Operations

Management
MGMT 3191

CHAPTER ONE
INTRODUCTION

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 What is Operations Management?
• Is responsible for the design, operation, and improvement of productive
systems that is responsible for producing goods and/or services.
• Operations is more than planning and controlling; it’s doing.
• Operations managers are found in banks, hospitals, factories, and gov’t
offices.
- They work with customers and suppliers, the latest technology, and global
partners.
• Operations management is responsible for orchestrating all the resources
needed to produce the final product
 What is operations?
– a function or system that transforms inputs into outputs of greater value.
– defined as transformation process.
• It is core business function whether an organization
 large or small,
 Provides a physical good or a service
 Domestic or International
 Profit or not-for-profit
 Three Major Functions
• Every business is managed through three major functions:
finance, marketing, and operations management.

• Operations is at the heart and all the other functions are support
functions
 Transformation Process
What is a transformation process?
– a series of activities along a value chain extending from supplier to
customer.
• activities that do not add value are superfluous and should be
eliminated
• OM tries to ensure that the transformation process is performed
efficiently and that the out put is of greater value than the sum of
inputs.
– Thus, the role of operations is value creation throughout the supply chain.
• Supply chain - a sequence of activities and organizations involved
in producing and delivering a good or service
Transformation Process can take the form of :
– Physical: as in manufacturing operations
– Locational: as in transportation operations
– Exchange: as in retail operations
– Physiological: as in health care
– Psychological: as in entertainment
– Informational: as in communication
Operations as a System

Requirements

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 Historical Milestones in OM
• The Industrial Revolution
• Post-Civil War Period
• Scientific Management
• Human Relations and Behaviorism
• Operations Research (1960’s and 70’s)
• The Service Revolution (1970’s and 80’s)
• Supply Chain Integration and Management
(1990’s)
• E-Commerce (late 1990’s)
• CR (early 2000)
 The Industrial Revolution
• The industrial revolution developed in England in the 1700s.
• The steam engine, invented by James Watt in 1764, largely replaced
human and water power for factories.
• Adam Smith’s The Wealth of Nations in 1776 touted the economic
benefits of the specialization of labor.
• Thus the late-1700s factories had not only machine power but also
ways of planning and controlling the tasks of workers.
• The industrial revolution spread from England to other European
countries and to the United Sates.
• In 1790 an American, Eli Whitney, developed the concept of
interchangeable parts.
• The first great industry in the US was the textile industry.
• In the 1800s the development of the gasoline engine and electricity
further advanced the revolution.
• By the mid-1800s, the old cottage system of production had been
replaced by the factory system.
• 1700s Cottage Industry.... Machine power for human power.... factory system
try.
• which resulted in greater productivity. 1790 Eli Whitney invented concept of
interchangeable parts. Forced consistent production of parts. Variation evil.
• 1865 -1900 Joint stock companies formed changing capital structure of
companies. Expansion into West created demand for products, development of
rail lines provided quick, cheap transportation of goods. Also influx of labor from
farm to urban centers.
• Early 1900s Frederick Taylor developed the concept of Shop System. Henry
Ford put concepts into practice with assembly lines that used modern scientific
management concepts: Standardized product design, mass production for low
manufacturing. costs, mechanized the lines, specialization of labor, and
interchangeable parts.
• 1927-32 Hawthorne studies at Western Electric plant demonstrated human
factors also impacted production.
• World War II required enormous quantities of supplies, people, etc. Operations
Research teams formed to develop models to manage the complex logistics.
Linear programming, PERT/CPM, forecasting developed/refined.
• Accelerated after WWII, 2/3’s workforce in service and 2/3’s GDP generated by
service indus 8
 Post-Civil War Period

• During the post-Civil War period great

expansion of production capacity occurred.
• By post-Civil War the following developments
set the stage for the great production explosion
of the 20th century:
– increased capital and production capacity
– the expanded urban workforce
– new Western US markets
– an effective national transportation system
 Scientific Management
• Frederick Taylor is known as the father of scientific management. His shop
system employed these steps:
– Each worker’s skill, strength, and learning ability were determined.
– Stopwatch studies were conducted to precisely set standard output per worker on
each task.
– Material specifications, work methods, and routing sequences were used to
organize the shop.
– Supervisors were carefully selected and trained.
– Incentive pay systems were initiated.
• In the 1920s, Ford Motor Company’s operation embodied the key elements of
scientific management:
– standardized product designs
– mass production
– low manufacturing costs
– mechanized assembly lines
– specialization of labor
– interchangeable parts
 Human Relations and Behaviorism

• In the 1927-1932 period, researchers in the

Hawthorne Studies realized that human factors
were affecting production.
• Researchers and managers alike were recognizing
that psychological and sociological factors affected
production.
• From the work of behaviorists came a gradual
change in the way managers thought about and
treated workers.
 Operations Research
• During World War II, enormous quantities of
resources (personnel, supplies, equipment, …) had to
be deployed.
• Military operations research (OR) teams were
formed to deal with the complexity of the
deployment.
• After the war, operations researchers found their
way back to universities, industry, government, and
consulting firms.
• OR helps operations managers make decisions when
problems are complex and wrong decisions are
costly.
 The Service Revolution
• The creation of services organizations accelerated sharply after
World War II.
• Today, more than two-thirds of the US workforce is employed in
services.
• About two-thirds of the US GDP is from services.
• There is a huge trade surplus in services.
• Investment per office worker now exceeds the investment per
factory worker.
• Thus there is a growing need for service operations
management.
• Jay heazer
• Chase and Aquilano
 The Computer Revolution
• Explosive growth of computer and communication technologies
• Easy access to information and the availability of more information
• Advances in software applications such as Enterprise Resource Planning
(ERP) software
• Widespread use of email
• More and more firms becoming involved in E-Business using the
Internet
• Faster, better decisions over greater distances
Today's Factors Affecting OM
Global Competition
Quality, Customer Service, and Cost Challenges
Rapid Expansion of Advanced Technologies
Continued Growth of the Service Sector
Scarcity of Operations Resources
Social-Responsibility Issues
 Manufacturing versus service operations
• Organizations can be classified in two broad categories as either
manufacturing or service.
• Manufacturing organizations produce physical, tangible items
which can be stored as inventory before delivery to the customer.
• Service organizations produce intangible items that cannot be
produced ahead of time.
• One of the key developments in operation management is the
increasing importance of service operations as service industry
accounts for an increasing proportion of the output of
industrialized economies.
• Manufacturing operations: converts input like materials, labor &
capital into some tangible outputs. The objective of each process
is to change the shape or physical characteristics of the raw-
materials or inputs
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 Cont…d

• Service operations: Non-manufacturing or service operations also

transform a set of inputs into a set of outputs, but the outputs are not
tangible. Features intangibility non inventor ability customer
involvement controlled flexibility.
• Intangibility is not tangible like the physical goods. It cannot be seen
physically, but it can be felt.
• Non-inventoried as opposed to physical goods services is not
inventoried, because a service is produced and consumed
simultaneously.
• In this sense a service does not exist, however the result of service
last for some time.
• Customer involvement besides the quality aspects, the storage of
services also means that the customer may be directly involved in
operations, where the production and consumption takes place
simultaneously. So the service and the service provider both are there
with the customer.
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 Cont…d
• Classifications of services: classifications of
services brings tangible actions to peoples
bodies: ex: hair cutting, restaurant, health care
etc. tangible actions to peoples goods: ex:
laundry, repairing centers, tailor etc. intangible
actions directed to peoples mind: ex: training,
information services, broadcasting etc. intangible
actions directed to peoples intangible assets: ex:
banking, insurance & accounting etc. based on
tangible & intangible nature of services.
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 Characteristics of Goods
 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer interaction
 Longer response time
 Capital intensive

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Characteristics of Service
 Intangible product
 Produced and consumed at same
time
 Often unique
 High customer interaction
 Inconsistent product definition
 Often knowledge-based
 Frequently dispersed
 Shorter response time
 Labor intensive

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Two major dimensions: Degree of tangibility & Degree of customer contact
 Goods Versus Services
Attributes of Goods Attributes of Services
(Tangible Product) (Intangible Product)
Can be resold Reselling unusual
Can be inventoried Difficult to inventory
Some aspects of quality Quality difficult to measure
measurable
Selling is distinct from Selling is part of service
production
Product is transportable Provider, not product, is
often transportable
Site of facility important for cost Site of facility important for
customer contact
Often easy to automate Often difficult to automate
Revenue generated primarily Revenue generated primarily
from tangible product from the intangible service

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 Similarities
• Despite many differences, there are a lot of similarities
between manufacturing & service operations.
• There is an interdependency of products & services, for ex:
customers want both good food as well as good service at a
restaurant.
• Again though service providers cannot inventoried their
outputs, but must have inventory of their inputs, for ex:
hospitals must maintain an adequate supply of medications,
nurses & doctors.
• While buying a car we not only buy a product but also a
guarantee. Hospital cares involves medication, bandages & x-
ray films & so on, so despite a lot of differences both product &
service are part of each other.

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 Cont…d

– Both  use technology 
– Both have quality, productivity, & response issues
– Both must forecast demand
– Both will have capacity, layout, and location issues
– Both have customers, suppliers, scheduling and
staffing issues
– Manufacturing often provides services
– Services often provides tangible goods

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 Operations Decision Making

 Decision making is analogous to a great stage play, in which all the

actors, the costumes, the music, the orchestra, and the script
must be choreographed and staged by the director, the stage
managers, the author, and the conductor so that everything
comes together for the performance.
The Decision Process in Operations
1. Clearly define the problems and the factors that influence it
2. Develop specific and measurable objectives
3. Develop a model
4. Evaluate each alternative solution
5. Select the best alternative
6. Implement the decision and set a timetable for completion

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 Decision analysis techniques

• Decision analysis is a generic technique that can be applied to a

number of different types of operational decision-making areas.
• Many decision-making situations occur under conditions of
uncertainty.
• For example, the demand for a product may not be 100 units
next week but may vary between 0 and 200 units, depending on
the state of the market, which is uncertain.
• Decision analysis is a set of quantitative decision-making
techniques to aid the decision maker in dealing with a decision
situation in which there is uncertainty.
• Decision analysis represents not only a collection of decision-
making techniques but also an analysis of logic underlying
decision making.
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 Decision-Making Environments
 Decision making under uncertainty
 Complete uncertainty as to which state of nature may occur
 Decision making under risk
 Several states of nature may occur
 Each has a probability of occurring
 Decision making under certainty
 State of nature is known
Decision analysis without probabilities/ uncertainty
 When probabilities cannot be assigned to the occurrence of future events,
the situation is called decision making under uncertainty.
 To facilitate the analysis of decision situations, they are organized into
payoff tables.
 A payoff table is a means of organizing and illustrating the payoffs from
the different decisions, given the various states of nature, and has the
general form shown in Table 1
 State of nature
Decisions a b
1 Payoff 1a Payoff 1b
2 Payoff 2a Payoff 2b

 Each decision, 1 or 2, in the table will result in an outcome, or

payoff, for each state of nature that will occur in the future.
 Payoffs are typically expressed in terms of profit, revenues, or cost
(although they may be expressed in terms of a variety of
quantities).
 Once the decision situation has been organized into a payoff table,
several criteria are available to reflect how the decision maker
arrives at a decision, including :
 maximax, maximin, minimax regret, Hurwitz, and equal likelihood.
 These criteria reflect different degrees of decision-maker
conservatism or liberalism. On occasion they result in the same
decision; however, they often yield different results. These decision-
making criteria are demonstrated by the following example. 27
 Example

• The Southern Textile Company is contemplating the future of one

of its plants located in South Carolina. Three alternative decisions
are being considered:
(1) Expand the plant and produce lightweight, durable materials for
possible sale to the military, a market with little foreign
competition;
(2) Maintain the status quo at the plant, continuing production of
textile goods that are subject to heavy foreign competition; or
(3) Sell the plant now.
• If one of the first two alternatives is chosen, the plant will still be
sold at the end of the year. The amount of profit that could be
earned by selling the plant in a year depends on foreign market
conditions, including the status of a trade embargo bill in Congress.
• The following payoff table describes this decision situation.

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 State of nature
Decision Good competitive condition Poor competitive condition
Expand $ 800,000 $ 500,000
Maintain status quo 1,300,000 -150,000
Sell now 320,000 320, 000
Determine the best decision using each of the decision criteria.
1.Maximax 2.Maximin3.Minimax regret 4.Hurwicz 5. Equal likelihood
1. Maximax
• The decision is selected that will result in the maximum of the
maximum payoffs. This is how this criterion derives its name—the
maximum of the maxima.
• The maximax criterion is very optimistic. The decision maker
assumes that the most favorable state of nature for each decision
alternative will occur.
• Thus, for this example, the company would optimistically assume
that good competitive conditions will prevail in the future,
resulting in the following maximum payoffs and decisions:
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 Expand: $800,000
Status quo: 1,300,000 ← Maximum
Sell: 320,000
• Decision: Maintain status quo
2. Maximin
• The maximin criterion is pessimistic. With the maximin criterion,
the decision maker selects the decision that will reflect the
maximum of the minimum payoffs.
• For each decision alternative, the decision maker assumes that the
minimum payoff will occur; of these, the maximum is selected as
follows:
Expand: $500,000 ← Maximum
Status quo: -150,000
Sell: 320,000
Decision: Expand
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3. Minimax Regret Criterion
• The decision maker attempts to avoid regret by selecting the decision
alternative that minimizes the maximum regret.
• A decision maker first selects the maximum payoff under each state of
nature; then all other payoffs under the respective states of nature are
subtracted from these amounts, as follows:
Good competitive conditions Poor competitive conditions
$1,300,000-800,000=500,000 500,000-500,000=0
1,300,000-1,300,000=0 500,000-(-150,000)=650,000
1,300,000-320,000=980,000 500,000-320,000=180,000
• These values represent the regret for each decision that would be experienced
by the decision maker if a decision were made that resulted in less than the
maximum payoff.
• The maximum regret for each decision must be determined, and the decision
corresponding to the minimum of these regret values is selected as follows:
Expand: $500,000 ← Minimum
Status quo: 650,000
Sell: 980,000 Decision: Expand 31
4. Hurwicz
• A compromise is made between the maximax and maximin criteria. The
decision maker is neither totally optimistic (as the maximax criterion
assumes) nor totally pessimistic (as the maximin criterion assumes).
• With the Hurwicz criterion, the decision payoffs are weighted by a
coefficient of optimism, a measure of the decision maker’s optimism.
• The coefficient of optimism, defined as α, is between 0 and 1 (i.e., 0 < α
<1). If α= 1, the decision maker is completely optimistic; if α = 0, the
decision maker is completely pessimistic.
• (Given this definition, 1 - α is the coefficient of pessimism.) For each
decision alternative, the maximum payoff is multiplied by α and the
minimum payoff is multiplied by 1 – α
• For our investment example, if α equals 0.3 (i.e., the company is slightly
optimistic) and 1 – α= 0.7, the following decision will result:
Expand: $800,000(0.3) + 500,000(0.7) =$590,000 ← Maximum
Status quo: 1,300,000(0.3) _ 150,000(0.7) = 285,000
Sell: 320,000(0.3) +320,000(0.7) = 320,000 Decision: Expand
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5. Equal Likelihood
• The equal likelihood criterion weights each state of nature
equally, thus assuming that the states of nature are equally likely
to occur. Since there are two states of nature in our example, we
assign a weight of 0.50 to each one. Next, we multiply these
weights by each payoff for each decision and select the alternative
with the maximum of these weighted values.
Expand: $800,000(0.50) + 500,000(0.50) = $650,000 ← Maximum
Status quo: 1,300,000(0.50) _ 150,000(0.50) = 575,000
Sell: 320,000(0.50) + 320,000(0.50) = 320,000
Decision: Expand
• The decision to expand the plant was designated most often by
four of the five decision criteria. The decision to sell was never
indicated by any criterion. This is because the payoffs for
expansion, under either set of future economic conditions, are
always better than the payoffs for selling.
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• Given any situation with these two alternatives, the decision to
expand will always be made over the decision to sell. The sell
decision alternative could have been eliminated from
consideration under each of our criteria. The alternative of
selling is said to be dominated by the alternative of expanding.
In general, dominated decision alternatives can be removed
from the payoff table and not considered when the various
decision-making criteria are applied, which reduces the
complexity of the decision analysis.
• Different decision criteria often result in a mix of decisions. The
criteria used and the resulting decisions depend on the decision
maker. For example, the extremely optimistic decision maker
might disregard the preceding results and make the decision to
maintain the status quo, because the maximax criterion reflects
his or her personal decision-making philosophy.
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 Decision making with probabilities/ under risk
• When probabilities can be assigned to the occurrence of states of
nature in the future, the situation is referred to as decision
making under risk.
• This happens when it is possible for the decision maker to know
enough about the future states of nature to assign probabilities
that each will occur.
• The most widely used decision-making criterion under risk is
expected value, computed by multiplying each outcome by the
probability of its occurrence and then summing these products
according to the following formula:
EV(x) = 
• Where
p (xi) = probability of outcome i
Xi = outcome i
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• Assume that it is now possible for the Southern Textile
Company to estimate a probability of 0.70 that good foreign
competitive conditions will exist and a probability of 0.30
that poor conditions will exist in the future. Determine the
best decision using expected value.
Solution
• The expected values for each decision alternative are
computed as follows.
EV (expand) =$800,000(0.70) + 500,000(0.30) = $710,000
EV (status quo) = 1,300,000(0.70) _ 150,000(0.30) =865,000 ←
Maximum
EV (sell) = 320,000(0.70) +320,000(0.30) = 320,000
• The decision according to this criterion is to maintain the
status quo, since it has the highest expected value.
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 Using Decision Trees for Decision Making
 A decision tree is a graphic display of the decision process that
indicates decision alternatives, states of nature and their respective
probabilities, and payoffs for each combination of decision alternative
and state of nature
 Information in decision tables can be displayed as decision trees
 Appropriate for showing sequential decisions
Fundamentals of Decision Making
1. Terms:
a. Alternative – a course of action or strategy that may be chosen by
the decision maker
b. State of nature – an occurrence or a situation over which the
decision maker has little or no control
2. Symbols used in a decision tree:
a. – decision node from which one of several alternatives may be
selected
b. – a state-of-nature node out of which one state of nature will
occur
 Decision Tree Example

A decision node A state of nature node

Favorable market

ru ct Unfavorable market
on st lant
C ep
larg Favorable market
Construct
small plant

Do Unfavorable market
no
thi
ng
 Steps in Decision Trees
1. Define the problem
2. Structure or draw the decision tree
3. Assign probabilities to the states of nature
4. Estimate payoffs for each possible combination of
decision alternatives and states of nature
5. Solve the problem by working backward through
the tree computing the EMV for each state-of-
nature node
 Decision Tree Example
EMV for node 1
= $710,000 = (.7)($800,000) + (.3)($500,000)

Payoffs
Favorable market (.7)
$800,000
1
Unfavorable market (.3)
x pan d EMV for node 2 Favorable market (.7)
$500,000
e
= $865,000 $1,300,000
Status = (.7)($1,300,000) + (.3)(-$150,000)
2
Unfavorable market (.3)
quo -$150,000
se Favorable market (.7)
ll $320,000
3
Unfavorable market (.3)
$320,000
EMV for node 3 = (.7)($320,000)+(.3)($320,000)
= $320,000
Complex
Decision
Tree
Example
Decision Trees in Ethical Decision
Making

 Maximize shareholder value and behave

ethically
 Technique can be applied to any action a
company contemplates
Decision Trees in Ethical Decision
Making
Action outcome
Yes Do it
Is it ethical? (Weigh the
affect on employees,
customers, suppliers,
Yes community verses
shareholder benefit) No Don’t
Does action do it
maximize
Yes company
returns? Don’t do
Is this Yes
action Is it ethical not to take it
legal? No action? (Weigh the harm to
shareholders verses
benefits to other Do it,
No but notify
stakeholders) No appropriate
parties

Don’t do
it
Exercise on Decision Making Under Risk
States of Nature
Favorable Unfavorable
Alternatives Market Market
Construct large plant (A1) $200,000 -$180,000
Construct small plant (A2) $100,000 -$90,000
Do nothing (A3) $0 $0
Probabilities 0.2 0.8

1.Find the expected monetary value for this question

and make a decision.
2. Find the expected monetary value for this question
and make a decision.(using decision trees method