Defining Operations Management

Every business is managed through multiple business functions each responsible for managing certain aspects
of the business. Figure 1-1 illustrates this by showing that the vice president of each of these functions reports
directly to the president or CEO of the company. Marketing is responsible for sales, generating customer
demand, and understanding customer wants and needs. Finance is responsible for managing cash flow,
current assets, and capital investments. MIS is responsible for managing flows of information. Most of us have
some idea of what finance and marketing are about, but what does operations management do?

Operations management (OM) is the business function responsible for managing the process of creation of
goods and services. It involves planning, organizing, coordinating, and controlling all the resources needed to
produce a companys goods and services. Because operations management is a management function, it
involves managing people, equipment, technology, information, and all the other resources needed in the
production of goods and services. Operations management is the central core function of every company. This
is true regardless of the size of the company, the industry it is in, whether it is manufacturing or service, or is
for-profit or not-for-profit.
Consider a pharmaceutical company such as Merck. The marketing function of Merck is responsible for
promoting new pharmaceuticals to target customers and bringing customer feedback to the organization.
Marketing is essentially the window to customers. The finance function of Merck makes sure that they have
needed capital for different processes including R&D. However, it is the operations function that plans and
coordinates all the resources needed to design, produce, and deliver the various pharmaceuticals to hospitals,
pharmacies, and other locations where needed. Without operations, there would be no products to sell to
customers.

The Transformation Role of Operations Management

We say that operations management performs a transformation role in the process of converting inputs such as
raw materials into finished goods and services. These inputs include human resources, such as workers, staff,
and managers; facilities and processes, such as buildings and equipment; they also include materials,
technology, and information. In the traditional transformation model outputs are the goods and services a
company produces. This is shown in Figure 1-2.

At a manufacturing plant the transformation is the physical change of raw materials into products, such as
transforming steel into automobiles, cloth into jackets, or plastic into toys. This is equally true of service
organizations. At a university OM is involved in organizing resources, such as faculty, curriculum, and facilities,
to transform high school students into college graduates. At an airline it involves transporting passengers and
their luggage from one location to another.
The transformation role of OM makes this function the engine room of the organization. As a result it is
directly responsible for many decisions and activities that give rise to product design and delivery problems.
The design and management of operations strongly influence how much material resources are consumed to
manufacture goods or deliver a service, making sure that there is enough inventory to produce the quantities
that need to be delivered to the customer, and ensuring that what is made is in fact what the customer wants.
Many of these decisions can be costly. It is for this reason that OM is a function companies go to in order to
improve performance and the financial bottom line.

Differences in Manufacturing Versus Service Operations

All organizations can be broadly divided into two categories: manufacturing organizations and service
organizations. Although both categories have an OM function, these differences pose unique challenges for the
operations function as the nature of what is being produced is different. There are two primary distinctions
between these categories of organizations. First, manufacturing organizations produce a physical or tangible
product that can be stored in inventory before it is needed by the customer. Service organizations, on the other
hand, produce intangible products that cannot be produced ahead of time. Second, in manufacturing
organizations customers typically have no direct contact with the process of production. Customer contact
occurs through distributors or retailers. For example, a customer buying a computer never comes in contact
with the factory where the computer is produced. However, in service organizations the customers are typically
present during the creation of the service. Customers here usually come in contact with some aspect of the
operation. Consider a restaurant or a barber shop, where the customer is present during the creation of the
service.
The differences between manufacturing organizations and service organizations are typically not as clear-cut
as they might appear in the preceding example. Usually there is much overlap between them, and their

distinctions are increasingly becoming murky. Most manufacturers provide services as part of their business,
and many service firms manufacture physical goods they use during service delivery. For example, a
manufacturer of jet engines, such as Rolls Royce, not only produces engines but services them. A barber shop
may sell its own line of hair care products.
We can further divide a service operation into high contact and low contact segments. High contact segments
are those parts of the operation where the customer is present, such as the service area of the post office or
the dining area of a restaurant. However, these services also have a low contact segment. These can be
thought of as back room or behind the scenes segments. Examples would include the kitchen segment at a
fast-food restaurant or the laboratory for specimen analysis at a hospital.
Finally, in addition to pure manufacturing and pure service, there are companies that have some characteristics
of each type of organization. It is difficult to tell whether these companies are actually manufacturing or service
organizations. An excellent example is an automated warehouse or a mail-order catalog business. These
businesses have low customer contact and are capital intensive. They are most like manufacturing
organizations yet they provide a service. We call these companies quasi-manufacturing organizations.
The operational requirements of these two types of organizations are different, from labor to inventory issues.
These differences are shown in Table 1-1. As a result, it is important to understand how to manage both service
and manufacturing operations.

Manufacturers

Services

Tangible product.

Intangible product.

Product can be inventoried.

Product cannot be inventoried.

Low customer contact.

High customer contact.

Longer response time.

Short response time.

Capital intensive.

Labor intensive

Home > Articles

Operations Management Defined

By CSCMP and Nada Sanders

Jan 23, 2014

Contents

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.

Defining Operations Management

Organizational Decision Levels
Key Terminology
Critical Processes
Measuring Productivity Levels
Inventory Determination
Inventory Policy Choices
Inventory Policy in a Fixed-Order Quantity System
Independent Versus Dependent Demand
ABC Inventory Classification
Vendor Managed Inventory (VMI)
Challenges Facing the Modern Operations Manager
Discussion Questions

Print

+ Share This

Page 1 of 13 Next >

The authors of The Definitive Guide to Manufacturing and Service Operationsdefine

operations management and explain why it's critical to the success of any company.
This chapter is from the book

This chapter is from the book

Definitive Guide to Manufacturing and Service Operations, The: Master the Strategies and Tactics
for Planning, Organizing, and Managing How Products and Services Are Produced
Learn More Buy

This chapter is from the book

Definitive Guide to Manufacturing and Service Operations, The: Master the Strategies and Tactics
for Planning, Organizing, and Managing How Products and Services Are Produced
Learn More Buy

Defining Operations Management

Every business is managed through multiple business functions each responsible for managing certain aspects
of the business. Figure 1-1 illustrates this by showing that the vice president of each of these functions reports
directly to the president or CEO of the company. Marketing is responsible for sales, generating customer
demand, and understanding customer wants and needs. Finance is responsible for managing cash flow,
current assets, and capital investments. MIS is responsible for managing flows of information. Most of us have
some idea of what finance and marketing are about, but what does operations management do?

Figure 1-1 Organizational chart

Operations management (OM) is the business function responsible for managing the process of creation of
goods and services. It involves planning, organizing, coordinating, and controlling all the resources needed to
produce a companys goods and services. Because operations management is a management function, it
involves managing people, equipment, technology, information, and all the other resources needed in the
production of goods and services. Operations management is the central core function of every company. This
is true regardless of the size of the company, the industry it is in, whether it is manufacturing or service, or is
for-profit or not-for-profit.
Consider a pharmaceutical company such as Merck. The marketing function of Merck is responsible for
promoting new pharmaceuticals to target customers and bringing customer feedback to the organization.
Marketing is essentially the window to customers. The finance function of Merck makes sure that they have
needed capital for different processes including R&D. However, it is the operations function that plans and
coordinates all the resources needed to design, produce, and deliver the various pharmaceuticals to hospitals,
pharmacies, and other locations where needed. Without operations, there would be no products to sell to
customers.

The Transformation Role of Operations Management

We say that operations management performs a transformation role in the process of converting inputs such as
raw materials into finished goods and services. These inputs include human resources, such as workers, staff,
and managers; facilities and processes, such as buildings and equipment; they also include materials,
technology, and information. In the traditional transformation model outputs are the goods and services a
company produces. This is shown in Figure 1-2.

Figure 1-2 The transformation role of operations management

At a manufacturing plant the transformation is the physical change of raw materials into products, such as
transforming steel into automobiles, cloth into jackets, or plastic into toys. This is equally true of service
organizations. At a university OM is involved in organizing resources, such as faculty, curriculum, and facilities,
to transform high school students into college graduates. At an airline it involves transporting passengers and
their luggage from one location to another.
The transformation role of OM makes this function the engine room of the organization. As a result it is
directly responsible for many decisions and activities that give rise to product design and delivery problems.
The design and management of operations strongly influence how much material resources are consumed to
manufacture goods or deliver a service, making sure that there is enough inventory to produce the quantities
that need to be delivered to the customer, and ensuring that what is made is in fact what the customer wants.
Many of these decisions can be costly. It is for this reason that OM is a function companies go to in order to
improve performance and the financial bottom line.

Differences in Manufacturing Versus Service Operations

All organizations can be broadly divided into two categories: manufacturing organizations and service
organizations. Although both categories have an OM function, these differences pose unique challenges for the
operations function as the nature of what is being produced is different. There are two primary distinctions
between these categories of organizations. First, manufacturing organizations produce a physical or tangible
product that can be stored in inventory before it is needed by the customer. Service organizations, on the other
hand, produce intangible products that cannot be produced ahead of time. Second, in manufacturing
organizations customers typically have no direct contact with the process of production. Customer contact
occurs through distributors or retailers. For example, a customer buying a computer never comes in contact
with the factory where the computer is produced. However, in service organizations the customers are typically

present during the creation of the service. Customers here usually come in contact with some aspect of the
operation. Consider a restaurant or a barber shop, where the customer is present during the creation of the
service.
The differences between manufacturing organizations and service organizations are typically not as clear-cut
as they might appear in the preceding example. Usually there is much overlap between them, and their
distinctions are increasingly becoming murky. Most manufacturers provide services as part of their business,
and many service firms manufacture physical goods they use during service delivery. For example, a
manufacturer of jet engines, such as Rolls Royce, not only produces engines but services them. A barber shop
may sell its own line of hair care products.
We can further divide a service operation into high contact and low contact segments. High contact segments
are those parts of the operation where the customer is present, such as the service area of the post office or
the dining area of a restaurant. However, these services also have a low contact segment. These can be
thought of as back room or behind the scenes segments. Examples would include the kitchen segment at a
fast-food restaurant or the laboratory for specimen analysis at a hospital.
Finally, in addition to pure manufacturing and pure service, there are companies that have some characteristics
of each type of organization. It is difficult to tell whether these companies are actually manufacturing or service
organizations. An excellent example is an automated warehouse or a mail-order catalog business. These
businesses have low customer contact and are capital intensive. They are most like manufacturing
organizations yet they provide a service. We call these companies quasi-manufacturing organizations.
The operational requirements of these two types of organizations are different, from labor to inventory issues.
These differences are shown in Table 1-1. As a result, it is important to understand how to manage both service
and manufacturing operations.

Table 1-1 Comparing Manufacturing and Service Operations

Manufacturers

Services

Tangible product.

Intangible product.

Product can be inventoried.

Product cannot be inventoried.

Low customer contact.

High customer contact.

Manufacturers

Services

Longer response time.

Short response time.

Capital intensive.

Labor intensive.

The Role of Manufacturing and Service Operations in the Organization and

Supply Chain
Operations management plays a critical role in the organization and supply chain. Without OM there would be
no products to sell. However, operations cannot work in isolation from other business functions. Recall that
each business function manages unique aspects of the business, and they all must work together. For
example, operations must work with marketing to understand the exact wants of a particular group of
customers. It can then design the exact products customers want and create the production processes to
efficiently produce these products. Marketing, on the other hand, must understand operations capabilities,
including the types of products it can produce and the limitations of the production process. Without
communication between marketing and operations, the company may find itself in a situation where it is
producing products the customers dont want.
Operations must also work closely with purchasing to understand availability of materials, cost and quality
issues, availability of sources of supply, and lead times. Operations links marketingwith its ties to customers
to sourcingwith links to sources of supply. Operations must understand exactly what customers want and
be able to ensure that sourcing can get the materials needed at the right price and at the right time to support
product designs, or offer alternative material options.
Ensuring that OM fits in with the other organizational functions is necessary but not sufficient. The reason is
that each company depends on other members of its supply chain to be able to deliver the right products to its
customers in a timely and cost-effective manner. In the upstream part of a companys supply chain, a company
depends on its suppliers for the delivery of raw materials and components in time to meet production needs. If
deliveries of these materials are late, or are of poor quality, production will be delayed, regardless of how
efficient a companys operations process is. On the downstream side, a company depends on its distributors
and retailers for the delivery of the product to the final customer. If these are not delivered on time, are
damaged in the transportation process, or are poorly displayed at the retail location, sales will suffer. Also, if the

operations function of other members of the supply chain is not managed properly, excess costs will result,
which will be passed down to other members of the supply chain in the form of higher prices.
The bottom line is that companies that comprise a supply chain need to coordinate and link their operations
functions so that the entire chain is operating in a seamless and efficient manner. Just consider the fact that
most of the components Dell uses are warehoused within a 15-minute radius of its assembly plant, and Dell is
in constant communications with its suppliers. Dell considers this to be essential to produce and deliver
components in a timely fashion.