Operations Management: Chapter one:-Nature of Operations Management

CHAPTER ONE
NATURE OF OPERATIONS MANAGEMENT

Learning objectives

After completing this chapter, you will be able to:

 Define Operations management
 Discuss history of operations management
 Distinguish manufacturing and service operations
 Explain operations decision making

1.1Introduction
 Today companies are competing in a very different environment than they
were only a few years ago.Production and operations management has seen
many innovations in recent years, becoming a topic of critical importance in
business today.
 Demands for business reengineering, quality, time-based competition, value-
adding processes, and a global view have demonstrated that superior
management of the operations function is vital to the survival of the firm.
 An understanding of production and operations management strategy and its
function is a necessary part of any good business education.
 The subject matter represents a blend of concepts from industrial
engineering, cost accounting, general management, quantitative methods,
and statistics.
 Production and operations activities, such as choosing a location for an
office or plant, allocating resources, designing products and services,

Page 1
Operations Management: Chapter one:-Nature of Operations Management

scheduling activities, and assuring and improving quality are core activities
and often strategic issues in business organizations.
 Some of you are or will be employed directly in these areas, while others
will have jobs that are indirectly related to this area. So whether this is your
field of study or not, knowledge of this field will certainly benefit you and
the organization you work for.
1.2 What is Operations Management?
Every business is managed through three major functions: finance, marketing, and
operations management. Other business functions such as accounting, purchasing,
human resources, and engineering support these three major functions. Finance is
the function responsible for managing cash flow, current assets, and capital
investments. Marketing is responsible for sales, generating customer demand, and
understanding customer wants and needs. Most of you have some idea of what
finance and marketing are about, but what does operations management do?

President or CEO

Operations
Marketing Finance
V.P. of Marketing V.P. of Operations V.P. of Finance
Manages: Manages: - people Manages:
-customer demands -equipment -cash flows
Generates:
Figure - Technology
1.1 Organizational chart showing the -current assets and
three major business functions
-sales for goods and - Materials and - -capital investments’
services information
Operations management (here after To produce: isgoods
OM) defined by many authors in deferent
and/or
services here.
ways. However, following definitions are proposed
 OM is the set of activities that creates value in the form of goods and
services by transforming inputs in to outputs (Heizer and Render, 2011).

Page 2
Operations Management: Chapter one:-Nature of Operations Management

 OM can be defined as the management of the conversion process, which

converts land, labor, capital, and management inputs into desired outputs
of goods and services (Roy, 2005).
 OM is defined as the design, operations, and improvement of the
systems that create and deliver the firm’s primary products and services
(Chase et.al, 2005).
 In other way, OM is the business function that plans, organizes,
coordinates, and controls the resources needed to produce a company’s
goods and services.
 Like marketing and finance, OM is a functional field of business with
clear line management responsibilities.
 Operations management is a management function. It involves managing
people, equipment, technology, information, and many other resources.
 Operations management is the central core function of every company.
This is true whether the company is large or small, provides a physical
good or a service, is for profit or not for profit.
 Every company has an operations management function. Actually, all the
other organizational functions are there primarily to support the
operations function. Without operations, there would be no goods or
services to sell.
1.3Why Study Operations Management

1. Operations Management creates an understanding of modern approaches to

managing operations.
 Every organization produces some product or service.
 The concept of OM becoming equally important in
services in service and manufacturing organizations.

Page 3
Operations Management: Chapter one:-Nature of Operations Management

 It has long been true in manufacturing.

 Forexample, total quality management,business
process reengineering, and just - in- time delivery are
concepts that fall under the OMumbrella.
2. Operations Management provides a systematic way of looking at
organizational processes.
 OM uses analytical thinking to deal with real world
problems like competition.
 It sharpens our understanding of the world around
us whether we are talking about how to compete
with Japan or how many lines to have at the bank
teller’s window.
3. Operations Management presents interesting career opportunities.
 These can be in direct supervision of operations or in
staff positions in operations management specialties
such as supply chain management and quality
assurance.
4. The concepts and tools of Operations Management are widely used in
managing other functions of a business.
 All managers have to plan work, control quality, and
ensure productivity of individuals under their
supervision.
1.4 The Role of Operations Management
 The role of operations management is to transform a company’s inputs into
the finished goods or services.
 Inputs include human resources (such as workers and managers), facilities

Page 4
Operations Management: Chapter one:-Nature of Operations Management

and processes (such as buildings and equipment), as well as materials,

technology, and information. Outputs are the goods and services a company
produces. Figure 1.2 shows this transformation process.

 At a factory, the transformation is the physical change of raw materials into

products, such as transforming leather into Shoe and bag, wheat in to
flour,or cotton in to cloths.

 At an airline, it is the efficient movement of passengers and their luggage

from one location to another. At a hospital it is organizing resources such as
doctors, medical procedures, and medications to transform sick people into
healthy ones.
 Operations management is responsible for orchestrating all the resources
needed to produce the final product. This includes
designing the product
deciding what resources are needed
arranging schedules, equipment, and facilities
managing inventory
controlling quality
designing the jobs to make the product and
designing work methods.
 Operations management is responsible for all aspects of the process of
transforming inputs into outputs.
 Customer feedback and performance information are used to continually
adjust the inputs, the transformation process, and characteristics of the
outputs.
 As shown in Figure 1.2, this transformation process is dynamic in order to
Page 5
 Operations Management: Chapter one:-Nature of Operations Management

adapt to changes in the environment.

 Proper management of the operations function has led to success for many
companies.

Customer feedback

Inputs
The Outputs
-Human resource
Transformation  Goods
-Facilities and process
process  Services
-Technologies
-Materials

Performance information
Figure 1.2The transformation Process

Table 1.1 Examples of productive systems their inputs, transformation process

and outputs.
System Primary Inputs Resources Transformation Typical
Functions Output
Hospital Patients MDS, Nurses, Examination, surgery,
Medical monitoring , Healthy
supplies, medication and individual
Equipment Therapy
Restaurant Hungry Food, chef, Well prepared well
Customers wait-staff, served food agreeable Satisfied
environment environment (physical customers

Page 6
 Operations Management: Chapter one:-Nature of Operations Management

and exchange
Automobile Sheet steel, Tools, Fabrication and High quality
factory engine parts equipment, assembly of cars automobile
workers physical)
College or High school Teachers Imparting knowledge Educated
university graduates book, and skills via lecture individuals
classrooms (informational)
Department Shoppers Displays, Attract customers Sales to
store stocks of promote products fill satisfied
goods, sales orders (exchange) customers
clerks
Airline Travelers Airplanes, Move to destination On-time, safe
crews , delivery to
scheduling/ destination
ticketing
systems

In general, transformation processes can be categorized as follows:

Physical (as in manufacturing)
Location (as in transportation)
Exchange (as in retailing)
Storage (as in warehousing)
Physiological (as in health care)
Informational (as in telecommunications)
These transformations are not mutually exclusive. For example, a department
store can (1) allow shoppers to compare price and quality (informational),
(2) hold items in inventory until needed (storage), and (3) sell goods
Page 7
 Operations Management: Chapter one:-Nature of Operations Management

(exchange).
1.5Historical Development of Operation Management
When we think of what operations management does namely, managing the
transformation of inputs into goods and services we can see that as a
function it is as old as time. Think of any great organizational effort, such as
organizing the first Olympic games, building the Great Wall of China, or
erecting the Egyptian pyramids, and you will see operations management at
work.
Operations management did not emerge as a formal field of study until the
late 1950s and early 1960s, when scholars began to recognize that all
production systems face a common set of problems and to stress the systems
approach to viewing operations processes.
Many events helped shape operations management. We will describe some
of the most significant of these historical milestones and explain their
influence on the development of operations management. Later we will look
at some current trends in operations management.

Table 1.3 Thehistorical milestones and current trends of operation management

Concept Time Explanation
Industrial Revolution Late 1700s Brought in innovations that changed production
by using machine power instead of human
power
Brought the concepts of analysis and
Scientific management Early 1900s
measurement of the technical aspects of work
design, and development of moving assembly
lines and mass production

Page 8
 Operations Management: Chapter one:-Nature of Operations Management

Focused on understanding human elements of

Human relations 1930s to 1940s
job design, such as worker motivation and job
movement
satisfaction
Focused on the development of
Management science 1940s to 1960s
quantitative techniques to solve
operations problems
Enabled processing of large amounts of data
Computer age 1960s
and allowed widespread use of quantitative
procedures
Designed to achieve high-volume production
Just-in-time systems 1980s
with minimal inventories
(JIT)

Sought to eliminate causes of production defects

Total 1980s
qualitymanagement
(TQM)
Reengineering 1980s Required redesigning a company’s processes
in order to provide greater efficiency and cost
reduction
Considered waste reduction, the need for
Environmental issues 1980s
recycling, and product reuse
Offered customization on a mass
Flexibility 1990s
scale.
Time-based 1990s Based on time, such as speed of delivery
competition
Supply chain 1990s Focused on reducing the overall cost of the system
management that manages the flow of materials and
information from suppliers to final customers

Page 9
 Operations Management: Chapter one:-Nature of Operations Management

Designed operations to compete in the global

Global competition 1990s
market
Electronic commerce Late 1990s; Used the Internet for conducting business activity
early
twenty-first
century

Table 1.3 Historical Development of Operations Management

1.6Manufacturing and Service Operations

Organizations can be divided into two broad categories: manufacturing
organizationsand service organizations.
Manufacturing implies production of a tangible output (i.e. something that
can be seen or touched) such as a car, tire, bread, knife, etc.
Service on the other hand, generally implies an act. Examples here include a
doctor’s examination, TV and auto repair, lawn care and lodging in a hotel.
The majority of service jobs fall into the following categories:
Education (schools, colleges, universities, etc.)
Business services (data processing, delivery, employment agencies, etc.)
Personal services (laundry, dry cleaning, hair/ beauty, gardening etc)
Health care (doctors, dentists, hospital care, etc)
Financial services (banking, stock brokerages, insurance, etc)
Wholesale / retail (clothing, food, appliances, stationeries, toys, etc)
Government (federal, state, local)

The difference between Manufacturing and service operation

The differences between manufacturing and service operations fall into the six
categories.

Page 10
Operations Management: Chapter one:-Nature of Operations Management

 First, manufacturing organizations produce physical, tangible goods that can

be stored in inventory before they are needed. By contrast, service
organizations produce intangible products that cannot be produced ahead of
time.
 Second, in manufacturing organizations most customers
have no direct contact with the operation. Customer contact
is made through distributors and retailers. For example, a
customerbuying a car at a car dealership never encounters
the automobile factory. However, in service organizations
the customers are typically present (inputs) during the
creation of the service. Hospitals,colleges, theaters, and
barbershops are examples of service organizations in which
the customeris present during the creation of the service.
 Third, service operations are subject to greater variability of input than
typical manufacturing operations. For example, each patient, each lawn and
each auto repair presents specific problems that often must be diagnosed
before it can be remedied. Manufacturing operations often have the ability to
carefully control the amount of variability of inputs and thus achieve low
variability in outputs. Consequently, job requirements for manufacturing are
generally more uniform than those for services.
 Fourth, because of the on-site consumption of service and the high degree of
variation of inputs, service require a higher labor content whereas
manufacturing, with exceptions, can be more capital intensive (i.e.,
mechanized).
 Fifth, measurement of productivity is more straightforward in manufacturing
due to the high degree of uniformity of most manufactured items. In service

Page 11
Operations Management: Chapter one:-Nature of Operations Management

operations, variations in demand intensity and in requirements from job to

job make productivity measurement considerably more difficult. For
example, compare the productivity of two doctors. One may have a large
number of routine cases while the others does not, so their productivity
appears to differ unless a very useful analysis is made.
 The final distinction between manufacturing and service operations relates to
the measurement of quality. Since manufacturing systems tend to have
tangible products and less customer contact, quality is relatively easy to
measure. However, the quality of service systems, which generally produce
intangibles, is often very difficult to measure. Coupled with this, the
subjective nature of individual preferences further makes the measurement
of services difficult(objective measurement of quality is sometimes
impossible). For example, one customer might value a friendly chat with the
sales clerk during the purchase. However, another customer might assess
quality by the speed and efficiency of transaction.
 To sum up, the distinctions between manufacturing and service operations
are as follows

Characteristics Manufacturing operation Service operation

Product Tangible, durable product Intangible, perishable

product

Inventory Output can be inventoried Output cannot be

inventoried

Customer contact Low High

Uniformity of input High Low

Page 12
Operations Management: Chapter one:-Nature of Operations Management

Intensity Capital intensive Labor intensive

Measurement of Easy Difficult

productivity

Quality measurement Quality easily measured Quality not easily

measured

Similarities between manufacturing and service operations

In spite of the differences already discussed there are compelling similarities
between manufacturing and service operation. Since manufacturing and service
operations are often similar in terms of what is done but different in terms of how it
is done. For instance both involve the following characteristics.
 Firstly both have processes that must be designed and managed effectively.
 Secondly, some type of technology be it manual or computerized, must be
used in each process.
 Thirdly, both of them are usually concerned about quality, productivity and
the timely response to customers.
 Fourthly they must make choices about capacity, location, and layout of
their facilities.
 Fifthly, both deal with suppliers of outside services and materials, as well as
scheduling problems.
 Finally, matching staffing levels and capacities with forecasted demand is a
universal problem.
1.7 Operations Decision Making

Page 13
Operations Management: Chapter one:-Nature of Operations Management

All good managers perform the basic functions of the management process. The
management process consists of planning, organizing, staffing, leading, and
controlling. Operations managers apply this management process to the decisions
they make in the OM functions. The 12 major decisions of OM are shown in Table
1.2. Successfully addressing each of these decisions requires planning, organizing,
staffing, leading and controlling. Typical issues relevant to these decisions are also
presented.
No Decisions areas Issues
.
1 Operations strategy What are the unique features of the business that will
make it competitive?
2 Product design What are the unique features of the product?
3 Process selection What are the unique features of the process that give
the product its unique characteristics?
4 Supply chain What sources of supply should we use to ensure regular
managements and timely receipt of the exact materials we need? How
do we manage these sources of supply?
5 Quality management How will managers ensure the quality of the product,
measure quality, and identify quality problems?
6 Forecasting What is the expected demand for the product?

7 Location analysis Where will the facility be located?

8 Capacity planning How largeshould the facility be?

9 Facility layout How should the facility be laid out? Where should the
kitchen and ovens be located? Should there be seating
for customers?
10 Job design and work What jobs will be needed in the facility, who should do

Page 14
Operations Management: Chapter one:-Nature of Operations Management

measurement what task, and how will their performance be measured?

11 Inventory management How will the inventory of raw materials be monitored?
When will orders be placed and how much will be kept
in stock?
12 Scheduling Who will work on what schedule?

1.8Productivity Measurement
 Recall that operations management is responsible for managing the
transformation of many inputs into outputs, such as goods or services.
 Productivity is measure of how efficiently inputs are being converted
into outputs.
 It is computed as a ratio of outputs (goods and services) to inputs (e.g.,
labor and materials).
 The more efficiently a company uses its resources, the more productive
it is:
Output
Productivity = Input

Page 15