Chapter 1

Discovering the Fundamentals of Operations Management

IN THIS CHAPTER

Understanding the function and value of operations management

Getting a handle on business models and processes

Facing key challenges in operations management

Operations - a set of methods that produce and deliver products and services in pursuit of specific goals - are the heartbeat of every kind of organization, from consumer electronic and hospital emergency wards to high finance and professional services. Well-designed operations enhance profitability. Poor operations, at best, equal ineffective processes and wasted resources. At worst, poor operations can drive a company out of business. Therefore, managing operations with competence is vital to meeting strategic goals and surviving financially.

In this chapter, we point out what's part of operations and what isn't. We also describe key concepts in the world of operations and tell you what you can do to improve operations in a business or any other type of organization.

Defining Operations Management

When most people think of operations management, if any picture comes to mind at all, an image of a large factory billowing smoke often emerges. And, yes, factories that billow smoke are indeed performing operations, but they're only a small subset of everything that's involved with operations management. Ultimately, operations determine the cost, quality, and timing of every interaction an organization has with the people it serves.

In this section, we tell you exactly what operations management is - and what it's not. Moreover, we point out why operations are such a critical part of an organization and why all departments must care about operations for an organization to be successful.

Getting beyond the smokestack

No job is so simple that it can't be done wrong.

-MESSAGE IN A CHINESE FORTUNE COOKIE

Operations management is the development, execution, and maintenance of effective processes related to activities done over and over, or to one-time major projects, to achieve specific goals of the organization.

Operations management covers much more than smokestacks or manufacturing parts and products; it also encompasses services and all sorts of projects and initiatives that groups of people undertake together. From restaurants and fast-food joints to medical services, art galleries, and law firms, operations management ensures that organizations minimize waste and optimize output and resource use for the benefit of customers as well as everyone else with skin in the game, or the stakeholders.

Doing something a little inefficiently one time is no big deal, but when you do something inefficiently over and over, hundreds or even millions of times per year, even little mistakes can add up to very expensive amounts of waste. Mistakes in an operation that result in defective products, even if they represent only 1 percent of total output, can alienate millions of customers. Similarly, if poorly designed operations result in habitually serving customers late, a company will eventually lose customers to better-functioning competitors.

In for-profit firms, operations management is concerned with the cost-effective operation and allocation of resources, including people, equipment, materials, and inventory - the stuff you use to provide goods or services for customers - to earn the big bucks and maximize your return on investment. Just look at the annual reports of big successful firms. Some, like Apple, take pride in their operational excellence. In the case of Apple, removing just pennies from the cost of one phone can mean millions of dollars to the bottom line.

In nonprofit organizations, managing resources is also vital. Here, operations management may be concerned primarily with maximizing a specific metric, such as people served with their limited resources.

Seeing the relevance of operations management

Operations management is a fundamental part of any organization. In fact, Forbes magazine reported that about three quarters of all CEOs came from an operations background. Not all these CEOs studied operations in school; only some of them did. Many majored in finance, marketing, information systems, or engineering and ended up in operations at some point in their careers.

Even if you don't want to be a CEO or ever work in operations, you'll probably have to work with operations people during your career. So consider these facts about the impact of operations on various business functions:

• Engineering: Engineers are notoriously great with numbers and focus. That doesn't always translate to being great with operations. Operations analysis is both quantitative and intuitive, and engineers without operations training can - and do! - waste millions of dollars when tasked to oversee operations. For maximum benefit, you need to evaluate the individual process in the context of the overall system of processes it connects to. So some operations knowledge can help engineers place their analysis of an individual process into an overall context of the operations system.
• Finance: Corporate finance folks exercise oversight over budgets, so having some operations knowledge can help this team make good decisions. For instance, when an operations leader asks for money to de-bottleneck a process (check out Chapter 3 for information on bottlenecks), knowing what this means tells you the intent is to increase the capacity of an existing operation. This almost always makes more economic sense than building a new plant. It also makes it easier to evaluate costs and benefits of the investment. Otherwise, you may suspect it's like spending money to put paint on an old jalopy.
• Information technology (IT): A big part of IT within some companies is to automate operations. Knowing the core principles of operations can help these folks build an operations superhighway instead of paving a cow path. Companies tend to easily accept the traditional way of doing things without question. There's a great temptation to simply automate an existing process with imbedded inefficiencies. Some knowledge of operations may help IT professionals to more effectively partner with operations management people to truly create competitive advantage by improving processes while they automate.
• Marketing: When the marketing folks come up with a new product idea or promotions concept, they need to talk to operations to find out whether it can be produced profitably. If the answer is no - operations managers are sometimes a grumpy lot - persuading them to find a solution may be easier if marketing can speak the language of operations and understand their concerns.

Marketing and operations must also be in sync when planning promotional campaigns. For example, if the marketing campaign increases demand quickly, they may not have enough capacity to meet the demand, which can lead to unhappy customers.

Understanding the Process of Operations

The field of operations management isn't always intuitive. Ultimately, the intent is to eliminate waste and maximize profitability. Depending on the type of organization and its specific goals, operations can be managed with a wide range of strategic approaches and techniques.

This section describes some of the major aspects of operations that often trip up people who study and work in this field.

Driving the business model

An organization's business model should influence operations strategy; likewise, operations strategy drives the business model (see Figure 1-1). The business model - which identifies the target market, the product or service available for sale, pricing, marketing, and overall budget - is intimately entwined with operations.

In other words, operations determine the cost, quality, and timing of the value proposition that a company delivers to its customers. Operations determine the customer experience, whether it's a service or a tangible product. If the customer experience is good, then financials also tend to be good - and there are always ways to further improve the business model (much more on continuous improvement later). If, on the other hand, operations and the customer experience are poor, then financials are also likely to be poor. This situation calls for a reevaluation of the business model, the operations strategy, or both.

© John Wiley & Sons, Inc.

FIGURE 1-1: The business model drives operations, and operations drive the business model.

In the pragmatic gray area of the real world, operations at a company may be independently good in some areas but out of alignment with the business model. For example, if the operations strategy emphasizes low cost, but the business model relies on using customization to obtain a higher markup from customers, then a company is functioning with fundamentally incompatible goals, making the "good" operations ineffective.

Recognizing the diversity of processes

Processes vary in thousands of ways for different kinds of organizations with different kinds of needs. Start-up firms need to scale up rapidly, and the restaurant business requires some artistry. Pharmaceutical companies must stay...