1.3 Modern Operations Management: A Brief History

The productivity gains of the Industrial Revolution increased prosperity, giving birth to our modern consumer society. Consumers began to buy in large enough quantities to create economies of scale. They also demanded efficient operations to produce a greater variety of affordable products.

Frederick Taylor brought an early form of continuous improvement to the factory floor. His approach of observing, training, monitoring, and improving led to standardized operations practices.3

Computational power transformed operations from an art to a science. Computers made it possible for complex algorithms to be applied routinely in situations where judgment and guessing previously prevailed. Computers also made smart machines a reality. Robots took over many mundane and hazardous jobs.

Toyota energized a paradigm shift, demonstrating that if you build the right manufacturing environment, your people can come up with the ideas needed to continuously find and eliminate waste. Lean Six SigmaA quality philosophy and practice that relies on the DMAIC methodology and to statistical analysis to identify and remove the causes of defects, reducing defects to 3.4 per million parts produced. made it possible to produce high-quality products at low costs, quashing the belief that a tradeoff always exists between quality and costs.

Since the 1980s, services have dominated economic activity in developed economies. Services now account for 80% of gross domestic product (GDP) and employment in the U.S. By contrast, employment in U.S. manufacturing has decreased from nearly 18 million in 1990 to 12.8 million today.4 To drive growth—and living standards—service operations had to become more innovative and productive.

From the 1980 to the early 2000s, the earning power of consumers increased dramatically. The result: Higher earnings meant more disposable income, and a shift in consumer priorities. Sustainability became a key corporate priority.5

However, the Great Recession and the COVID pandemic showed that when the economy slows down so does momentum for sustainability. The result: A great debate about how fast to transition to a sustainable future has emerged. Figure 1.2 depicts the motivations that drive this debate. Our sustainable future depends on innovations—operating and technological—that enable the economy and environment to thrive together.

The 1980s ushered in a new era of economic globalization. "Why," you ask? Because that is where the money is. Consider the fact that almost 80% of the world's gross domestic product (GDP) is produced outside the U.S.—the world's largest economy. And over 80% of the world' potential consumers live outside India—the world's most populous country. Simply put, companies worldwide depend on global resources and consumer markets for growth and profits.

Global manufacturing and supply networks make it possible to reach these customers. That's why companies have invested huge sums of money in foreign direct investment (FDI)—i.e., plant and equipment as well as ownership stakes in foriegn companies—to gain access to worldwide resources and global consumers. Tapping the global market to improve cash flow and profitability has become the chosen path to long-term success for most big companies.

Table shows the FDI stocks for the five largest economies in the world (see Table 1.1). The data imply that access to global markets is a key to national wealth—and improved living standards. The flood of FDI into China over the past 30 years has enabled China to become the world's second largest economy, lifting 800 million people out of poverty. The need for market access, not just low-cost labor, will make re-designing manufacturing footptints to increase resilience post COVID a real challenge.

The Internet made ecommerce a reality. Today, you can go to a store to check out the new TV (or whatever else) you're shopping for and then do all of your comparison-shopping online. The convenience of shopping at your leisure and having products delivered to your door has led to dramatic growth in ecommerce (see Figure 1.3).

However, retailers, including Amazon, are still trying to figure out how to manage eCommerce operations profitably. The big question: Will changes in shopping behavior that drove huge growth in ecommerce during the 2020 COVID pandemic persist? Or will consumers long to return to a more social in-store experience?

The Internet of ThingsThe process of connecting different devices to the Internet, creating smart devices. (IoT) is also making smart devices—from phones and thermostats to cars and factory equipment—possible. You can already set your home's thermostat or check in on your factory's assembly line from anywhere in the world (as long as you have Internet access). As IoT evolves, the Factory of the Future, where the factory runs itself with minimal human intervention, is coming closer to reality.