Operations Management Module 1

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Learning Unit 1: Operations Management and Value Chains

1.1 Operations Management

Creating and delivering goods and services to customers depends on an effective system of
linked facilities and processes, and the ability to manage them effectively around the world.

For example: Apple, manages a large, global network of suppliers in coutries such as Malaysia
and Indonesia, and factories in the United States, China, and other countries to produce its
physical goods, which must be coordinated with the development and production of software
and other digital content, retail sales, and service and support.

Operations management (OM) is the science and art of ensuring that goods and services,
and the processes that create them; the day-to-day management of those processes; and the
continual improvement of these goods, services, and processes.

REMEMBER!
The way in which goods and services, and the processes that create and support them, are
designed and managed can make the difference between a delightful or an unhappy customer
experience. That is OM is all about! Operations management is the only function by which
managers can directly affect the value provided to all stakeholders- customers, employees,
investors, and society.

1.2 OM in the Workplace

Many people who are considered “operations manager” have titles such as chief operating
officer, hotel or restaurant manager, vice president of manufacturing, customer service
manager, plant manager, field service manager. The concepts and methods of OM can be
used in any job, regardless of the functional area of business or industry, to better create
value for internal customers (within the organization) and for external customer (outside the
organization). OM principles are used in accounting, human resource management, legal
work, financial activities, marketing, environmental management, and every type of service
activity.

Example:
After graduating from college, Shelly Decker and her sister embarked on an entrepreneurial
venture to manufacture and sell natural soaps and body products. Shelly was an accounting
and information system major in college, but she was using OM skills everyday:

• Process design: When a new product was to be introduced, the best way to produce
it had to be determined. This involved charting the detailed steps needed to make
the product.
• Inventory management: Inventory was tightly controlled to keep cost down and to
avoid production that wasn’t needed. Inventory was taken every four weeks and
adjusted in the inventory management system accordingly.
• Scheduling: Production schedules were created to ensure that enough product was
available for both retail and wholesale customers, taking into account such factors
as current inventory and soap production capacity.
• Quality management: Each product was inspected and had to conform to the highest
quality standards. If a product did not conform to standards (e.g., wrong color,
improper packaging, improper labeling, improper weight, size, or shape), it was
removed from inventory to determine where the process broke down and to initiate
corrective action.

Without an understanding of OM, the company would never have gotten off the ground!

1.3 Understanding Goods and Services

Companies design, produce, and deliver a wide variety of goods and services that
consumers purchase. A good is a physical product that you can see, touch, or possibly
consume. Examples of goods include cellphones, appliances, food, flowers, soap,
airplanes, furniture, coal, lumber, personal computers, paper, and industrial machines. A
durable good is one that does not quickly wear out and typically lasts at least three years.
A nondurable good is one that is no longer useful once it’s used, or lasts for less than
three years.
A service is any primary or complementary activity that does not directly produced a physical
product. Service represent the nongoods part of a tansaction between a buyer (customer)
and seller (supplier). Service-providing firms are found in industries such as banking.
lodging, education, healthcare, and government.

Goods and services share many similarities.

1. Goods are tangible, whereas services are intangible.

2. Customer participate in many service processes, activities, and transactions.

3. The demand for services is more difficult to predict than the demand for goods.

4. Services cannot be stored as physical inventory.

5. Service management skills are paramount to a successful service encounter.

6. Service facilities typically need to be in close proximity to the customer.

7. Patents do not protect services.

1.4 The Concept of Value

Value is the perception of the benefits associated with a good, service, or bundle of goods
and services in relation to what buyers are willing to pay for them. The decision to purchase
a good or service or a customer benefit package is based on an assessment by the
customer of the perceived benefits in relation to its price.

Perceived benefits

Value =

Price (cost) to the customer


1.5 Customer Benefit Packages

“Bundling” goods, services, and digital content in a certain way to provide value to
customers not only enhances what customers receive, but can also differentiate the product
from competitors. Such a bundle is often called a customer benefit package.

A customer benefit package (CBP) is a clearly defined set of tangible (goodscontent) and
intangible (service-content) features that the customer recognizes, pays for, uses, or
experiences. The CBP is a way to conceptualize and visualize goods and services by
thinking broadly about how goods and services are bundled and configured together.

1.6 Value Chains

A value chain is a network of facilities and processes that describes the flow of materials,
finished goods, services, information, and financial transactions from suppliers, through the
facilities and processes that create goods and services, and those that deliver them to the
customer. Value chains involve all major functions in an organization. This includes not
only operations but also purchasing, marketing and sales, human resource management,
finance and accounting, information systems and technology, distribution, and service and
support. A supply chain is the portion of the value that focuses primarily on the physical
movement of goods and materials, and supporting flows of information and financial
transactions through the supply, production, and distribution processes.

1-6a Processes

Key processes in business typically include;

1. Core processes focused on producing or delivering an organization’s primary goods


or services that create value for customers, such as filling and shipping a customer’s order,
assembling a dishwasher, or providing a home mortgage.

2. Support processes such as purchasing materials and supplies used in


manufacturing managing inventory, installation, health benefits, technology acquisition, day
care onsite services, and research and development.
3. General management processes, including accounting and information systems,
human resource management, and marketing.

It is important to realize that nearly every major activity within an organization involves a
processes that crosses traditional organizational boundaries. For example, an order
fulfillment process might involve a sales-person placing the order; a marketing
representative entering it on the company’s computer system; a credit check by finance;
picking, packaging, and shipping by distribution and logistics personnel: invoicing by
finance; and installation by field service engineers. Thus, a process does not necessarily
reside within a department or traditional management function.

1-7 Key Challenges

OM is continually changing, and all managers need to stay abreast of the challenges that
will define the future workplace. Here are some issues facing contemporary OM:

• Customers. • Optimizing
• Technology
• Supply Chain
• Workforce
• Globalization
• Sustainability

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