Operations management is a multi-disciplinary field that focuses on managing all aspects of an organization's operations. The typical company carries out various functions as a part of its operation. The dividing of a company's activities into functional categories occurs very early on, even in a company formed and operated by a single individual. Most companies make a product of some kind or produce a salable service. They must also carry out a sales and marketing function, an accounting function, and an administrative function to manage employees and the business as a whole. Operations management focuses on the function of providing the product or service. Their job is to assure the production of a quality good and/or service. They apply ideas and technologies to increase productivity and reduce costs, improve flexibility to meet rapidly changing customer needs, assure a safe workplace for all employees, and when possible assist in assuring high-quality customer service.
For the most part, the title "Operations Manager" is used in companies that produce a tangible good—manufacturers on the whole. In service-oriented businesses, the person responsible for the operations manager role is often called by another name, one that addresses the service being offered. Examples include project manager, consultant, lawyer, accountant, office manager, datacenter manager, etc.
KEY ISSUES IN OPERATIONS
As an organization develops plans and strategies to deal with the opportunities and challenges that arise in its particular operating environment, it should design a system that is capable of producing quality services and goods in the quantities demanded and in the time frames necessary to meet the businesses obligations.
Designing the System
Designing the system begins with product development. Product development involves determining the characteristics and features of the product or service to be sold. It should begin with an assessment of customer needs and eventually grow into a detailed product design. The facilities and equipment used in production, as well as the information systems needed to monitor and control performance, are all a part of this system design process. In fact, manufacturing process decisions are integral to the ultimate success or failure of the system. Of all the structural decisions that the operations manager makes, the one likely to have the greatest impact on the operation's success is choice of the process technology. This decision answers the basic question: How will the product be made?
Product design is a critical task because it helps to determine the characteristics and features of the product, as well as how the product functions. Product design determines a product's cost and quality, as well as its features and performance. These are important factors on which customers make purchasing decisions. In recent years, new design models such as Design for Manufacturing and Assembly (DFMA) have been implemented to improve product quality and lower costs. DFMA focuses on operating issues during product design. This can be critical even though design costs are a small part of the total cost of a product, because, procedures that waste raw materials or duplicate effort can have a substantial negative impact on a business's operating profitability. Another innovation similar to DFMA in its emphasis on design is Quality Functional Deployment (QFD). QFD is a set of planning and communication routines that are used to improve product design by focusing design efforts on customer needs.
Process design describes how the product will be made. The process design decision has two major components: a technical (or engineering) component and a scale economy (or business) component. The technical component includes selecting equipment and selecting a sequence for various phases of operational production.
The scale economy or business component involves applying the proper amount of mechanization (tools and equipment) to make the organization's work force more productive. This includes determining: 1) If the demand for a product is large enough to justify mass production; 2) If there is sufficient variety in customer demand so that flexible production systems are required; and 3) If demand for a product is so small or seasonal that it cannot support a dedicated production facility.
Facility design involves determining the capacity, location, and layout for the production facility. Capacity is a measure of an company's ability to provide the demanded product in the quantity requested by the customer in a timely manner. Capacity planning involves estimating demand, determining the capacity of facilities, and deciding how to change the organization's capacity to respond to demand.
Facility location is the placement of a facility with respect to its customers and suppliers. Facility location is a strategic decision because it is a long-term commitment of resources that cannot easily or inexpensively be changed. When evaluating a location, management should consider customer convenience, initial investment necessary to secure land and facilities, government incentives, and operating transportation costs. In addition, qualitative factors such as quality of life for employees, transportation infrastructure, and labor environment should also be taken under consideration.
Facility layout is the arrangement of the workspace within a facility. It considers which departments or work areas should be adjacent to one another so that the flow of product, information, and people can move quickly and efficiently through the production system.
Once a product is developed and the manufacturing system is designed, it must be implemented, a task often more easily discussed than carried out. IF the system design function was done thoroughly, it will have rendered an implementation plan which will guide activities during implementation. Nonetheless, there will inevitably be changes needed. Decisions will have to be made throughout this implementation period about tradeoffs. For example, the cost of the originally planned conveyor belt may have risen. This change will make it necessary to consider changing the specified conveyor belt for another model. This, of course, will impact upon other systems linked to the conveyor belt and the full implications of all these changes will have to be assessed and compared to the cost of the price increase on the original conveyor belt.
Planning and Forecasting
Running an efficient production system requires a great deal of planning. Long-range decisions could include the number of facilities required to meet customer needs or studying how technological change might affect the methods used to produce services and goods. The time horizon for long-term planning varies with the industry and is dependent on both complexity and size of proposed changes. Typically, however, long-term planning may involve determining work force size, developing training programs, working with suppliers to improve product quality and improve delivery systems, and determining the amount of material to order on an aggregate basis. Short-term scheduling, on the other hand, is concerned with production planning for specific job orders (who will do the work, what equipment will be used, which materials will be consumed, when the work will begin and end, and what mode of transportation will be used to deliver the product when the order is completed).
Managing the System
Managing the system involves working with people to encourage participation and improve organizational performance. Participative management and teamwork are an essential part of successful operations, as are leadership, training, and culture. In addition, material management and quality are two key areas of concern.
Material management includes decisions regarding the procurement, control, handling, storage, and distribution of materials. Material management is becoming more important because, in many organizations, the costs of purchased materials comprise more than 50 percent of the total production cost. Questions regarding quantities and timing of material orders need to be addressed here as well when companies weigh the qualities of various suppliers.
BUILDING SUCCESS WITH OPERATIONS
To understand operations and how they contribute to the success of an organization, it is important to understand the strategic nature of operations, the value-added nature of operations, the impact technology can have on performance, and the globally competitive marketplace.
Efficient organization operations are a vital tool in achieving competitive advantage in the daily contest for customers/clients. What factors influence buying decisions for these entities? For most services and goods, price, quality, product performance and features, product variety, and availability of the product are critical. All these factors are substantially influenced by actions taken in operations. For example, when productivity increases, product costs decline and product price can be reduced. Similarly, as better production methods are developed, quality and variety may increase.
By linking operations and operating strategies with the overall strategy of the organization (including engineering, financial, marketing, and information system strategy) synergy can result. Operations become a positive factor when facilities, equipment, and employee training are viewed as a means to achieve organizational objectives, rather than as narrowly focused departmental objectives. In recognition of this evolving viewpoint, the criteria for judging operations are changing from cost control (a narrowly defined operating objective) to global performance measurements in such areas as product performance and variety, product quality, delivery time, customer service, and operational flexibility.
In today's business environment, a key component of operational flexibility in many industries is technological knowledge. Advances in technology make it possible to build better products using fewer resources. As technology fundamentally changes a product, its performance and quality often increases dramatically, making it a more highly valued commodity in the marketplace. But the growth in high-tech business applications has created new competitors as well, making it important for businesses to try to register advantages in any and all areas of operations management.
Over time, operations management has grown in scope and increased in importance. Today, it has elements that are strategic, it relies on behavioral and engineering concepts, and it utilizes management science/operations research tools and techniques for systematic decision-making and problem-solving. As operations management continues to develop, it will increasingly interact with other functional areas within the organization to develop integrated answers to complex interdisciplinary problems. Indeed, such interaction is widely regarded as essential to long-term business success for small business establishments and multinational corporations alike.
Dyson, Robert G. "Strategy, Performance and Operational Research." Journal of the Operational Research Society. January 2000.
Lester, Tom. "Why Manufacturers Must Take Advantage of Design Counsel Co-operation Between Managers and Designers Holds the Key to the Success of a Product and Even of the Company Behind It." The Financial Times. 27 February 2006.
Magnuson Coe, Thomas. Electronic Supply Chain Collaboration for Small Job Shop Manufacturers. Universal Publishers, March 2005.
Nie, Winter. "Waiting: Integrating Social and Psychological Perspectives in Operations Management." Omega. December 2000.
Ruffini, Frans A. J., Harry Boer, and Maarten J. Van Riemsdijk. "Organization Design in Operations Management." International Journal of Operations and Production Management. July 2000.
Sharma, Anand, and Patricia E. Moody. The Perfect Engine: Driving Manufacturing Breakthroughs with the Global Production System. Simon and Schuster, 2001.
Thrun, Walter. Maximizing Profit: How to Measure the Financial Impact of Manufacturing Decisions. Productivity Press, October 2002.
Hillstrom, Northern Lights
updated by Magee, ECDI
"Operations Management." Encyclopedia of Small Business. . Encyclopedia.com. (September 23, 2018). http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/operations-management
"Operations Management." Encyclopedia of Small Business. . Retrieved September 23, 2018 from Encyclopedia.com: http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/operations-management
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An important element of any business system is management, whether an individual or a team performs it. In American society, we no longer think of company management in terms of one person acting as the entrepreneur, but rather as a team effort. Each member possesses specialized knowledge and understanding of one functional area of the business system and is by temperament and training able to work cooperatively with other members of the team toward a common goal.
Whatever the system or organization, the functions of management are always the same: (1) designing, (2) planning, (3) organizing, (4) directing, and (5) controlling. Management establishes the goals and objectives of the firm or organization and plans how to attain them. It is management that organizes the system and directs it so that its goals can be reached. Finally, management must be able to analyze the working of the system in order to control it and to correct any variations from the planned procedures in order to reach the predetermined goals. These functions interact with one another and managers must be skilled in these coordinating processes and functions if they are to accomplish their goals through the efforts of other people.
The concepts of managerial functions has some hidden difficulties when one attempts to apply them to a specific managerial job. First, one cannot tell which functions are most important and how much time must be allocated to each. All functions are important parts of a manager's job, but the significance attached to each one may vary at different times, such as at different stages of a product life cycle. Furthermore, the significance of each function varies at different management levels in the same organization. Operations management, for example, is more focused on directing and controlling than on planning or organizing.
All organizations have operations. Operation management, or technical management, is comprised of department managers and persons with professional technical competence. This level is oriented downward to basic operations, such as producing goods and moving them out the door. A manufacturing company may conduct operation in a mill or factory. The driving force in operations management must be an overriding goal of continually improving service to customers, where customer means the next process as well as the final external user. Since there is an operations element in every function of the enterprise, all people in all jobs in every department of the organization should work together for the improvement of their own operations management elements. It is important to note that the technical expert often seeks recognition from peers and colleagues rather than from managers at the administrative level.
The input of a system depends on its specific objective. What raw materials will yield the desired output? If one were to visually illustrate a system, the input would be shown as the components vital to it. A television repairperson needs a diagram of a TV set in order to repair it, or an auditor might need a flowchart of a company's accounting system to check for possible diversion of funds. If a system is designed to maintain a state, the input is information or feedback concerning the essential variable that must be maintained. If the purpose of a system is to make a decision, the input is relevant information about the problem. In a production system, the input consists of raw material, labor, and other manufacturing costs that are combined in the final product.
After input is established, it is necessary to transform it into a desirable output. In business, the transformation operation is extremely important. Manufacturing, marketing, and distribution must be studied and known in detail. However, there are some areas in which little is known. In a business system, for example, one must consider the way people act and react. Often behavior is placed in this gray area because so little is known about what motivates it. Also, for some people in an organization it may not matter how something works, while others may be vitally interested. A manager may not care how a report gets to him or her, but an accountant would be concerned with all the steps in gathering data, preparing the report, and communicating it to the manager. Thus, in studying any transformation operation, it is important to know the reliability of the process and who is interested in it. This system will vary depending on the output.
In one sense, output is the quality and quantity of the services and goods produced. In another sense, output may be thought of as the payments made for all the factors of production used. In the first sense, the entire system of the firm is designed to produce something that is desired in a market. Consumers want and seek out goods and services that will make their lives happier, more comfortable, healthier, longer, and so on. In order to produce those goods and services, the firm needs inputs. What may be output for one business may be input for another.
In the second sense, output is converted into revenue for the firm that is used to compensate the owners for the risks they have taken, management for its role in producing the revenue, and employees for their role in producing the good or service. It is also used to pay interest for the use of borrowed capital and wages for labor. Rent must be paid for the use of land; goods and materials used in production must be paid for; and taxes must be paid to the government. The output is the result of the system and is closely related to its objective. Output will accomplish or help to accomplish the specific objective if the system has been designed correctly.
All systems should include feedback. When an input is received in the system and undergoes a transformation operation, the result or output is then monitored and transmitted for comparison with a standard. If there is variation between the output and the standard, suitable action can be taken to correct the variation.
A business organization with many systems that range from very simple to very complex requires a much more complicated feedback network. Information must be communicated from person to person and from one part of the organization to another. In fact, the original data may be transformed many times before it reaches its final destination. Each of these transformations is subject to feedback.
Feedback can be defined as knowledge of results. Three basic types of feedback are needed: informational feedback, corrective feedback, and reinforcing feedback. The flow of information in an organization should be two-way from managers to workers as well as vice versa. In contrast to informational feedback, corrective feedback is evaluative and judgmental. An effective manager will not only point out mistakes but also get the individual worker headed in the right direction by means of corrective feedback. Positive consequences or reinforcements are one key to desired performance. In other words, reinforcing feedback is a prime means of achieving growth in job performance.
Products can be classified in many ways and their distribution can take many forms. However, the essence of production management is that the factors of production—land, labor, and capital—are transformed by management from raw materials into something finished, something to be used, or something to be sold profitably in order to keep the business in operation.
Before production can be started, the firm must determine what kind of product it can profitably produce. Management must decide what markets the product will satisfy, what materials it will contain, what processes will be required to form it, by what means it can be transported, and what quality and quantity of labor will be needed to produce it. Knowledge of all this provides direction to the planning and organization of manufacturing.
Once the firm has decided on the basic product or service to produce, design and development can begin. Planning the product involves all parts of the business system. The marketing department may discover the need for a new or improved product, and the production department may then determine whether it can manufacture the product for sale at a given price. The finance department then decides whether the venture will be profitable and whether financing is available to cover the costs of development, manufacturing, and distribution. Such product planning determines whether development and design will go forward.
The process of refining a product to a finished form sheds further light on the problems of manufacture: the equipment, raw materials, and fabricated parts that will be required, as well as the flow of production. Planning for production actually starts as soon as the decision is made to develop and design a product.
Production management makes suggestions for manufacturing that will save time, effort, and money without impairing the design of the product. Production management is very complex. Decisions must be made about labors, money, machinery, and materials. Inventories of parts must be maintained, and proper machinery and equipment must be combined with labor. All these activities, although performed within the production system, must be closely coordinated with the overall system of the firm.
Production managers are involved in many diverse areas. They are concerned with all the peripheral aspects of production and must be able to manage workers, materials, and machines in a changing environment.
Why is productivity so important? The basic reason is that productivity is a measure of the efficiency with which a person, business, or entire economy produces goods and services. It is a key indicator of a nation's economic strength. In general, the concept of productivity refers to a comparison of the output of a production process with one or more of its inputs. Thus, productivity may mean different things in different situations.
Manufacturing is simply a special form of production by which raw and semifinished materials are processed and converted into finished products needed by consumers. In a broader and more basic sense, production is the transformation of inputs from human and physical resources into outputs desired by consumers. These outputs may be either goods or services. The production of services is often called operations management.
At the beginning of the twenty-first century, production and corporate management are becoming recommitted to one of the basics of business: making a better product faster and cheaper. This effort is important because the great bulk of assets used in manufacturing companies, including capital invested, people employed, and management time, are allotted to the production function of the business rather than to marketing or finance. This situation is also true in service firms.
The organization for manufacturing depends on the complexity of the products manufactured and the size of the company. In a large company the manufacturing organization has divisions such as engineering, production control, inspection, and purchasing. The success of a product depends on the proper development and management of the product.
Management is universal. When more than one person is concerned with a goal, there is need for a process by which this goal can be attained. Management is active in every part of business and at every level. Its functions are performed in every department and in every function of the business. The practice of operations management is a continuous process of problem solving and decision making. The functions of management are based on the ability to make decisions and then to carry out all the implications of those decisions.
see also Productivity
Kusiak, Andrew (1999). Engineering Design: Products, Processes, and Systems. San Diego: Academic Press.
Moody, Patricia E. (1999). The Technology Machine: How Manufacturing Will Work in the Year 2020. New York: Free Press.
Williams, Blair R. (1996). Manufacturing for Survival: The Howto Guide for Practitioners and Managers. Reading, MA: Addison-Wesley.
"Operations Management." Encyclopedia of Business and Finance, 2nd ed.. . Encyclopedia.com. (September 23, 2018). http://www.encyclopedia.com/finance/finance-and-accounting-magazines/operations-management
"Operations Management." Encyclopedia of Business and Finance, 2nd ed.. . Retrieved September 23, 2018 from Encyclopedia.com: http://www.encyclopedia.com/finance/finance-and-accounting-magazines/operations-management
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Operations management is the planning, scheduling, and control of the activities that transform inputs (raw materials and labor) into outputs (finished goods and services). Along with marketing and finance, it is one of the three main areas of any business. Operations management is also an academic field of study that focuses on the effective planning, scheduling, use, and control of a manufacturing or service firm and their operations. Operations management is concerned with the efficiency and effectiveness of a firm's operation in support and development of the firm's strategic goals. Other areas of concern to operations management include the design and operations of systems to provide goods and services.
Operations management is a broad framework that includes a set of recognized and well-developed concepts, tools, and techniques. While the term operations management conjures up views of manufacturing environments, many of these concepts have been applied in service settings, with some of them actually developed specifically for service organizations. The field is a synthesis of concepts derived from design and industrial engineering, management information systems, quality, production, and inventory management, accounting, and other functions.
HISTORY OF OPERATIONS MANAGEMENT
During the early Industrial Revolution, manufacturing was often more of an art than a science. This changed with the development of Frederick W. Taylor's method of scientific management and Henry Ford's moving assembly line. These innovations brought the world into an age where management was predominantly centered on the production of goods. In the late 1950s and early 1960s scholars moved from writing about industrial engineering and operations research into writing about production management. Production management had itself become a professional field as well as an academic discipline. As the U.S. economy evolved into a service economy and operations techniques began to be incorporated into
services, the term production/operations management came into use. Today, services are such a pervasive part of our life that the term operations management is used almost exclusively.
The field of operations management has been gaining increased recognition over the last two decades. One major reason for this is public awareness of the success of Japanese manufacturers and the perception that the quality of many Japanese products is superior to that of American manufacturers. As a result, many businesses have come to realize that the operations function is just as important to their firm as finance and marketing. In concert with this, firms now realize that in order to compete effectively in the global market, they must have an operations strategy to support the mission of the firm and its overall corporate strategy.
Another reason for greater awareness of operations management is the increased application of operations management concepts and techniques to service operations. Finally, operations management concepts are being applied to other functional areas such as marketing and human resources. The term marketing/operations interface is often used in twenty-first century management discussions.
WHAT OPERATIONS MANAGERS DO
While operations management may sound like it focuses solely on the mechanics of production, operations managers must actually answer questions on three different levels: the strategic level, the tactical level, and the operational level.
Strategic Level . At the strategic level (long term), operations managers are responsible for or associated with making decisions in four key areas:
- Product development—what shall we make?
- Process and layout decisions—how shall we make it?
- Site location—where will we make it?
- Capacity—how much do we need?
Tactical Level . At the tactical level (intermediate term), operations management addresses the issues relevant to efficiently scheduling material and labor within the constraints of the firm's strategy and making aggregate planning decisions. Operations managers have a hand in deciding employee levels (How many workers do we need and when do we need them?), inventory levels (When should we have materials delivered and should we use a chase strategy or a level strategy?), and capacity (How many shifts do we need and do we need to work overtime or subcontract some work?).
Operational Level . At the operational level, operations management is concerned with lower-level (daily/weekly/monthly) planning and control. Operations managers and their subordinates must make decisions regarding scheduling (What should we process and when should we process it?), sequencing (In what sequence should we process the orders?), loading (What order do we put an item on what machine?), and work assignments (To whom do we assign individual machines or processes?).
A MULTI-FACETED FIELD
Originally, operations managers required only knowledge about productive processes. Today's operations managers must not only have knowledge of advanced operations technology and technical knowledge relevant to their industry, they must also possess interpersonal skills as well as know about other functional areas within the firm. Operations managers must have the ability to manage projects, work on multidisciplinary teams, communicate effectively, and motivate other people. The authors of Managing Business Process Flows (2008) describe the scope of operations management as encompassing these multi-disciplinary areas:
- Supply Chains—management of all aspects of providing goods to a consumer from extraction of raw materials to end-of-life disposal.
- Operations Management/Marketing Interface—determining what customers value prior to product development.
- Operations Management/Finance Interface—capital equipment and inventories comprise a sizable portion of many firms' assets.
- Service Operations—coping with inherent service characteristics such as simultaneous delivery/consumption, performance measurements, etc.
- Operations Strategy—consistent and aligned with firm's other functional strategies.
- Process Design and Improvements—managing the innovation process.
The authors of Fundamentals of Operations Management suggested that the following issues are the major issues for operations management today:
- Reducing the development and manufacturing time for new goods and services
- Achieving and sustaining high quality while controlling cost
- Integrating new technologies and control systems into existing processes
- Obtaining, training, and keeping qualified workers and managers
- Working effectively with other functions of the business to accomplish the goals of the firm
- Integrating production and service activities at multiple sites in decentralized organizations
- Working effectively with suppliers at being user-friendly for customers
- Working effectively with new partners formed by strategic alliances
All of the areas encompassed by operations management are critical to any firm no matter the industry or sector. No longer is operations management considered subservient to marketing and finance; rather, it is a legitimate functional area within most organizations. Also, operations management can no longer focus on isolated tasks and processes but must be one of the architects of the firm's overall business model. The importance of these concerns can be seen in the rise and popularity of various operations doctrines, from Six Sigma and lean manufacturing to total quality management.
SEE ALSO Lean Manufacturing and Just-in-Time Production; Management Functions; Operations Strategy; Product Design; Production Planning and Scheduling; Product-Process Matrix; Service Operations; Supply Chain Management
Anupindi, Ravi, Sunil Chopra, Sudhakar D. Deshmukh, Jan A. Van Mieghem, and Eitan Zemel. Managing Business Process Flows: Principles of Operations Management. 2nd ed. Upper Saddle River, NJ: Pearson Prentice Hall, 2008.
Davis, Mark M., Nicholas J. Aquilano, and Richard B. Chase. Fundamentals of Operations Management. 4th ed. Boston: Irwin McGraw-Hill, 2003.
Finch, Byron. Operations Now. 2nd ed., Boston: McGraw-Hill Irwin, 2006.
Heizer, Jay, and Barry Render. Principles of Operations Management. 7th ed. Upper Saddle River, NJ: Prentice Hall, 2007.
Rainbird, Mark. “A Framework for Operations Management: The Value Chain.” International Journal of Operations and Production Management 34, no. 3/4 (2004): 337–345.
Raturi, Amitabh, and James R. Evans. Principles of Operations Management. Mason, OH: Thomson Southwestern, 2005.
"Operations Management." Encyclopedia of Management. . Encyclopedia.com. (September 23, 2018). http://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/operations-management
"Operations Management." Encyclopedia of Management. . Retrieved September 23, 2018 from Encyclopedia.com: http://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/operations-management