Introduction to Operations Management: Cost, Quality, Time, Flexibility, and Customer Service
ITEM-12: Introduction to Operations Management
Introduction
Organizations involved in producing goods and services, from industrial firms to utilities, benefit from effective and efficient operations management. This can increase product value and contribute significantly to organizational success.
Concept of Operations Management
Production
Production encompasses the processes, procedures, methods, and techniques used to create goods and services. It involves systematic decision-making aimed at increasing product value and meeting customer needs. Operations management is responsible for managing the production system.
Operations Management
Operations management transforms an organization’s inputs (resources) into final goods and services (outputs). It applies to both goods (e.g., computers) and services, although the distinction between the two is becoming increasingly blurred.
Focus of Operations Management
Since Frederick Taylor’s scientific management work in the early 20th century, a primary goal of operations management has been to increase labor productivity.
Productivity
Productivity measures production efficiency. It’s calculated as the ratio of output to input. Improving productivity involves either reducing input while maintaining constant output or increasing output while maintaining constant input.
While productivity has been a classic goal, the modern competitive landscape has introduced new objectives. Today, the core objectives of operations management include:
- Cost
- Quality
- Time
- Flexibility
- Customer Service
A) Cost
The cost of a good or service reflects the value of the resources used in its production. Cost analysis helps determine how effectively a company creates value by comparing the product’s value with the cost of the resources used.
Cost Classification
- Based on Production Volume:
- Fixed Costs: Remain constant regardless of production volume.
- Variable Costs: Change with production volume or processing time.
- Based on Imputation Certainty:
- Direct Costs: Directly linked to the product transformation process.
- Indirect Costs: Affect the overall production process, making it difficult to determine their specific impact on each product.
Cost Objective: From World War II until the 1970s, minimizing production costs to offer lower prices was a priority for maximizing market share. This changed when Japanese companies prioritized high quality and fast turnaround times without significantly compromising cost.
B) Quality
Quality is defined by the attributes of a product that meet customer needs. A product is considered high-quality if the customer perceives it as such.
Japan’s quality revolution in the mid-1950s demonstrated that quality improvements lead to increased productivity, market share, and higher prices. This forced Western companies to adopt similar quality-focused strategies.
C) Time
Fast response to customer demand is a competitive advantage. Time-based competition focuses on:
- Delivery speed
- Meeting delivery deadlines
- New product development time
D) Flexibility
Flexibility is the ability to adapt quickly to changing market needs and competitive environments. This includes reducing machine changeover times and shortening new product development cycles.
E) Customer Service
Companies now offer a range of services that enhance product value. The quality of these services is crucial for competitiveness, applying to both service-oriented and industrial companies.
Cost, quality, time, flexibility, and customer service are the key competitive priorities for operations management. However, these objectives can be conflicting, requiring organizations to prioritize based on their specific circumstances.
Emerging priorities, such as ecological attributes and corporate social responsibility, are also gaining importance.
Key Operating Decisions
Operations managers make two types of decisions:
- Strategic
- Tactical
These categories can overlap. For example, product quality decisions can be both strategic (implementing a total quality management model) and tactical (quality inspections).
Strategic Decisions
These long-term decisions impact the entire organization and are difficult to reverse. They should be coordinated across functional areas.
Key Strategic Decisions:
- Product/service selection and design
- Production process and technology selection
- Operating system strategic planning
- Facility capacity determination
- Facility location
- Plant layout and machinery distribution
- Human resource decisions
- Quality management guidelines
Tactical Decisions
These are more structured, routine, and repetitive decisions focused on meeting market demand and maximizing profits. They involve planning, control, and corrective actions.
Key Tactical Decisions:
- Medium-term production planning and scheduling
- Inventory level decisions
- Developing procedures and time measurement standards
- Product quality assurance
- Preventative machinery maintenance