the previous year).
• Continued development of its supply chain with retailers like Toys ‘R’ Us and Target generated revenues of $225 million and profit margins that were double Amazon’s overall 25 percent margin
Operations Management in Practice
EXCERPTS FROM TWO LETTERS FROM FORMER STUDENTS
“. . . part of an audit for a CPA firm includes learning about the systems of a client. A by-product of the audit is a management letter which suggests how the client might improve their systems. By systems I am referring to the accounting information systems, the inventory control systems, as well as the production process.
In evaluating these systems, one must first understand the generalities underlying all systems. OM explains these generalities as they apply to production processes. The better one understands how processes work, the easier it is to apply this understanding to different systems and provide your client with good suggestions for improving the efficiency of their operations.
The course you teach in Operations Management is invaluable, and any student of accounting would be a fool to blow it off and try to just get by without learning anything. . . .”
Operations Management’s Contributions to Society
Operations management plays important, although not always an obvious, role in the societies in which we live. It is responsible for the food we eat and even the table on which we eat it; it provides us with the clothing we wear, with vehicles we use for transportation, and with the “toys” we use for recreation, from baseballs and bats to computer games. In other words, operations management affects nearly all aspects of our day-to-day activities.
Higher Standard of Living
A major factor in raising the standard of living in a society is the ability to increase its productivity. (Productivity, which can be broadly defined as how efficiently inputs are converted into outputs, is discussed in greater detail in Chapter 8.) Higher productivity is the result of increased efficiency in operations, which in turn translates into lower-cost goods and services. Thus, higher productivity provides consumers with more discretionary income, which contributes to their higher standard of living. As seen in Exhibit 1.4, the United States had significant increases annually in productivity during the 1990s, which was a major factor in the economic prosperity we experienced during that decade.
Better Quality Goods and Services
One of the many consumer benefits of increased competition is the higher-quality products that are available today. Quality standards are continually increasing. Many companies today, as we will learn in Chapter 9, have established Six-Sigma quality standards (pioneered by Motorola in the late 1980s), resulting in no more than 3.4 defects per million opportunities. Such high quality standards were once considered not only prohibitively expensive but also virtually impossible to achieve even if cost wasn’t a consideration. Today we know that such high quality is not only very possible, but also results in lower costs, because firms can reduce their waste and rework.
Concern for the Environment
Many companies today are taking up the challenge to produce environmentally friendly products with environmentally friendly processes, all of which falls under the purview of operations management. The Very fine Corporation, which is located in Westford, Massachusetts, and produces a wide variety of beverage drinks, is a good example of such firms. All of its packaging is made from 100 percent recyclable materials and it also recycles 94 percent of all solid waste materials that are generated throughout the production process.1 Ford’s new River Rouge manufacturing plant in Detroit provides another good example. No longer is raw waste dumped into the waterways or the air polluted with smoke from its operations. Vegetation will be used to clean up contaminated land, and the River Rouge will be restored so fish will have access to the upper part of the river.2
Improved Working Conditions
Managers recognize the benefits of providing workers with better working conditions. This includes not only the work environment but also the design of the jobs themselves. Workers are now encouraged to participate in improving operations through suggestions. After all, who would know better how to do a particular operation than that person who does it every day. Managers also have learned that there is a very clear relationship between satisfied workers and satisfied customers, especially in service operations.
The Emergence of Operations Management
Operations management has been gaining increased recognition in recent years for several reasons, including (a) the application of OM concepts in service operations, (b) an expanded definition of quality, (c) the introduction of OM concepts to other functional areas such as marketing and human resources, and (d) the realization that the OM function can add value to the end product.
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