Introduction

Introduction

Introduction
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Operations management is the management of that part of an organization that is responsible for producing goods and/or services. There are examples of these goods and services all around you. Every book you read, every video you watch, every e-mail you send, every telephone conversation you have, and every medical treatment you receive involves the operations function of one or more organizations. So does everything you wear, eat, travel in, sit on, and access the Internet with. The operations function in business can also be viewed from a more far-reaching perspective: The collective success or failure of companies’ operations functions has an impact on the ability of a nation to compete with other nations, and on the nation’s economy.

Business organizations typically have three basic functional areas, as depicted in Figure 1.1: finance, marketing, and operations. It doesn’t matter whether the business is a retail store, a hospital, a manufacturing firm, a car wash, or some other type of business; all business organizations have these three basic functions.

FIGURE 1.1	The three basic functions of business organizations

Finance is responsible for securing financial resources at favorable prices and allocating those resources throughout the organization, as well as budgeting, analyzing investment proposals, and providing funds for operations. Marketing and operations are the primary, or “line,” functions. Marketing is responsible for assessing consumer wants and needs, and selling and promoting the organization’s goods or services. Operations is responsible for producing the goods or providing the services offered by the organization. To put this into perspective, if a business organization were a car, operations would be its engine. And just as the engine is the core of what a car does, in a business organization, operations is the core of what the organization does. Operations management is responsible for managing that core. Hence, operations managementThe management of systems or processes that create goods and/or provide services. is the management of systems or processes that create goods and/or provide services.

The creation of goods or services involves transforming or converting inputs into outputs. Various inputs such as capital, labor, and information are used to create goods or services using one or more transformation processes (e.g., storing, transporting, cutting). To ensure that the desired outputs are obtained, an organization takes measurements at various points in the transformation process (feedback) and then compares them with previously established standards to determine whether corrective action is needed (control). Figure 1.2 depicts the conversion system.

FIGURE 1.2	The operations function involves the conversion of inputs into outputs

Table 1.1 provides some examples of inputs, transformation processes, and outputs. Although goods and services are listed separately in Table 1.1, it is important to note that goods and services often occur jointly. For example, having the oil changed in your car is a service, but the oil that is delivered is a good. Similarly, house painting is a service, but the paint is a good. The goods-service combination is a continuum. It can range from primarily goods, with little service, to primarily service, with few goods. Figure 1.3 illustrates this continuum. Because there are relatively few pure goods or pure services, companies usually sell product packages, which are a combination of goods and services. There are elements of both goods production and service delivery in these product packages. This makes managing operations more interesting, and also more challenging.

TABLE 1.1	Examples of inputs, transformation, and outputs

FIGURE 1.3	The goods-service continuum

Table 1.2 provides some specific illustrations of the transformation process.

The essence of the operations function is to add value during the transformation process: Value-addedThe difference between the cost of inputs and the value or price of outputs. is the term used to describe the difference between the cost of inputs and the value or price of outputs. In nonprofit organizations, the value of outputs (e.g., highway construction, police and fire protection) is their value to society; the greater the value-added, the greater the effectiveness of these operations. In for-profit organizations, the value of outputs is measured by the prices that customers are willing to pay for those goods or services. Firms use the money generated by value-added for research and development, investment in new facilities and equipment, worker salaries, and profits. Consequently, the greater the value-added, the greater the amount of funds available for these purposes.

TABLE 1.2	Illustrations of the transformation process

There are many factors that affect the design and management of operations systems. Among them are the degree of involvement of customers in the process and the degree to which technology is used to produce and/or deliver a product or service. The greater the degree of customer involvement, the more challenging it can be to design and manage the operation. Technology choices can have a major impact on productivity, costs, flexibility, and quality and customer satisfaction.

Production of Goods versus Delivery of Services

Although goods and services often go hand in hand, there are some very basic differences between the two, differences that impact the management of the goods portion versus management of the service portion. This section explores those differences.

Production of goods results in a tangible output, such as an automobile, eyeglasses, a golf ball, a refrigerator—anything that we can see or touch. It may take place in a factory, but can occur elsewhere. For example, farming produces nonmanufactured goods. Delivery of service, on the other hand, generally implies an act. A physician’s examination, TV and auto repair, lawn care, and the projection of a film in a theater are examples of services. The majority of service jobs fall into these categories:

Government (federal, state, local).
Wholesale/retail (clothing, food, appliances, stationery, toys, etc.).
Financial services (banking, stock brokerages, insurance, etc.).
Health care (doctors, dentists, hospitals, etc.).
Personal services (laundry, dry cleaning, hair/beauty, gardening, etc.).
Business services (data processing, e-business, delivery, employment agencies, etc.).
Education (schools, colleges, etc.).

Manufacturing and service are often different in terms of what is done but quite similar in terms of how it is done. For example, both involve design and operating decisions. Manufacturers must decide what size factory is needed. Service organizations (e.g., hospitals) must decide what size building is needed. Both must make decisions on location, work schedules, capacity, and allocation of scarce resources.

Manufacturing and service organizations differ chiefly because manufacturing is goods-oriented and service is act-oriented. The differences involve the following:

Degree of customer contact.
Uniformity of input.
Labor content of jobs.
Uniformity of output.
Measurement of productivity.
Production and delivery.
Quality assurance.
Amount of inventory.
Evaluation of work.
Ability to patent design.

Let us consider each of these differences.

Often, by its nature, service involves a much higher degree of customer contact than manufacturing. The performance of a service often occurs at the point of consumption. For example, repairing a leaky roof must take place where the roof is, and surgery requires the presence of the surgeon and the patient. On the other hand, manufacturing allows a separation between production and consumption, so that manufacturing can occur away from the consumer. This permits a fair degree of latitude in selecting work methods, assigning jobs, scheduling work, and exercising control over operations. Service operations, because of their contact with customers, can be much more limited in their range of options. Moreover, customers are sometimes a part of the system (e.g., self-service operations such as gas stations, shopping), so tight control is impossible. In addition, product-oriented operations can build up inventories of finished goods (e.g., cars, refrigerators), enabling them to absorb some of the shocks caused by varying demand. Service operations, however, cannot build up inventories of time and are much more sensitive to demand variability—banks and supermarkets alternate between lines of customers waiting for service and idle tellers or cashiers waiting for customers. Note: If a service system has little or no customer contact, it functions in much the same manner as a goods-producing operation.

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Service operations are subject to greater variability of inputs than typical manufacturing operations. Each patient, each client, each lawn, and each auto repair presents a specific problem that often must be diagnosed before it can be remedied. Manufacturing operations often have the ability to carefully control the amount of variability of inputs and thus achieve low variability in outputs. Consequently, job requirements for manufacturing are generally more uniform than those for services.
Many services involve a higher labor content than manufacturing operations.
Because high mechanization generates products with low variability, manufacturing tends to be smooth and efficient; service activities sometimes appear to be slow and awkward, and output is more variable. Automated services are an exception to this.
Measurement of productivity is more straightforward in manufacturing due to the high degree of uniformity of most manufactured items. In service operations, variations in demand intensity and in requirements from job to job make productivity measurement considerably more difficult. For example, compare the productivity of two doctors. One may have a large number of routine cases while the other does not, so their productivity appears to differ unless a very careful analysis is made.
In many instances customers receive the service as it is performed (e.g., haircut, dental care).
Quality assurance is more challenging in services when production and consumption occur at the same time. Moreover, the higher variability of input creates additional opportunity for the quality of output to suffer unless quality assurance is actively managed. Quality at the point of creation is typically more evident for services than for manufacturing, where errors can be corrected before the customer receives the output.
Due to the nature of manufacturing, manufacturing systems usually have more inventory on hand (e.g., raw materials, partially completed items, finished goods inventories) than service firms. Nonetheless, all business organizations carry at least some items in inventory that are necessary for the operation of their businesses (e.g., office supplies, spare parts for equipment). And some service organizations have substantial amounts of inventory (e.g., firms that supply replacement parts for automobiles, construction equipment, or farm equipment). Hence, in spite of differing inventory requirements, managers in both manufacturing and service organizations must make decisions concerning inventory (e.g., which items to stock, how much to stock, when to reorder).
Because goods are tangible and there is often a time interval between production and delivery, evaluation of output is less demanding than it is for services.
Product designs are often easier to patent than service designs, and some service designs cannot be patented, making it easier for competitors to copy them.

Service jobs are sometimes categorized as professional or nonprofessional. Wholesale/retail and personal services generally fall into the nonprofessional category. Often these jobs tend to be on the low end of the pay scale, whereas professional services (e.g., surgery, consulting) tend to be on the high end of the pay scale. Manufacturing jobs, on the other hand, don’t show this bimodal tendency, and few salaries fall in either the high or low range.

Note that many service activities are essential in goods-producing companies. These include training, human resource management, customer service, equipment repair, procurement, and administrative services.

A teller talks with a depositor at the newly launched Mizuho Bank headquarters in Tokyo. Customers continue to value personalized service, often even for routine financial transactions.

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AP Photo/Tsugufumi Matsumoto.

Table 1.3 gives an overview of the differences between production of goods and service operations. Remember, though, that most systems are a blend of goods and services.

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TABLE 1.3	Typical differences between goods and services

Discussion and Review Questions 1, 2, 6, 15

Critical Thinking Exercise

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Home > Chapter 1 > Introduction

	More Resources
		Glossary
	eBook
		Chapter Opener Introduction The Scope of Operation... Operations Management ... Why Study Operations M... The Historical Evoluti... Trends in Business Summary Selected Bibliography ... Taking Stock Discussion and Review ... Experiential Learning ... Key Terms Critical Thinking Exer...

	More Resources
		Glossary
	eBook
		Chapter Opener Introduction The Scope of Operation... Operations Management ... Why Study Operations M... The Historical Evoluti... Trends in Business Summary Selected Bibliography ... Taking Stock Discussion and Review ... Experiential Learning ... Key Terms Critical Thinking Exer...