Operations management refers to the complex set of management activities involved in planning organizing leading, and controlling an organization’s operations. At one time, operations management was considered the backwater of management activities – a dirty, drab necessity. This view has changed in recent years, as more and more managers realize how operations can be a “beehive” of activity with major financial consequences for any organization. For instance, to support the work of Johns Hopkins University Hospital in Baltimore, the facilities department each year handles more than 40,000 work orders, oversees hundreds of construction projects, and manages an annual capital budget nearing $200 million. Operations management also includes something seemingly as mundane as mailing. Many, many companies spend millions annually on mailing costs. With rising Postal Service rates and widening global business operations, managers pay very close attention to mailing costs and alternatives. Indeed, a whole new industry has emerged in competition with the Postal Service as managers take mailing operations. Some prominent players in that industry are United Parcel Service (UPS) and Federal Express.
Operations management is important to an organization’s managers for at least two reasons. First, it can improve productivity, which improves an organization’s financial health. Second, it can help organizations meet customers’ competitive priorities.
To improve productivity: A measure of efficiency
Productivity, the ratio of output to input, is a measure of a manager’s or an employee’s efficiency in using the organization’s scarce resources to produce goods and services. The higher the numerical value of this ratio, the greater the efficiency. Ernst & Young managers use “hoteling” to affect to affect both parts of this ratio. They seek to cut inputs (space cost) and to boost the output of traveling accountants.
A total Quality approach to operations improvement:
The quality movement, with such approaches as small scale continuous improvement processes and the large scale radical redesign of processes, is directly affecting productivity and measures of efficiency. Take, for example, the Dutch telecommunications company Philips Business Communication Systems (PBCS). PBCS was long sheltered by import barriers and captive government contracts. Recently it has found itself in a competitive global economy and a deregulated, privatized network where customers shop around for services. When David Kynaston became managing director of the company in 1990 be found much in need of change: Poor service had damaged sales, and profits had declined to the point where the parent company, Philips Electronics, could no longer support the company.
Assisted by a team of London based consultants from Coopers & Lybrand, PBCS strove to cut cost while improving services. The focus was on the supply chain, partly because that was where a great amount of working capital was being wasted and partly because to provide the catalyst for reviewing all components of the operation. Calculations showed that logistics improvements changes in how material and goods are procured, transported and stored could reduce stocks by 30 percent and raise the speed and quality of service by more than 20 percent. Improvement has advanced primarily through more efficient order processing. Goods are now ordered centrally and shipped directly to clients from the company’s three factories in Europe. The financial health of the company has improved dramatically. Changes arising from increased employee involvement are anticipated to deliver another 10-15 percent savings in working capital. Kynaston and the team also believe that reengineering approaches will yield additional savings from increased efficiency and other improvements.
In filling a customer order, for example strategic control points would occur when the purchase order becomes an invoice, when an inventory item becomes an item to be shipped, and when an item to be shipped becomes part of a truckload of goods to be delivered. Any of these strategic control points is potential sources of confusion and inefficiency, as work is passed from one set of workers to another. An unclear form or a confusing policy say, for handling out-of-stock items creates the risk that orders will be lost or mishandled, wasting valuable time, money, or energy. From this vantage point, the operations system looks like a sieve that can leak valuable resources unless it is managed efficiently. Productivity offers one measure of this efficiency.