defining operations professor stephen lawrence. diego rivera, detroit industry, 1933; front wall...
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Definitions Transformation definition Organizational definition Economic definition Transaction cost definition Added-value definition
What is Operations?
Transformation Definition The design, control, and
management of processes that transform inputs into finished goods and services for sale to customers
TransformationProcesses
TransformationProcesses
GoodsGoods
ServicesServices
LaborLabor
KnowledgeKnowledge
CapitalCapital
MaterialsMaterials
What is Operations?
Transformation Definition
INPUTS OUTPUTS
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!
Manufacturing and Services Continuum of Characteristics
Mining (coal)
Automobiles
Fast Food
Banking
Consulting
ServiceOrientation
Manufacturing Orientation
StrategyBusiness C
StrategyBusiness A
CorporateStrategy
StrategyBusiness B
MarketingFinance Accounting
What is Operations?
Organizational Definition
OPERATIONS
What is Operations?
Economic Definition
Operations is responsible for improving the“production function” of the firm.
Example:
Bicycle Manufacturing
Labor Used per unit produced
Capital Used(equipment) per unit produced
Huffy
Serotta
Schwinn ’80sLots of automationLots of labor / unit
Automated equipmentLittle labor per unit
Little automationLots of skilled laborModerate Automation
Moderate LaborTrek
Example:
Bicycle Manufacturing
Labor Used per unit produced
Capital Used(equipment) per unit produced
Desirable
Desirable
Undesirable!
Desirable
EfficientFrontier
Labor Used per unit produced
Capital Used(equipment) per unit produced
What is Operations?
Economic Definition
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.
What is Operations? Transaction-Cost Definition
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
[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 inanother 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
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
What is Operations?
Added-Value Definition
Added Value Model
adapted from Porter, Competitive Advantage, Free Press, 1985
Information SystemsInformation Systems
People and OrganizationPeople and Organization
FinanceFinance
AccountingAccounting
MarketingMarketing OperationsOperations
Profit!Profit!
CostCost
Loss!Loss!
Added Value for CustomerAdded Value for Customer
Added Value Model
adapted from Porter, Competitive Advantage, Free Press, 1985
Suppliers Customers
Competitors
The Firm
BusinessEnvironment
Value Chain
Adding Value withMarketing and Operations
MarketingMarketing OperationsOperations
Inputs:• Materials• Labor• Ideas• Technology
Outputs:• Goods +• Services• = “Products”
How?
Marketing and OperationsMarketing and Operations““touch the product”touch the product”
Operations is the fundamental means by
which firms…
What is Operations?
Added-Value Definition
Add Value!
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? Whatwould cause you to purchase one car versus another?
What is Operations?
How do Firms Add Value? 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
The Value Equation
price
ePerformancValue
price
InnovationyFlexibilitTimelinessQualityValue
P
IFTQValue