Operations Management: Understanding and Using It

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Natalya Yashina is a CPA, DASM with over 12 years of experience in accounting including public accounting, financial reporting, and accounting policies.

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What Is Operations Management?

Operations management (OM) is the administration of business practices to create the highest level of efficiency possible within an organization. It is concerned with converting materials and labor into goods and services as efficiently as possible to maximize the profit of an organization.

Operations management teams attempt to balance costs with revenue to achieve the highest possible net operating profit.

Key Takeaways

• Operations management (OM) is the administration of business practices to create the highest level of efficiency possible within an organization.
• Operations management is concerned with converting materials and labor into goods and services as efficiently as possible.
• Corporate operations management professionals try to balance costs with revenue to maximize net operating profit.

Understanding Operations Management

Operations management involves utilizing resources from staff, materials, equipment, and technology. Operations managers acquire, develop, and deliver goods to clients based on client needs and the company’s abilities.

Operations management handles various strategic issues, including determining the size of manufacturing plants and project management methods and implementing the structure of information technology networks. Other operational issues include the management of inventory levels, including work-in-process levels and raw materials acquisition, quality control, materials handling, and maintenance policies.

This aspect of a company entails studying the use of raw materials and ensuring that minimal waste occurs. Operations managers use numerous formulas, such as the economic order quantity formula, to determine how large an inventory order to process and when to do so as well as how much inventory to hold on hand.

The combination of understanding and coordinating the work of a company is central to becoming a successful operations manager.

Operations and Supply Chain Management (OSCM)

A critical function of operations management relates to the management of inventory through the supply chain. This process is known as operations and supply chain management (OSCM).

To be an effective operations management professional, one must be able to understand the processes that are essential to what a company does and get them to flow and work together seamlessly. The coordination involved in setting up business processes in an efficient way requires a solid understanding of logistics.

An operations management professional understands local and global trends, customer demand, and available resources for production. Operations management approaches the acquisition of materials and the use of labor in a timely, cost-effective manner to deliver customer expectations. Inventory levels are monitored to ensure that ample quantities are on hand. Operations management is responsible for finding vendors that supply the appropriate goods at reasonable prices and have the ability to deliver the product when needed.

Another large facet of operations management involves the delivery of goods to customers. This includes ensuring that products are delivered within the agreed time commitment. Operations management also typically follows up with customers to ensure that the products meet quality and functionality needs. Finally, operations management takes the feedback received and distributes the relevant information to each department to use in process improvement.

What Operations Managers Do

Operations managers are involved in coordinating and developing new processes while reevaluating current structures. Organization and productivity are two key drivers of being an operations manager, and the work often requires versatility and innovation. As part of their daily responsibilities, operations managers must possess a variety of skill sets, including:

• Technical expertise in areas such as production automation, data entry, budget tracking, and design.
• Organizational ability and attention to detail, including keeping track of project files, employee reports, budgets, schedules, and other details related to company processes.
• Motivational prowess in the form of strong leadership skills that provide the expertise to motivate others, inspire ideas, and foster a supportive and diverse team.
• Analytical aptitude, including skill in risk analysis and mitigation when initiating new projects. Operations managers must also analyze processes to identify challenges and offer solutions if negative situations develop.
• Decision-making proficiency, especially under stress, when there is very little time to assess all factors.
• Ability to maintain quality standards, including as they relate to raw materials, machinery, manufacturing procedures, packaging, delivery processes, and the finished product.

A master of business administration (MBA) degree in operations management can provide a global perspective on industry trends and an awareness of financial regulations and political uncertainties that can affect an organization. It also provides a solid grasp of the inherent complexities and the tools needed to respond effectively to change.

What Is the Purpose of Operations Management?

Operations management (OM) is concerned with controlling the production process and business operations in the most efficient manner possible. OM professionals attempt to balance operating costs with revenue to maximize net operating profit.

What Are Some Systems of Operations Management?

Modern operations management revolves around four theories:

• Business process redesign (BPR), which is focused on analyzing and designing workflow and business processes within a company. The goal of BPR is to help companies dramatically restructure the organization by designing the business process from the ground up.
• Reconfigurable manufacturing systems, which are designed to incorporate accelerated change in structure, hardware, and software components. This allows systems to adjust rapidly to the capacity at which they can continue production and function efficiently in response to market or intrinsic system changes.
• Six Sigma, an approach that focuses on quality. The word “six” references the control limits, which are placed at six standard deviations from the normal distribution mean. Tools used within the Six Sigma process include trending charts, potential defect calculations, and other ratios.
• Lean manufacturing, which is the systematic elimination of waste within the manufacturing process. This theory sees resource use for any reason other than value creation for customers as wasteful and seeks to eliminate wasteful resource expenditures as much as possible.

What Is an Example of Operations Management?

Operations management is prevalent and most easily understood in the healthcare sector. The current healthcare system overuses expensive, technological, and emergency-based treatment. High costs from care often remain uncompensated due to uninsured patients. The high frequency of services in expensive settings creates a burden on taxpayers, health insurance holders, and healthcare institutions.

To combat this, operations management seeks to streamline costs through optimally allocating resources and optimizing efficiencies to provide quality patient care.

The Bottom Line

In simple terms, operations management (OM) is the process of prioritizing and employing business practices designed to achieve maximum efficiency as a means to achieve maximum profitability. Within the process, operations managers utilize organization and productivity to achieve their primary goals.

Balancing the efficient use of resources, including staff, materials, equipment, and technology, is key to a successful OM process and, by extension, the success of the company.