What is Operations Management?

The definition of operations management is the activities that relate to the creation of goods and services through the transformation of inputs into outputs. One of the key elements of OM is production, or the creation of goods and services. In the case of manufacturing, the output is very obvious, because it produces a product. You know the end product in a Harley manufacturing plant is going to be a Harley Davidson motorcycle. It is tangible.

The production of less tangible products, such as booking a hotel room, is services. These products are less obvious or "hidden" from the public or even the customer. Regardless of tangibility, any activity that goes into production is a function of operations management.

Why study OM?

Operations management is one of the three functions every organization performs to achieve its goals. These are not only for production, but for survival in the marketplace.

1. Marketing generates the demand for the product. Unless consumers know it is available, they might not want it or know they need it. Marketing puts the product or service within view and explains how it benefits the consumer.

2. Production/operations create the product. Without the product, there is no way to create or meet demand.

3. Finance/accounting collects money, pays the bills, and tracks how well the organization is doing in regard to its bottom line. Yet without a product and a demand, this function is unnecessary.

Every type of business – hospitals, nonprofits, trucking companies, factories, etc. – has these components.

So we study operations management for four main reasons, no matter what industry:

1. To learn how people organize themselves to be productive and profitable at their chosen enterprise

2. To learn how goods and services are produced

3. To learn what operations managers do so it can be put to use in numerous opportunities

4. To learn what makes it such a costly part of an organization, and how to manage those costs through informed decisions

What Operations Managers Do

The reason all good managers study operations management is to effectively accomplish the next layer of basic functions in the management process. Those are: planning, organizing, staffing, leading, and controlling.

To do any of those things, operations managers need to evaluate all the information at hand and decide on a course of action. There are seven major decisions in which operations managers play an integral part. Each are summarized here, .

1. Product and Service Management. What good or service do we offer, and what is the design of it?

2. Operations and Supply Chain Management. Should we make -- or buy -- what we need to produce our good or service? If we purchase it, who can supply it?

3. Inventory Management. How much should we keep on hand? When do we re-order?

4. Forecasting and Capacity Planning. What does the short-term and long-term schedule look like? How much can we make in what period of time?

5. Operations Scheduling. What do we need for materials? Personnel?

6. Management of Quality. What quality system should we use? What impact does quality have on our organization?

7. Facilities Planning and Management. How is the facility used in production? What is its relationship to other resources? How should it be arranged?

Manufacturers make a tangible product. Services are economic activities that typically produce an intangible product, such as education, entertainment, lodging, government, financial, and health services, to name a few. Most products, however, are a combination of a good and a service. That makes it hard to track and accumulate data or statistics about services.

The Difference Between a Good and a Service

If you have a hard time telling the difference between a good and a service, here are some characteristics of each.

Good Service

Product can be resold. Reselling a service is uncommon.

Good can be inventoried. Services are not inventoried.

Quality measurement is objective. Quality measurement is subjective.

Selling is separate from production. Service is performed and sold at the same time.

Product can be transported. Provider of the service is transportable.

Site of facility is important to cost. Site is important for customer contact.

Production can be automated easily. Services are difficult to automate.

Job is the services sector makes up nearly 80 percent of the percent of all jobs in the United States. While manufacturing employment numbers have stayed relatively steady, workers are now producing 20 times the product of their counterparts 80 years ago. While services jobs are considered low-paying, because of fields like retail sales, the opposite is also true. Operations managers in airline maintenance or computer services, for example, are well-paid. Pay is not a determining factor between a good and a service.

Productivity

What does matter to production of both goods and services is a high level of productivity. This requires converting resources into goods and services as efficiently as possible. The better that is accomplished, the more value is added to the organization's good or service. The job of an operations manager is to manage those resources and those outputs to the benefit of the company.

Inputs are resources, such as labor, capital, and management. Outputs are the goods and services. Improving productivity -- and therefore improving efficiency -- is accomplished is one of two ways: reducing inputs while maintaining outputs, or to increase the output while maintaining the inputs. Operations managers create and manage the production system that enables the conversion. It is important for operations managers to remember that high employment and high production does not necessarily mean high productivity. This is why tracking, calculating, and managing productivity through the seven major decision areas is crucial to success.

Measuring Productivity

A simple calculation for measuring productivity is "Productivity = units produced/inputs used." As you break out the inputs (i.e. labor, material, energy, capital, and more) it can get more complicated, but it all starts with that equation.

Not everything is a controllable variable. There are factors that will distort the equation, yet must be considered.

1. Quality can change, while inputs and outputs remain. A factory can produce the same amount of tires today as in the 1960s, but the quality has greatly improved.

2. External elements are those factors beyond your control that directly affect your productivity. These can include natural disasters, or changes by providers of your support system. If the main entrance to your business will be inaccessible for two weeks due to road construction, this affects your business, but you are incapable of doing anything about it.

3. The same general product can require different inputs, but result in the same good. A car is a car is a car but a Chevy Malibu requires some different parts than an Equinox or a Silverado.

The Variables in Productivity

As previously noted, there are general inputs that vary in productivity. A change in any of those variables can affect your organization's outputs – for better or worse. Knowing more, each variable can help you determine what to manipulate to increase efficiency.

1. Labor. This is the most controllable variable, and where most companies focus when a change needs to be made to the bottom line. Quality in labor can be obtained by providing the proper education or training, having a healthy workforce, and providing a comfortable work environment. If you can provide those things, the end result will a better utilized work force with a stronger commitment to performing work in which the individual can take pride, and ultimately work for the benefit of your organization.

2. Capital. We use tools to work smarter, not harder. While capital investment may be expensive, the potential return on the investment may be worth it. Studies have shown that capital investment provides 38 percent of the annual growth in productivity each year, making each dollar invested per employee an indicator of the success of your company and how it will meet future goals.

3. Management. Bad management sinks companies. There are examples of it in the news every day, from Fortune 500 companies, to local businesses. It can take the form of announced management changes, closing factories, and large lay-offs. Management is responsible for making sure that labor and capital are used effectively and increase productivity, hence it makes up over half of the annual increase in productivity.

Productivity And Services

It is much more difficult to measure productivity in any of the service industries. Inputs, such as customers requiring service, is beyond the control of the organization, only influenced by marketing and other endeavors. As such, measuring it is also difficult. The following factors are examples of what makes services hard to improve:

1. Tough to gauge quality

2. Not easily automated

3. Labor intensive

4. Very specific service is provided

5. Intellectual work by trained professionals