Operations Management Management > Operations Management

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1 RESEARCH STARTERS ACADEMIC TOPIC OVERVIEWS Management > Table of Contents Abstract Keywords Overview Applications Terms & Concepts Bibliography Suggested Reading Abstract Operations management comprises those areas of management that are concerned with the productivity, quality, and cost in the operations function as well as strategic planning for the organization. This discipline covers not only manufacturing processes, but support processes that add value to the product or service as well as the management of the entire supply chain. There are a number of ways that organizations can streamline their operations to meet the demands of today s marketplace. However, for these to have any significant or lasting effect, they must be done within a coordinated strategy for both short and long-term organizational effectiveness. There are a number of tools and techniques that can be used by managers to improve the effectiveness and efficiency of business operations. These include lean manufacturing, total quality management, and business process reengineering strives to improve the effectiveness and efficiency of the various processes within an organization. Overview Business organizations exist to provide something of value to their stakeholders. For stockholders, this may mean profitability and return on investment. For employees, this may mean job security and a wage that is at or above industry standards. For distributors and suppliers, this may mean sufficient commerce to keep their own operations going. To meet these disparate objectives, organizations need to be able to offer a product or service of value to the customer, whether it is light-weight running shoes, steel rivets, or consulting services. Operations management comprises those areas of management that are concerned with productivity, quality, and cost in the operations function (i.e., activities necessary to transform inputs such as business transactions and information into outputs such as completed transactions) as well as strategic planning for the organization. Business operations include any processes that transform any inputs such as labor, capital, materials, and energy into products and services that are of value in the marketplace. Operations management draws from multiple disciplines in order to optimize the effectiveness of operations within the organization. Operations management is more than an emphasis on manufacturing processes. There are many activities within an organization that add value to the end product or service but that do not directly provide goods or services to the customer. For example, the accounting department adds value to the organization s activities by making sure that the employees, distributors, and suppliers are all paid promptly and accurately. Human resources also supports business operations by developing and implementing policies and procedures that ensure that employees are treated fairly and are motivated to use their skills and talents in helping the business become a high performing organization. In addition, operations management is not only concerned with the operations within the single organizational entity, but also of the smooth and efficient operations of the entire supply chain. This is the network of organizations involved in the production, delivery, and sale of a product. The supply chain may include suppliers, manufacturers, storage facilities, transporters, and retailers. The supply chain includes the flow of tangible goods and materials, funds, and information between the organizations in the network, all of which adds value to the product or service being offered to the customer. Historically, operations management focused on providing the highest possible quality for the lowest possible price. Increasingly, however, customers are also demanding greater product EBSCO Research Starters Copyright 2008 EBSCO Publishing Inc. All Rights Reserved

2 Keywords Business Process Reengineering (BPR) Just-in-Time Manufacturing (JIT) Lean Manufacturing Six Sigma (6σ) Stakeholder Strategic Planning Total Quality Management (TQM) variety, short life cycles, and other qualities that require organizations to more closely examine their operations for ways to better meet the needs of the marketplace. In addition, globalization has brought with it increased competition from overseas operations that are able to provide products or services at lower cost. This results not only in greater competition but also in the need to put even more emphasis on optimizing the effectiveness and efficiency of operations in order to stay viable in the marketplace. There are a number of ways that organizations can streamline their operations to meet the demands of today s marketplace. However, for these methods to have any significant or lasting effect, they must be done as part of a coordinated strategy designed to improve both short and long-term organizational effectiveness. A strategy is a plan of action to help the organization reach its goals and objectives, including organizational effectiveness and marketplace viability. A good business strategy should be based on the rigorous analysis of empirical data, including market needs and trends, competitor capabilities and offerings, and the organization s resources and abilities. The strategic planning process helps the organization determine what goals to set and how to reach them. This process also allows the organization to determine and articulate its long-term goals and to develop a plan to use the company s resources including materials, equipment and technology, and personnel in reaching these goals. Because of its concern with organizational performance and effectiveness, one of the tasks of operations management is to set the strategy including goals and objectives of the organization. Strategic planning is the process of determining the best way to accomplish the goals of the organization. Goals and objectives define in practical terms what the organization would like to be within a specific period of time. Determining the organization s business goals requires an examination of all the organization s operations and processes to determine which add value to the organization s products or services and which do not. Applications There are a number of tools and techniques that can be used by managers to improve the effectiveness and efficiency of business operations. These include lean manufacturing, total quality management, and business process reengineering. Lean manufacturing strives to eliminate waste and continually improve productivity. Total quality management strives to improve customer satisfaction by improving quality. Business process reengineering strives to improve the effectiveness and efficiency of the various processes within an organization. Lean Manufacturing Lean manufacturing is manufacturing philosophy that attempts to eliminate all waste from production processes. The objectives of lean manufacturing are to lower production costs, increase output, and shorten lead times. To do this, lean manufacturing efforts attempt to do several things. First, lean manufacturing efforts attempt to reduce defects and unnecessary physical waste during the production process. This includes reducing the excess or unnecessary use of raw materials or other inputs, reducing the number of defects and their associated costs, and reducing or eliminating product features that are not of value to the customer. Lean manufacturing efforts also attempt to reduce manufacturing lead times and production cycle times in the manufacturing process. This can result in less cost associated with storage of materials and products and the ability to get products to the customer in a more timely manner. Similarly, lean manufacturing attempts to minimize inventory throughout the production process. This practice helps reduce the amount of working capital needed to sustain operations. Just-in-time manufacturing is a manufacturing philosophy that strives to eliminate waste and continually improve productivity. The primary characteristics of just-in-time manufacturing include having the required inventory only when it is needed for manufacturing and reducing lead times and set up times. In addition, lean manufacturing attempts to optimize the use of equipment and space to reduce or eliminate bottlenecks in manufacturing processes and optimize the rate of production. Lean manufacturing also examines business processes (see below) and their effect on the productivity of employees. Under the lean manufacturing philosophy, idle time is reduced and workers efforts are streamlined so that they contribute directly to the value of the product or service. One lean manufacturing approach is the Six Sigma process. This term is a statistical reference to how far (i.e, the number of standard deviations, symbolized by the Greek letter sigma, σ ) a data point is from the middle of the normal curve. Six sigma distance signifies the degree to which a product reaches its quality goal. Specifically, at six sigma above normal, a product is reaching its quality goal percent of the time, or has only 3.4 defects per million. Six Sigma projects set this as the goal toward which manufacturing and quality control efforts in the organization are focused. Six Sigma programs are targeted at reducing costs by making changes before defects or problems occur. As part the Six Sigma EBSCO Research Starters Copyright 2008 EBSCO Publishing Inc. All Rights Reserved Page 2

3 program, employees and managers are trained in statistical analysis, project management, and problem solving methodology. These skills are used to help them reduce defects in their products. Most organizations that have implemented Six Sigma programs report increased profitability resulting from lower production costs from doing the thing correctly the first time in combination with reduced costs for not having to redo the work previously done. Total Quality Management Another strategy for increasing the quality of goods and services and concomitant customer satisfaction is Total Quality Management (TQM). TQM attempts to improve the quality of products or services by raising awareness of quality concerns across the organization. This management strategy emphasizes developing an organizational environment that supports innovation and creativity as well as taking risks to meet customer demands using such techniques as participative problem solving that includes not only managers, but employees and customers as well. There are five cornerstones to TQM: The product, the process that allows the product to be produced, the organization that provides the proper environment needed for the process to work, the leadership that guides the organization, and commitment to excellence throughout the organization. To be successful, TQM programs need to consider all five of these primary emphases. To help ensure the success of the TQM strategy, it is necessary that an environment of quality be fostered within the organization. This requires not only an emphasis on the efficiency of processes, but also an emphasis on consistency, integrity, and other positive interpersonal relationship skills. To foster the teamwork necessary to bring about high quality, TQM encourages organizations to implement a decentralized authority structure where decisions are made close to those affected and all have a chance to participate in the process. This practice helps employees feel part of the system and that they are a vital part of the organization, not just hirelings. Ownership of team members working on the product can also be fostered by increasing the flow of communication across all levels of the organization and providing each employee the training that s/he needs to successfully add value to the product. TQM looks not only at the bottom line in terms of profits or other relevant numbers, but also helps link the concepts of value to the customer with the cost of the product. This practice can help with market positioning and increasing market share. This can be enabled by continually assessing the marketplace of the organization s product vis a vis the organization s skills and resources to better position the organization to excel in the marketplace. Business Process Reengineering Business process reengineering is a management approach that strives to improve the effectiveness and efficiency of the various processes within an organization. Business process reengineering is a radical rethinking and redesign of business processes so that they achieve dramatic improvements in critical organizational performance criteria such as cost, quality, service, and speed. To be successful, business process reengineering requires organizations to reexamine the assumptions underlying their business operations and to question why they do things the way that they do. The purpose of this analysis is to get at the root of any business process problems that the organization is experiencing. This will allow managers to reinvent the way that things are being done as opposed to modifying current practices to be somewhat more effective. This analysis often reveals obsolete, erroneous, or inappropriate practices or procedures that do not add value to the product or service being offered by the business. While business process reengineering is not appropriate for every organization, it is most appropriate where more traditional methods fail or where there is a major discrepancy between where the organization is and where the organization needs to be. Businesses that are in serious trouble can often benefit from business process reengineering. Symptoms of this serious trouble can include having costs that are significantly higher the competition s, customer service that is causing the organization to lose a significant number of customers, or failure rates that are significantly above those for the industry. Organizations that find themselves in such situations have little choice than to perform a major overhaul of their business processes if they want to be viable. In addition, organizations that are not yet in such dire straits but that are headed on a trajectory to that condition can also often benefit from reengineering efforts. Symptoms of these situations include increased competition or competitors that have significantly improved their offerings or new customer needs that cannot be adequately met by the current business processes. Business process reengineering may often enable organizations to avoid falling into the first category where reengineering is mandatory if the organization is to survive. Not only failing or inefficient organizations can benefit from reengineering efforts, however: Top performing organizations with aggressive management that wants to take them further may also benefit from this analysis and redesign. Business process reengineering in highly successful organizations can help them further consolidate their position in the marketplace and create further barriers to their competitors. The goal of business process reengineering efforts is to improve the effectiveness of the organization. This is commonly demonstrated in a number of ways. For example, reengineering frequently results in several jobs being consolidated into one. Business process reengineering efforts also often change processes so that workers who better understand the situation can make decisions rather than submitting these up the line for a supervisor to consider. Similarly, business process reengineering often results in work being performed where it makes the most sense. This situation results in less delays, lower overhead costs, and higher job satisfaction for the employees. As a result, reengineered processes can help improve customer satisfaction by providing quick resolution to their problems. One of the basic tenets of the business process reengineering process is that steps in any business process must be performed in a natural order and all the steps must add value to the product or service rather than activity for the sake of activity. So, EBSCO Research Starters Copyright 2008 EBSCO Publishing Inc. All Rights Reserved Page 3

4 for example, a manufacturing company process might analyze the customer requirements and then translate these into internal product codes, transmit this information to various plants and warehouses, receive the various components, assemble the components into a finished product, and deliver and install the equipment, requiring the involvement of a different organization for each step in the process. Although these steps might traditionally be performed sequentially, if some of the data collected are not needed until delivery, time could be saved by not waiting until all of these steps were completed before starting the rest of the process. Reengineered processes frequently have different versions that take into account various situations so that value is added to the product or service and the customer is better served. Although standardization of business process works fine in an assembly line, many jobs today do not need this degree of structure. For example, clerks in a retail store could be given the authority to take care of customer problems at the point of sale rather than making the customer go to the customer service department or waiting for a manager to come and authorize a simple activity. Similarly, a technician on a technical help line might be given the authority to treat customers according to their individual needs rather than going through a pre-ordained script. In this way, reengineering processes reduce the amount of time for the transaction. This results in lower costs for the organization as well as increased customer satisfaction and loyalty. Terms & Concepts Business Process: Any of a number of linked activities that transforms an input into the organization into an output that is delivered to the customer. Business processes include management processes, operational processes (e.g., purchasing, manufacturing, marketing), and supporting processes, (accounting, human resources). Business Process Reengineering (BPR): A management approach that strives to improve the effectiveness and efficiency of the various processes within an organization. Globalization: Globalization is the process of businesses or technologies spreading across the world. This creates an interconnected, global marketplace operating outside constraints of time zone or national boundary. Although globalization means an expanded marketplace, products are typically adapted to fit the specific needs of each locality or culture to which they are marketed. High Performing Organization: Businesses that consistently out-perform their competitors. Just-in-Time Manufacturing (JIT): A manufacturing philosophy that strives to eliminate waste and continually improve productivity. The primary characteristics of JIT include having the required inventory only when it is needed for manufacturing and reducing lead times and set up times. Also called lean manufacturing. Lean Manufacturing: A set of tools and techniques used to eliminate all waste from production processes. : Those areas of management that are concerned with productivity, quality, and cost in the operations function (i.e., activities necessary to transform inputs such as business transactions and information into outputs such as completed transactions) as well as strategic planning for the organization. Return on Investment (ROI): A measure of the organization s profitability or how effectively it uses its capital to produce profit. In general terms, return on investment is the income that is produced by a financial investment within a given time period (usually a year). There are a number of formulas that can be used in calculating ROI. One frequently used formula for determining ROI is (profits costs) (costs) x 100. The higher the ROI, the more profitable the organization. Six Sigma (6σ): An approach to improving quality. The term six sigma is a statistical term referring to the degree to which a product reaches its quality goal. At six sigma, a product is reaching its quality goal percent of the time, or has only 3.4 defects per million. The six sigma system was originally developed by Motorola. Stakeholder: A person or group that can affect or be affected by a decision or action. In marketing, stakeholders may include the organization s employees, suppliers, distributors, and stockholders. Strategic Planning: The process of determining the long-term goals of an organization and developing a plan to use the company s resources including materials and personnel in reaching these goals. Strategy: In business, a strategy is a plan of action to help the organization reach its goals and objectives. A good business strategy is based on the rigorous analysis of empirical data, including market needs and trends, competitor capabilities and offerings, and the organization s resources and abilities. Supply Chain: A network of organizations involved in production, delivery, and sale of a product. The supply chain may include suppliers, manufacturers, storage facilities, transporters, and retailers. Each organization in the network provides a value-added activity to the product or service. The supply chain includes the flow of tangible goods and materials, funds, and information between the organizations in the network. Total Quality Management (TQM): A management strategy that attempts to continually increase the quality of goods and services as well as customer satisfaction through raising awareness of quality concerns across the organization. Bibliography Creech, B. (1994). The five pillars of TQM: How to make total quality management work for you. New York: Truman Talley Books/Dutton. Hammer, M. & Champy, J. (1993). Reengineering the corporation: A manifesto for business revolution. New York: Harper Business. EBSCO Research Starters Copyright 2008 EBSCO Publishing Inc. 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5 Heger, D. A. (2006). An introduction to operations research benefits, methods & application. Retrieved July 6, 2007, from Fortuitous Online Database com/docs/primers/or-intro.pdf Lowson, R. H. (2002). Strategic operations management: The new competitive advantage. New York: Routledge. Lucas, H. C. Jr. (2005). Information technology: Strategic decision making for managers. New York: John Wiley and Sons. Senn, J. A. (2004). Information technology: Principles, practices, opportunities (3rd ed.). Upper Saddle River, NJ: Pearson/Prentice Hall. Suggested Reading Nerur, S. & Balijepally, V. (2007). Theoretical reflections on agile development methodologies. Communications of the ACM, 50(3), Retrieved June 27, 2007, from EBSCO Online Database Business Source Complete. h&an= &site=ehos Parker, K. (2006). Emerging trends in plant operations management. Manufacturing Business Technology, 24(12), 2. Retrieved June 27, 2007, from EBSCO Online Database Business Source Complete. login.aspx?direct=true&db=bth&an= &site=eh ost-live Vonderembse, M. A. & Marchal, W. G. (2001). Operations management. In Saul I. Gass, S. I. & Harris, C. M. (eds.). Encyclopedia of Operations Research and Management Science. New York: Wiley, Retrieved June 27, 2007, from EBSCO Online Database Business Source Complete. rue&db=bth&an= &site=ehost-live Szwejczewski, M. & Cousens, A. (2007). Increasing flexibility: What are your options? Management Services, 51(1), Retrieved June 27, 2007, from EBSCO Online Database Business Source Complete. &site=ehost-live Ruth A. Wienclaw holds a Doctorate in industrial/organizational psychology with a specialization in organization development from the University of Memphis. She is the owner of a small business that works with organizations in both the public and private sectors, consulting on matters of strategic planning, training, and human/systems integration. EBSCO Research Starters Copyright 2008 EBSCO Publishing Inc. All Rights Reserved Page 5

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