Operations management

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Operations management looks at the processes businesses use to turn raw materials into finished products. Noam Shiber published a provocative article in The New Republic recently suggesting that the decline of American manufacturing is due in large part to the decline of operations management in the business school curriculum. Instead of studying how to make things, a large majority (~67%) of students at top MBA programs major in finance. As a result, business schools largely teach finance, and in many programs it isn’t even possible to major in operations.

In a similar vein, Gary Pisano at the Harvard Business Review notes that the trend of outsourcing production may weaken the ability of American companies to invent new products. When we design products here and have them manufactured overseas, those foreign companies gain an edge in learning how to manufacture efficiently, and once they know how to make our products, “they are in a much better position to move up the food chain into manufacturing and designing more sophisticated components and subsystems and, eventually, the entire product.”

What happens when we have a generation of managers who think of companies as assets to be bought and sold rather than as “makers of specific products, where the goal was to maximize quality and long-term market share”?

The field of operations management studies how a business produces its products. Remember that products include both goods and services, so that even though we tend to focus on production of goods when we discuss operations management, the same principles apply to producing services. Operations management is concerned with deciding on a production method, whether mass production, mass customization, or make to order production.

In addition, operations managers must decide on where to locate and design the layout of production facilities. Think about why Mercedes chose to locate in Vance. What advantages in terms of climate, transportation, and land and labor costs does that site provide? Would the same site be a good location for a Google data center or a Best Buy? Would The Dallas, Oregon, be a good site for a Mercedes plant?

One of the most important functions of operations management is quality management. Traditionally, firms used quality control to ensure that their products were not defective by inspecting finished goods. The problem with this method is that once the problem is found, it’s too late—you’ve already produced a defective product. QC treats the symptoms and not the causes. Since the 1950s, we’ve seen the rise of quality assurance, most notably in the form of Total Quality Management. The idea behind TQM is to make sure that the production process prevents defects from occurring in the first place. TQM seeks to constantly improve customer satisfaction by involving all employees in producing quality products, and by constantly measuring, analyzing, and controlling the production process to improve the level of quality. Because of this focus on continuous improvement, many people refer to total quality management as CQI, or continuous quality improvement. More recently, Six Sigma has taken the idea of continuous quality improvement and used statistical process control to reduce variability and keep defects below 3.4 per million (six standard deviations from the mean).