Chapter 1 Introduction to Operations Management
Matching supply with demand is the goal of operations management. By better
matching supply with demand, a firm is able to gain a significant competitive
advantage over its rivals.
Consumers buy the products or services that maximize their utility. Utility is a
measure of the strength of customer preference for a given product or service.
The drivers of customer utility:
1. Consumption utility
A measure of how much you like a product or service, ignoring the effects of
price and of the inconvenience of obtaining the product or service.
o Performance how much an average consumer desires a product or
service (first class > economy class).
o Fit how well the product or service matches with the unique
characteristics of a given consumer (vegetarian / not).
2. Price
The total cost of owning the product or receiving the service.
3. Inconvenience (transaction costs)
The reduction in utility that results from the effort of obtaining the product or
service.
o Location place where a consumer can obtain a product or service.
o Timing time that passes between the consumer ordering a product or
service and the consumer obtaining the product or service.
Marketing is the academic discipline that is about understanding and influencing how
customers derive utility from products or services.
Capabilities – the dimensions of the customer’s utility function a firm is able to satisfy.
Trade-offs – the need to sacrifice one capability in order to increase another one.
Strategic trade-off – when selecting inputs and resources, the firm must choose
between a set that excels in one direction of customer utility or another, but no single
set of inputs and resources can excel in all dimensions.
Market segment – a set of customers who have similar utility functions.
Pareto dominated – a firm’s product or service is inferior to one or multiple
competitors on all dimensions of the customer utility function.
,The efficient frontier consists of a set of firms that are not pareto dominated.
Inefficiency is the gap between a firm and the efficient frontier.
You want to be on the pareto frontier!
A high-performing operation (restaurant D) enters the market:
, Towards the pareto frontier:
Three ways in which operations management can improve a business as it seeks to
match supply with demand:
Make trade-offs among the dimensions of performance.
Reduce inefficiencies so that the business does not have to sacrifice one
performance versus another, thereby moving toward the efficient frontier.
Innovate and improve the operations, corresponding to a shift in the efficient
frontier.
Operations management
Improving the way, a business does its work in order to be part of the efficient
frontier (“The Science for the Better”).
Managing processes to efficiently (e.g., reduced cost, better utilized resources)
match demand and supply.
Types of costs:
- Costs for inputs things a business purchase
- Costs for resources help transform input into output that match customers
demand
Operations comes from the Latin word opus which means work.
System inhibitors
1. Waste the consumption of inputs and resources that do not add value to
the customer (expired food)
2. Variability predictable or unpredictable changes in the demand or the
supply process (customer arrival / requests / behavior)
3. Inflexibility the inability to adjust to either changes in the supply process or
changes in customer demand (sick coworker, same service?)
Operational problems modules / key decisions:
• Process Analysis and Improvement
• Process Productivity and Quality
• Anticipate Customer Demand
• Respond to Customer Demand
Matching supply with demand is the goal of operations management. By better
matching supply with demand, a firm is able to gain a significant competitive
advantage over its rivals.
Consumers buy the products or services that maximize their utility. Utility is a
measure of the strength of customer preference for a given product or service.
The drivers of customer utility:
1. Consumption utility
A measure of how much you like a product or service, ignoring the effects of
price and of the inconvenience of obtaining the product or service.
o Performance how much an average consumer desires a product or
service (first class > economy class).
o Fit how well the product or service matches with the unique
characteristics of a given consumer (vegetarian / not).
2. Price
The total cost of owning the product or receiving the service.
3. Inconvenience (transaction costs)
The reduction in utility that results from the effort of obtaining the product or
service.
o Location place where a consumer can obtain a product or service.
o Timing time that passes between the consumer ordering a product or
service and the consumer obtaining the product or service.
Marketing is the academic discipline that is about understanding and influencing how
customers derive utility from products or services.
Capabilities – the dimensions of the customer’s utility function a firm is able to satisfy.
Trade-offs – the need to sacrifice one capability in order to increase another one.
Strategic trade-off – when selecting inputs and resources, the firm must choose
between a set that excels in one direction of customer utility or another, but no single
set of inputs and resources can excel in all dimensions.
Market segment – a set of customers who have similar utility functions.
Pareto dominated – a firm’s product or service is inferior to one or multiple
competitors on all dimensions of the customer utility function.
,The efficient frontier consists of a set of firms that are not pareto dominated.
Inefficiency is the gap between a firm and the efficient frontier.
You want to be on the pareto frontier!
A high-performing operation (restaurant D) enters the market:
, Towards the pareto frontier:
Three ways in which operations management can improve a business as it seeks to
match supply with demand:
Make trade-offs among the dimensions of performance.
Reduce inefficiencies so that the business does not have to sacrifice one
performance versus another, thereby moving toward the efficient frontier.
Innovate and improve the operations, corresponding to a shift in the efficient
frontier.
Operations management
Improving the way, a business does its work in order to be part of the efficient
frontier (“The Science for the Better”).
Managing processes to efficiently (e.g., reduced cost, better utilized resources)
match demand and supply.
Types of costs:
- Costs for inputs things a business purchase
- Costs for resources help transform input into output that match customers
demand
Operations comes from the Latin word opus which means work.
System inhibitors
1. Waste the consumption of inputs and resources that do not add value to
the customer (expired food)
2. Variability predictable or unpredictable changes in the demand or the
supply process (customer arrival / requests / behavior)
3. Inflexibility the inability to adjust to either changes in the supply process or
changes in customer demand (sick coworker, same service?)
Operational problems modules / key decisions:
• Process Analysis and Improvement
• Process Productivity and Quality
• Anticipate Customer Demand
• Respond to Customer Demand
