Defining OperationsDefining Operations

Professor Stephen Lawrence

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

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

Goals for Course?

What is Operations?

How is Wealth Created?

OPERATIONS…

Operations is all about adding value, and creating wealth

Operations – 80-90% Hidden

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?

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

Defining OperationsDefining Operations

Professor Stephen Lawrence