Operations Management



Pre Reading Comment – Chapter 7

This is one of the better chapters in the textbook.  Read all of it carefully.  Be especially prepared to explain how operations and quality measures vary for goods and services.



Lecture Notes

Lecture Summary

·        Operations can consist of goods creation, and services. 

·        Planning is a major function of operations management. 

·        Managers also need to carefully monitor quality. 

·        Supply chain management and logistics have helped improve performance and reduce costs. 

·        ERP systems help tie all functional area together.



Major Points

Goods and Services

You create a product by taking things apart (refining ore), or putting things together (making furniture).  The chief goals of the manager are process efficiency, and product quality (Can I make it more cheaply and better?).  Services are performed.  They can either be something a customer cannot do for him/herself (getting medical care), or something the company can do more efficiently than a customer can do (changing the oil in your car).  The chief goal of the manager in a service business is performance and customer satisfaction (Can I respond to the customer as quickly as they want with the service they need?).  Often times businesses have both a product and service orientation.


Activity #1:  If you were running a McDonald’s restaurant, what are some of the goods and services you would manage?  List ten ways to improve each.


Activity #2:  Is the business you are planning a producer of goods or of services?  How would you measure your success as a manager in such areas as efficiency, quality, and customer satisfaction?



Chief aspects of planning are capacity, location, layout, quality, methods (process engineering for materials, proper procedures for services), scheduling, materials management, and process control (JIT, lean, MRP).


Activity #3:  How would you plan the layout for a new bookstore?


The Value Chain

Another way to appreciate the activities of a business is to review the “value chain”.  This sees business as a sequence of operations.  In our book store example is might look like this:


Research on best books – purchasing the best books – shipping – delivery – payment – display – customer contact – advertising – pricing – sales – support


The chain contains places where goods are predominant, and places where services are most important.  All along the chain a company has an opportunity to determine where it will place emphasis for competitive advantage.


Activity #4:  Pick two or three places in the value chain and explain strategies you might use to beat a competing bookstore.



Chief values here are consistency (statistical process control (to keep consistency in a narrow range), ISO 9000 (an international approach to process improvement)), reduced defects, and improved customer satisfaction.  For example, what is “quality” on a hamburger?  Consistent size of the meat, no spoiled pickles, and fast delivery to a customer. 


Activity #5:  How would you know what “quality” means to a customer at your company?


The Supply Chain

The Internet and other technologies allow us to link to our suppliers.  What information do we share via the link?  Sales demand, shipping information, billing information.  A good retail example is JC Penney where, if a shirt is sold, the POS terminal captures the information about the shirt, transfers it automatically to a supplier in China who makes the needed shirt, packages it, and ships it directly to the store that just sold the same shirt.  Key concepts here are Just-in-Time – parts arrive just as needed, and “safety stock” – the amount of a part that needs to be kept on hand to meet sales needs until more parts can be ordered and shipped.  Logistics also become an important part of this as trucking companies like Schneider National include GPS equipment so that companies know exactly where their needed parts are and when they will arrive.  Inventory is also a factor as companies try to reduce costs by reducing the amount of inventory they carry.  Therefore they need to be more aware of when replacement parts will be arriving.


Activity #6:  What is the supply chain for a restaurant?  What safety stock would you want?  How would you reduce inventory costs?


Enterprise Resource Planning Systems

During the last ten years many larger companies have replaced older computer systems with enterprise systems – computer systems that can collect all the information needed for every part of the company (the whole “enterprise”), and run all the main processes of the company.  Essentially, they are replacing lots of smaller systems that might do payroll or monitor inventory, or send out billings, with one larger system that does it all.   Why?  For one thing one computer system is easier to maintain than lots of smaller systems, and many of the older systems needed replacing anyway.  But the main reason is to get all company information in one place – to have one database that contains customer records, inventory data, shipping information, product materials lists… Now all the information is available to all departments in the company and can be shared.  Here’s why operations managers appreciate the change:


Old way-  A customer places an order.  The sales people enter the information into their computer system.  The customer wants to know how long it will take to deliver the product.  The sales people start phoning other departments.  Are there products in inventory?  They call the warehouse.  Are the products currently being made?  They call the production manager.  When will the product be scheduled for manufacture?  The production manager looks at his schedule, and then calls the warehouse to see if the parts for the product are on-hand or have to be ordered.  If they have to be ordered, he calls the purchasing department.  They check their vendor lists and make a call…  You get the idea.  A simple question – when can I get my order – requires significant effort to answer because all the answers are in different departments.


New way – Because all employees are linked to the same computer system and the same database of information, the sales people check inventory levels themselves, then check the production schedule, then check safety stock levels on parts and shipping notices they have received from vendors.  Just by reviewing data they now have available to them, the sales people can understand all aspects of the production process.


The same holds true for operations managers.  They now can find the information they need to plan, schedule, and to evaluate the production process.


Activity #7:  If you order a computer on-line, what business departments will be involved with that order?  What information would an operations manager want from that order?  What information would be shared with the company supply chain?  How are you kept aware of the progress of your order?



Business Plan Aspects

To succeed in business you will have to provide a quality product or service.  How will you define quality?  What planning will you have to do to ensure that your meet those quality requirements?  What is the value chain for your business?  Where is your business on that chain?  Why did you decide to pick that spot?  What other spot on the chain might be more profitable?


Chapter Summary  - Exam Highlight

Besides the basics of planning and quality, students need to understand linkage – how a company is linked to its supply chain, and how departments are linked together through an ERP.  They need to see the flow of information that is essential to operations management.