CHAPTER 1: OPERATIONS FUNCTION

Objectives of the chapter

 Define new terms
 Identify objectives of operations management
 Describe scope of operation management
 Discuss relationship of operations management and decisions making
 Discuss operations as a function
 Describe operations as a production system
 Distinguish between manufacturing and service systems
 Discuss reasons for the study of operations management
 Describe new operations themes
 Differentiate between efficiency and effectiveness

Introduction
Production/operations management is the process, which combines and transforms various
resources used in the production/operations subsystem of the organization into value added
product/services in a controlled manner as per the policies of the organization. Therefore, it is
that part of an organization, which is concerned with the transformation of a range of inputs into
the required (products/services) having the requisite quality level.

The set of interrelated management activities, which are involved in manufacturing certain
products, is called as production management. If the same concept is extended to services
management, then the corresponding set of management activities is called as operations
management.

1.1. Definition of Production

Production is defined as ‘the step-by-step conversion of one form of material into another form
through chemical or mechanical process to create or enhance the utility of the product to the
user’. Thus production is a value addition process. At each stage of processing, there will be
value addition.

Edwood Buffa defines production as ‘a process by which goods and services are created’.
Some examples of production are: manufacturing custom-made products like boilers with a
specific capacity and manufacturing standardized products like, car, bus, motor cycle, radio,
television, etc.

1.2. Definition of Production/Operations Management

Production management is ‘a process of planning, organizing, directing and controlling the
activities of the production function.

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According to E.S. Buffa, Production management deals with decision-making related to
production processes so that the resulting goods or services are produced according to
specifications, in the amount and by the schedule demanded and with minimum cost.

Joseph G .Monks defines Operations Management as the process whereby resources, flowing
within a defined system, are combined and transformed by a controlled manner to add value in
accordance with policies communicated by management.

Operations management is a business functions that plans, organizes, coordinates and controls
the resources needed to produce goods and/or services.

1.3. Objectives of Operations Management

Objectives of operations management can be categorized into:
(i) Customer service and (ii) Resource utilization

(i) Customer service

The first objective is the customer service which means the service for the satisfaction of
customer wants. Customer service is therefore a key objective of operations management.

The Operations Management must provide something to a specification which can satisfy the
customer in terms of cost and timing. Thus, primary objective can be satisfied by providing the
‘right thing at the right price at the right time’. These three aspects of customer service -
specification, cost and timing should be met.

(ii) Resource Utilization

Another major objective is to utilize resources for the satisfaction of customer wants effectively,
i.e., customer service must be provided with the achievement of effective operations through
efficient use of resources. Inefficient use of resources or inadequate customer service leads to
commercial failure of an operating system.

Operations management is concerned essentially with the utilization of resources, i.e., obtaining
maximum effect from resources or minimizing their loss, under utilization or waste. The extent
of the utilization of the resources’ potential might be expressed in terms of the proportion of
available time used or occupied, space utilization, levels of activity, etc. Each measure indicates
the extent to which the potential or capacity of such resources is utilized. This is referred as the
objective of resource utilization.

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1.4. Scope of Production/Operations Management
Operations Management concern with the conversion of inputs into outputs, using physical
resources, so as to provide the desired utilities to the customer while meeting the other
organizational objectives of effectiveness, efficiency and adoptability. It distinguishes itself from
other functions such as personnel, marketing, finance, etc. by its primary concern for ‘conversion
by using physical resources’.

Following are the activities, which are listed under Production and Operations Management
functions:
1. Facility Location - Selecting appropriate location for the production
2. Plant layouts and material handling - Deciding upon arrangement of the machines,
equipment and necessary devices that leads to desired production. Storage of material and
handling it in most effective way to avoid the wastage.
3. Product design - Designing the product with regards to its production specification.
4. Process design - Determination of the production process which is most relevant and
efficient in the given state of affairs.
5. Production and planning control – of its various aspects how, when and where
producing a particular product will be done.
6. Quality control - Controlling the production and ensuring the quality by setting the
check points and taking the periodic measurements of the current performance.
7. Materials management - Managing the inventories of raw material, semi-finished and
finished goods.
8. Maintenance Management - Analysis the deviations and formulating the corrective
measures to stay in track with planned quality, time-schedule and predetermined cost
schedules.
.

Fig 1-3: Scope of production/operations management

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1.5. Operations management decisions
Operations Management is essentially a function concerning decision-making with operations
respect to a production/operation system so as to render the necessary customer satisfaction at
lowest cost.

a) Strategic (long-term) Decisions

A decision is said to be strategic if it has a long-term impact; influences a larger part of the
system and is difficult to undo once implemented. These decisions in the context of production
systems are essentially those which deal with the design and planning (long-range or
intermediate range) aspects. Some examples of these decisions are:
 Product selection and design
 Process selection and planning
 Facilities location
 Facilities layout and materials handling
 Capacity planning
b) Operational (short-term) Decisions
Operational level decisions deal with short-term planning and control problem. Some of these are
 Production planning, scheduling and control
 Inventory planning and control
 Quality assurance
 Work and job design
 Maintenance and replacement
 Cost reduction and control

1.6. Operations as a function

Activities in operations management (OM) include organizing work, selecting processes,
arranging layouts, locating facilities, designing jobs, measuring performance, controlling quality,
scheduling work, managing inventory, and planning production. Operations managers deal with
people, technology, and deadlines. These managers need good technical, conceptual, and
behavioral skills. Their activities are closely intertwined with other functional areas of a firm.

1.7. Operations as a production system

The production system is ‘that part of an organization, which produces products of an
organization through a defined system. A simplified production system is shown below:

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Fig.1.1: Schematic production system

The above figure describes a generalized concept of production system. It takes resource inputs
and processes them to produce useful outputs in the form of goods or services.

The production system has the following characteristics:

1. Production is a well organized activity with pre-established objective.
2. The system transforms the various inputs to useful outputs.
3. It is integrated with other organization system.
4. Feedback is necessary to control and improve system performance.
5. It is a continuous process

1.8. Manufacturing and Service Systems

There is less difference than similarity between P/OM in manufacturing and service
organizations. Manufacturing is the fabrication and assembly of goods, whereas service system
renders service.

Although basic structure of service systems is amenable to same analysis as manufacturing

systems, service systems do have some silent features making the management of such systems
slightly more difficult. Some of the differences between the two are as follows:
a. Manufacturing system produces tangible goods but, service system renders services.
b. Output from the manufacturing system can be stored whereas, for service cannot.
c. In manufacturing system, most of customers have no direct contact with operations; on
the other hand, in case of service systems customers are present during the creation of the
service.
d. Operations is capital intensive for manufacturing whereas, labor-intensive for service.
e. Location of service operation is dictated by location of users.

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Even though manufacturing and service systems are different on the above points, they are
similar on the following characteristics.
a) Firstly both have processes that must be designed and managed effectively.
b) Secondly, some type of technology be it manual or computerized, must be used in each
process.
c) Thirdly, both of them are usually concerned about quality, productivity and the timely
response to customers.
d) Fourthly they must make choices about capacity, location, and layout of their facilities.
e) Fifthly, both deal with suppliers of outside services and materials, as well as scheduling
problems.
f) Finally, matching staffing levels and capacities with forecasted demand is a universal
problem.

1.9. Reasons for the study of Operations Management

Operations management (OM) is studied for the following reasons.
 Critical function. OM is about how businesses manage the design, production, and
distribution of goods and services to the marketplace. Since all organizations either produce
tangible products or perform services, they are engaging in OM. In a very real sense, all
people in an enterprise are operations managers. Some are responsible for producing
products or delivering services to the customers. Others, working in marketing, sales,
finance, and information technology, are engaged in managing processes that supply internal
“customers” with services such as marketing and promotional plans, sales forecasts, budgets,
information, and so on.
 Organizing processes. The role of operations managers is to make decisions about how
businesses are organized to perform the information, production, and services activities that
best realize the goals and objectives of the organization.
 Process performance. Knowledge of OM provides a detailed insight into how products and
services are actually created and delivered to the marketplace. In addition, measuring the
performance of processes enables managers to assess how well the organization is meeting
its business targets and assists them in identifying areas for improvement.
 Cost. Managing operations constitutes by far the largest portion of cost expended by the
typical organization. By effectively managing a company’s costs (efficiencies) while
improving its customer service (responsiveness), OM can directly contribute to profitability
and enhance a company’s value to the marketplace.
 Role of OM professionals. Studying OM enables everyone in the organization to understand
not only what managers responsible for production and service management actually do, but

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 also what concepts and practices from the science of OM can be directly applied to their
business function.

Overall, a well-rounded education in business management would be incomplete without a

working knowledge of OM. OM provides managers with knowledge of analytical tools, as well
as management concepts, such as supply chain management (SCM), total quality management
(TQM), lean, and environmental sustainability, which enables them to solve real-world problems
from planning work and productivity targets on the departmental level to managing operations
on a global scale.

1.10. New Operations Themes

Operations managers work in an exciting and dynamic environment. This environment is the
result of a variety of challenging forces. Let’s look at some of these challenges:
1. Global Market Place: Globalization of business has compelled many manufacturing firms
to have operations in many countries where they have certain economic advantage. This has
resulted in a steep increase in the level of competition among manufacturing firms
throughout the world.
2. Total Quality Management (TQM): TQM approach has been adopted by many firms to
achieve customer satisfaction by a never-ending quest for improving the quality of goods and
services.
3. Flexibility: The ability to adapt quickly to changes in volume of demand, in the product mix
demanded, and in product design or in delivery schedules, has become a major competitive
strategy and a competitive advantage to the firms. This is sometimes called as agile
manufacturing.
4. Time Reduction: Reduction of manufacturing cycle time and speed to market for a new
product provides competitive edge to a firm over other firms. When companies can provide
products at the same price and quality, quicker delivery (short lead times) provide one firm
competitive edge over the other.
5. Technology: Advances in technology have led to a vast array of new products, new
processes and new materials and components. Automation, computerization, information and
communication technologies have revolutionized the way companies operate. Technological
changes in products and processes can have great impact on competitiveness and quality, if
the advanced technology is carefully integrated into the existing system.
6. Worker Involvement: The recent trend is to assign responsibility for decision making and
problem solving to the lower levels in the organization. This is known as employee
involvement and empowerment. Examples of worker involvement are quality circles and use
of work teams or quality improvement teams.
7. Re-engineering: This involves drastic measures or break-through improvements to improve
the performance of a firm. It involves the concept of clean-slate approach or starting from
scratch in redesigning the business processes.

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8. Environmental Issues: Today’s production managers are concerned more and more with
pollution control and waste disposal which are key issues in protection of environment and
social responsibility. There is increasing emphasis on reducing waste, recycling waste, using
less-toxic chemicals and using biodegradable materials for packaging.
9. Supply-Chain Management: Management of supply-chain from suppliers to final
customers reduces the cost of transportation, warehousing & distribution throughout the
supply chain.

1.11. Efficiency and Effectiveness

The difference between efficient and effective is that efficiency refers to how well you do
something, whereas effectiveness refers to how useful it is. “Efficiency is doing things right;
effectiveness is doing the right things.” Doing the Right Things is More Important than Doing
Things Right. For example, if a company is not doing well and they decide to train their
workforce on a new technology, the training goes really well - they train all their employees in a
very short time and tests show they have absorbed the training well. But overall productivity
doesn't improve. In this case the company's strategy was efficient but not effective.

1.12. Productivity (Measuring Productivity)

Productivity is defined in terms of utilization of resources, like material and labor. In simple
terms, productivity is the ratio of output to input. It has been said, “If you can‘t measure it, you
can‘t manage it”. This is particularly true of productivity. Now we come to the main question of
how we know that we are managing our operation system well. This concerns the efficiency with
which we are converting the input in to outputs. This conversion efficiency can be roughly
gauged by the ratio of: Output/inputs (a term which generally known as productivity of the
system).

Productivity is used for making comparison or to measure improvement. Productivity is a

relative term i.e., it gives sense only when we compare it with: company’s previous
performance, with other similar company’s performance or with the performance of leader of the
industry.

Productivity may be expressed as:

 Total factor productivity: measures the ratio of all output to all input i.e., total
outputs/total inputs. Total inputs include all resources used in the production of goods
and services: labor, capital, raw materials, and energy.
 Multi factor productivity: measures only a sub set of these inputs i.e., output/(labor +
capital), output/(labor+ capital + materials), output/(materials + energy).
 Single factor (partial productivity) measure: is the ratio of output to a single resource

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 (inputs) i.e., output/labor, output/capital, output/material, output/energy etc.
Example: ABC Furniture Company produced 1,000 chairs, with annual labor, raw materials and
equipment cost of $3000, $5,000 and $2000 respectively. Total productivity can be calculated
as:

Labor productivity, however, is measured for this example as:

1,000/3,000 = 0.33 ℎ / − .
There are several ways in which operations manager can improve productivity. These
may be classified as:
 Increasing output while keeping input constant
 Decreasing input while keeping output constant
 Increasing output at higher rate than increasing input
 Decreasing output at lower rate than decreasing input
 Increasing output while decreasing input (Most challenging but effective).