Why Study Operations Management?
In some ways, operations management is the opposite of project management. The objective of operations management is to refine and perfect repeatable processes. It is about keeping processes and systems stable, consistent, and always available. The objective of project and program management is to develop and introduce new or changed processes and technologies. It is about disrupting and changing the status quo. Projects are temporary endeavors. Operations management focuses on ongoing processes. This is why a project implementation plan is so critical, it helps transition the new process or technology into the existing operational landscape with the goal of adding new capabilities, tools, processes, and technologies.
So, why study operations management as a project manager? For three primary reasons:
1. Understanding the environment into which you will deploy your project is essential to program success. This chapter will describe common operations management concepts that may increase your knowledge and success in future projects.
2. One of the ways I have seen program managers deployed is to manage regular, repeatable bodies of work. This is more akin to operations management than project management. Examples include annual audit oversight, regular planning processes, review cycles, and so on. Some program managers work exclusively on work that directly intersects with operational duties, such as new product introduction (NPI) or mergers and acquisitions (M&A), and, thus, can learn from operations management.
3. Some operations management experts (and text books) include project management as a core competency within the operations management field. While I agree that project management competency is important in operations, I am not sure I agree it lives within the subset of operations management.
Operations management is a core MBA topic and something about which all business-savvy employees should develop a working knowledge.
Understanding the Basics
The history of operations management starts in the earliest days of the industrial revolution. Production techniques were largely manual and not terribly efficient at the start. Typically, the items being produced would be stationary, and the production workers would move around to do their work. This changed when assembly lines were invented. While Henry Ford did not invent assembly lines, his use of them was an early success story. He set up his automobile factory in a moving assembly line where he had workers stay in their areas and the automobile components would travel to them. This radically changed production capacity for automobiles. The foundations of manufacturing operations changed forever with the adoption of these practices.
Today, manufacturing organizations study and measure every motion required to make a product and continuously work to streamline the manufacturing process. Reducing the number of steps, or reducing the time for a step in the process can yield enormous efficiencies, especially when the volume of products produced is large.
Modern operations management looks beyond just manufacturing. Companies that have no manufacturing capabilities often have operations teams that help manage business processes and services. Operations management is involved in process and service design, risk management, quality measurement and improvement, enterprise planning, supply chain, and other areas key to running a business. One of the primary missions of operations management is to make the organization more efficient. Each dollar saved directly impacts the organization’s bottom-line financials.
A more recent evolution of operations management has to do with digital operations, or managing the organization in a paperless, data-driven way. The great thing about operations management is that the overall mission to drive efficiencies remains the same, but over decades, the tools and techniques used have evolved to keep up with business innovations. The remainder of this chapter will review the core principles of modern operations management.
Process Analysis and Design
Whether people think about it or not, an organization is made up of thousands of processes. Processes that seem basic or simple can actually have hundreds or thousands of subprocesses that support the primary processes. It is the job of operations experts to streamline, automate, and simplify these processes as much as possible.
Think about what it takes to cut a simple paycheck. First, a bank account needs to be set up and maintained, including managing who can access the account. Most larger organizations use direct deposit, so those processes must be established and communicated. Someone must calculate not just the paycheck amount, but how much federal, state, and local tax must be pulled. Those taxes must be collected, reported, and sent to the appropriate collection organizations. If the employer offers benefits such as health insurance, dental insurance, life insurance, retirement accounts, and similar, it must calculate, collect, and disposition each of those accounts. Once the amount of the paycheck is calculated, the check must be cut using whatever governance processes are required by the organization to ensure there is no abuse when issuing checks. All of the subprocesses required to cut a single check could number in the hundreds at larger organizations. It is no wonder that companies spend a significant time and money to continuously improve processes. In the case of paychecks, it has become common practice to outsource parts of the payroll process because they are not core to what most companies do. It makes more sense to pay someone else with expertise in that area to manage the processes for them.
Understanding what processes are core to an organization is one of the first discussions all organizations should have. If the company makes automobiles, then they will want to analyze and invest in making the manufacturing processes as efficient as possible. It is much less important for the automobile manufacturer to spend time and attention on processes such as payroll because these can be handed off to experts in that area. This allows the company to remain focused on its areas of competitive advantage.
Efficiency experts are sometimes hired to improve process efficiency. These experts will decompose all of the subprocesses, observe how they are run, measure current efficiency, and then make suggestions for improvement. Corporations such as General Electric developed entire training programs around process efficiency (called Six Sigma), with graduates certified at different belt levels that mirror martial arts achievements. The foundation of these programs is using lean process thinking and statistics to manage and improve processes.
Sometimes an organization does not have existing processes or is introducing a major change to existing process. This allows the company to design the process in question from the ground up. New processes are often designed and explained using workflow diagrams. Most project managers will be familiar with process workflow diagrams with their step-by-step mapping of process components.
Sometimes in large process changes (such as replacing an entire enterprise resource planning (ERP) system), the processes of an entire department are carefully blueprinted, then redesigned so that the new system will account for all of the many component processes.
Smaller organizations can get away with simpler processes at first. But as small organizations grow, they will have to add new processes and scale existing ones. A process that works for an organization with 50 people will not likely work for an organization with thousands of people. Process analysis and design are always taking place in organizations, and project and program managers are likely to be tasked with running processes re-design projects.
Risk Management
Another key responsibility of operations management is identifying, documenting, managing, and reporting on important risks that might impact an organization. Just as good project and program managers manage risk at a program level, operational risk management takes place at the organization level. Managing risk at the organizational level is often called enterprise risk management (ERM). The principles taught to project managers are largely the same as those used by enterprise risk managers. The definition of ERM is as follows:
Enterprise risk management (ERM) is a plan-based business strategy that aims to identify, assess, and prepare for any dangers, hazards, and other potentials for disaster—both physical and figurative—that may interfere with an organization’s operations and objectives.1
Benefits of Risk Management
Risk management takes concerted effort on the part of the organization to do well, so why would it want to make the effort?
• ERM examines positive (upside) risk as well as negative risk, allowing for organizations to exploit identified opportunities to their benefit.
• Business operations become more stable and reliable over time.
• When risk is better quantified, it enables management to make better decisions.
• Improved compliance processes can reduce the overall costs of compliance.
• When risks do hit, the impact can reduce financial and reputational damage.
Fundamentals of Risk Management
Similar to project risk management, there are a few primary steps risk managers take to reduce risk.
Identifying Risk: Before a risk can be managed, it has to be identified and cataloged. Risks can come from anywhere, and experienced risk managers will look at many types of risks. Risks can be physical, financial, competitive, political, regulatory, security, and so on. Each type of risk will be written in a risk register to be assessed.
Assessing Risk: Once risks are identified, they are assessed for how likely they are to actually happen, as well as how impactful they will be if they do manifest. Risks that are likely to arise are prioritized for further analysis, as are those risks that, if they hit, would devastate the organization.
Planning for Mitigation: Organizations cannot plan for every kind of risk. It doesn’t make financial sense to spend time on low-likelihood risk, or low-impact risks, but for those deemed worth further analysis, the organization can start to make plans for how it will respond. One of the more common methods to start risk planning is to decide whether the organization should take one of the following four actions:
1. Accept Risk: This is the simplest of actions and is a formal acknowledgment that the risk might happen, and if it does, the organization accepts the consequences. No additional action will be taken for this risk.
2. Mitigate: Mitigating the risk means the organization will take steps to reduce either the likelihood of the risk manifesting or reduce the impact if it happens. Mitigations could include adding safety processes or structures, increasing financial reserves, increasing patent protections, increasing security tools and monitoring, or many other mitigations.
3. Transfer: Some risks can be given to other organizations. This is most often accomplished through insurance. For example, if the risk of flooding is deemed large enough, an organization can choose to take out insurance against that risk. Other types of risk transfer can include using outsourcing organizations to do risky work.
4. Avoid: As it sounds, this means an organization will choose to step around the risk by stopping the activities that create the risk exposure. If the risk of government regulation is too large in a particular country, the organization may choose not to do business in that country, eliminating the risk.
For risks that are large enough, the organization may choose to do more detailed analysis and planning. Some organizations create full playbooks that they will activate should the risk manifest. One way of planning for major risks is to do business continuity planning (BCP). BCP sets up plans for how an organization will act when a major risk event takes place. This often includes impacts to headquarters, when executives have to be physically separated while maintaining control of the organization. BCP can include the loss of major business functions such as key information technology systems, major impacts to the workforce and their ability to do their work, loss of facilities, and other potentially catastrophic losses.
Monitoring and Reporting: Identifying and planning for risks does little good to the organization if the risk environment changes in the future, or the plans become outdated. Continuously monitoring for risk and remaining on the right footing to respond quickly to risk is part of a robust ERM program. Larger organizations may set up security operations centers where live camera feeds allow for centralized monitoring of physical assets such as buildings. Some functions within the organization, such as in finance, will monitor for financial risks, and security teams will monitor for security and data risks. Enterprise risk teams can bring all of these groups together when an event happens and coordinate a comprehensive response to lessen the impact.
Control
When a process is in control in an operations context, it is operating within pre-defined parameters. The National Institute of Standards and Technology defines control this way:
Process Control is the active changing of the process based on the results of process monitoring. Once the process monitoring tools have detected an out-of-control situation, the person responsible for the process makes a change to bring the process back into control.2
Thus, when a process is in control, it is operating within expected standards and producing expected outcomes. When a process goes out of control, it no longer produces the expected outcome.
How does this apply to project and program management? As project and program managers, we work within a framework of processes. The goal of these processes is to improve outcomes and consistency. Think about what control means within the common processes used in your organization. What is the implication if you do not follow your organization’s project reporting process? Would the needed status be available to leadership? Wouldn’t this create an out of control situation where the process did not produce the intended outcome? As you think through existing processes, it may be helpful to think about the intended outcomes and what happens when they are (or are not) producing expected outcomes.
This exercise becomes more powerful when you are creating or modifying processes to improve them. As you develop new processes, think about what the ideal, or in-control, state is. Then, think about what out of control would look like, and what you would need to do to bring the process back into control. The processes you create will become more meaningful as you consider the concept of control.
Quality Management
Occasionally, when I buy a new item of clothing, I will find a small piece of paper tucked in the clothing that says “Inspected by,” and then a person’s name or identification number. This is meant to show a consumer that the company has a strong quality program because the item was inspected. However, quality practitioners will recognize the flaw in this. Quality should be built into the system from the start of the process so that post-manufacturing inspection is not required (or minimally required). This is where a good project manager can be invaluable—by including quality as one of the key pillars of project delivery.
One of the principal founders of the modern quality movement is W. Edwards Deming. Deming, an engineer and statistician, found enormous success in Japan and helped transition their struggling automobile manufacturing sector into an international juggernaut known for the quality of its automobiles. Deming introduced many of the key quality principles that are still in use today, including the Deming wheel.
Deming Wheel
The key steps to ensuring quality outcomes include Plan, Do, Study, Act, which form a virtuous cycle. Each step is briefly outlined as follows:
1. Plan: This step includes identifying the area to improve, collecting data, and developing a plan for the improvement.
2. Do: This step involved implementing the plan, then collecting data on whether the plan has actually improved the quality of the output.
3. Study: This step is about analyzing the new data and comparing it to the original data.
4. Act: If data shows the plan has improved quality, continue with the plan. If not, make adjustments, collect new data, and do additional analysis.
By using the principles of the Deming wheel when implementing change, you can bolster odds of success with that change.
There are many key contributors to modern quality practices besides Deming. It is worth briefly mentioning at least two more because the organization you work for may have been influenced by their contributions. One is the work of Joseph Juran, who was a major force in spreading the Pareto principle across the United States and the industrial world. The other is Kaizen, a Japanese principle of continuous improvement. Japanese auto manufacturer Toyota adopted the principles of Kaizen as part of their quality drive decades ago. The principle of Kaizen includes making small but meaningful changes that can create great impact over time.
Supply Chain Management
Supply chain management (SCM) focuses on ensuring the materials and raw ingredients needed to create the organizations’ products are available in the quantities needed, at the quality needed, and at the time needed for business operations. It also includes storage of products as they are in mid-assembly, which is called work in progress (WIP). Supply chain includes the logistics of shipping and receiving goods, ensuring items received are up to the specification required, return of defective items, and storage of supplies waiting for assembly.
Project and program management is dependent on, and a beneficiary of, SCM. Many of the inputs we need to deliver our projects may be a product of SCM. It is interesting to note that projects also have the concept of work in progress to express the state between raw ingredient and finished product. Project and SCM disciplines have many common connections and dependencies on each other.
In stable economic times, with solid transportation distribution channels, SCM focuses on optimizing supply chains. Other times, such as during the Covid-19 pandemic, supply chains were disrupted, creating shortages in many products. From toilet paper, to disinfecting supplies, to flour—the demand for certain supplies created unprecedented pressure on some supply chains. One of the more noticeable shifts in demand during the pandemic was the shift away from restaurant meals to cooking at home. Interestingly, the shortages seen in supermarkets was not, in most cases, due to a lack of food in the supply chain, but due to the fact that the supply chain was set up to supply much of the food in institutional packaging for restaurants. At one point, some supermarkets started to repackage the flour received for in-store bakeries into smaller consumer-sized packages because supply chains could not keep up with the demand for consumer-packaged flour.
Even without a pandemic, it is difficult for supply chains to react quickly to large changes in demand. A sudden change in consumer preference can cause ripples in supply chains across the world. Unfortunately for supply chain managers, the demands of consumers are changing faster than ever, creating the need for fast, flexible supply chains.
Some organizations such as coffee producers sometimes get involved in the very earliest part of production by investing and controlling farming practices to ensure adequate supply. Due to the difficult growing conditions and small-farm ownership in some coffee-producing countries, coffee companies must invest in farm infrastructure, water supplies, and other necessities to keep production stable.3
Modern SCM involves using technology to manage resources at every stage of the production process. ERP systems are critical to managing supply chains. ERP systems are used for placing orders, tracking them, paying for them, receiving them, and then tracking the progress as those raw supplies are turned into a product.
Another consideration in modern supply chains is the shift to green, renewable, and humanely sourced supplies. If it is not complicated enough to secure a continuous supply of resources for a business, it is now important for organizations to pay attention to how the suppliers treat their employees and the environment. Companies from Apple to Gap regularly audit their suppliers to ensure that their suppliers are treating their employees humanely, and not doing anything to harm the environment. A few decades ago, this kind of involvement in the business of a supplier was unheard of, but it is a reality in today’s supply chains.
Depending on where you work, you may be involved in projects that directly impact the organization’s supply chain. Whether it is working on an ERP project, optimizing supplier contracting, or any number of potential touch points, SCM is one of the most important aspects of any organization.
Future of Operations—Digital
As mentioned earlier in the chapter, there is a new type of operations management that sprung up as a result of the transition companies are making to become digital enterprises. The digital transformation taking place puts digital operations at the heart of the organization. Digital operations, sometimes called DigitalOps, put the companies’ processes and data at the heart of the operation. DigitalOps helps organizations become more agile by coordinating resources and systems across the company.
Application to Project and Program Managers
In the beginning of this chapter, I said operations management and project management are opposites. I still stand by that statement, but the reality is that both of these professional fields need each other and both fulfill critical missions within an organization. Operations management is about keeping an organization stable and secure. Projects are about introducing change.
Given the scope of operations management, there is a strong chance that at some point, you will manage a project that impacts some aspect of it. Understanding the basics of operations management will help you be a better program manager. Even better, incorporating principles of operations management such as the process design, risk management, and Deming wheel can improve our project management practice.
Free lean textbook: https://open.umn.edu/opentextbooks/textbooks/beyond-lean-simulation-in-practice-second-edition
Free risk management textbook: https://open.umn.edu/opentextbooks/textbooks/risk-management-for-enterprises-and-individuals