Defining Operations

1. Professor Stephen Lawrence Defining Operations

2. Diego Rivera, Detroit Industry, 1933; Front Wall Mural, Detroit Institute of Art

3. Diego Rivera, Detroit Industry, 1933; South Wall Mural, Detroit Institute of Art

4. Goals for Course?

5. What is Operations?

6. How is Wealth Created?

7. OPERATIONS… Operations is all about adding value, and creating wealth

8. Operations – 80-90% Hidden

9. Definitions • Transformation definition • Organizational definition • Economic definition • Transaction cost definition • Added-value definition

10. What is Operations?Transformation Definition • The design, control, and management of processes that transform inputs into finished goods and services for sale to customers

11. What is Operations?Transformation Definition INPUTS OUTPUTS Materials Goods Labor Transformation Processes Capital Services Knowledge

12. Who are “operations” managers?

13. Who are “operations” managers? • Managers transform inputs into outputs • Example: Accounting Manager • Inputs: data, information, labor • Transformation: application of accounting principles and knowledge • Outputs: accounting reports, knowledge of performance, ... • All managers have an “operation” to run • Therefore: All managers are Operations Managers!

14. Manufacturing and ServicesContinuum of Characteristics Service Orientation Mining (coal) Automobiles Fast Food Banking Consulting Manufacturing Orientation

15. What is Operations?Organizational Definition Corporate Strategy Strategy Business A Strategy Business B Strategy Business C Finance Marketing OPERATIONS Accounting

16. What is Operations?Economic Definition Operations is responsible for improving the “production function” of the firm.

17. Schwinn ’80s Example:Bicycle Manufacturing Lots of automation Lots of labor / unit Huffy Capital Used (equipment) per unit produced Serotta Automated equipment Little labor per unit Little automation Lots of skilled labor Moderate AutomationModerate Labor Trek Labor Used per unit produced

18. Example:Bicycle Manufacturing Desirable Undesirable! Capital Used (equipment) per unit produced Efficient Frontier Desirable Desirable Labor Used per unit produced

19. What is Operations?Economic Definition Capital Used (equipment) per unit produced Labor Used per unit produced

20. Why Do Firms Exist? “The assumptions of micro-economics, when applied to the question of why there are firms, suggest that firms should not exist at all.” Barney and Ouchi (eds), Organizational Economics, 1986.

21. General approach to economic organization: Markets and firms are alternative instruments for completing a related set of transactions The relative efficiency of each determines which mode is used The costs of writing and executing complex contracts vary with the properties of the market and the characteristics of the human decision makers involved The same human and environmental factors apply to both transactions between firms and within a firm What is Operations?Transaction-Cost Definition [Firms exist because it is difficult to use the price system to coordinate all economic activity.] The question always is, will it pay to bring an extra exchange transaction under the organizing authority? At the margin, the costs of organizing within the firm will be equal either to the costs of organizing in another firm or to the costs involved in leaving the transaction to be “organized” by the price mechanism. Coase, “The nature of the firm,” Economica 4, 1937. Williamson, Markets and Hierarchies, 1975

22. What is Operations?Added-Value Definition • Value is the customer’s subjective evaluation, adjusted for cost, of how well a good or service meets or exceeds expectations. • Note that: • Value is defined in terms of a singular customer • It is a subjective evaluation • The evaluation is compared with an expectation • Expectations can be influenced and do change

23. Cost Operations Marketing Added Value for Customer Added Value Model Finance Accounting Profit! Loss! Information Systems People and Organization adapted from Porter, Competitive Advantage, Free Press, 1985

24. Added Value Model BusinessEnvironment The Firm Value Chain Suppliers Customers Competitors adapted from Porter, Competitive Advantage, Free Press, 1985

25. Adding Value withMarketing and Operations • Inputs: • Materials • Labor • Ideas • Technology • Outputs: • Goods + • Services • = “Products” How? Marketing and Operations “touch the product” Marketing Operations

26. What is Operations?Added-Value Definition Operations is the fundamental means by which firms… Add Value!

27. What is Operations?How do Firms Add Value? Suppose you are in the market for a new automobile? What attributes are you most interested in? What would cause you to purchase one car versus another?

28. Greater Productivity Lower costs and expenses Lower prices for the customer Higher Quality Better performance Greater durability, reliability, aesthetics, ... Better Timeliness Faster response and turnaround On-time delivery, meet promises Greater Flexibility Greater variety Customization for customer needs / desires Useful Innovation Features, technology Better performance New capabilities Often unrecognized What is Operations?How do Firms Add Value?

29. The Value Equation

30. Professor Stephen Lawrence Defining Operations