Unit I : Introduction to Operations

Management
1. Operations and Productivity
1.1 Introduction
1.2 organizing for transformation process
1.3 Objectives of operations management
1.4 Heritage of operations management
1.5 Operations in service sector
1.6 Trends in operations management
1.7 Productivity challenges
1.8 Ethics and social responsibility
 1.1 Introduction of OM
• Operations Management is:
 The art of managing process to best support organizational
goals and policies.
 The management of systems or processes
that create goods and/or provide services (William J
Stevenson)
 The set of activities that creates value in the form of goods
and services by transforming inputs into outputs. (Jay Heizer
and Barry Render)
 Operation Manager’s job is to manage the process of
converting inputs into desired outputs. (Everett E Adam Jr.
and Ronal J. Ebert)
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 OM is
• OM Transforms inputs to outputs
– Inputs are resources such as
• Man, Machine , Material, and Money

– Outputs are goods and services

 Scope of Operations Management
• Operations Management includes:
– Forecasting
– Capacity planning
– Scheduling
– Managing inventories
– Assuring quality
– Motivating employees
– Deciding where to locate facilities
– Supply chain management

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 Types of Operations

Operations Examples
Goods Producing Farming, mining, construction ,
manufacturing, power generation
Storage/Transportation Warehousing, trucking, mail
service, moving, taxis, buses,
hotels, airlines
Exchange Retailing, wholesaling, banking,
renting, leasing, library, loans
Entertainment Films, radio and television,
concerts, recording
Communication Newspapers, radio and television
newscasts, telephone, satellites

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 Key Decisions of Operations Managers

• Design of goods and services

• Managing quality
• Process and capacity strategy
• Location strategy
• Layout strategy
• Human resources and job design
• Supply chain management
• Inventory management
• Scheduling:
• maintenance
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1.2 organizing for transformation process

The Three Basic Functions

Organization

Finance Operations Marketing

Function Function Function

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Operation function involving the transformation of
inputs into outputs
The essence of the operations function is to add value during the
transformation process:
• To add value (e.g. yarsagumba)
– Increase product value at each stage
– Value added is the net increase between output product value and
input material value

• Provide an efficient transformation

– Efficiency – means performing activities well for least possible cost
• Finance Function
It includes activities related to securing resources
at favorable process and allocating those
resources throughout the organization.
Finance manager performs the following
activities:
• Budgeting
• Economic analysis of investment proposals
• Provision of funds
Marketing Functions
• It consists selling and/or promoting the goods or
services.
• Assesses customer wants and needs, and
communicating those to operations people.
 1.3 Objectives of operations management
1. Performance Objectives
i. Efficiency (Output per unit of input. “doing things right”)
ii. Effectiveness: optimum utilization of available resources (“doing the
right things”)
iii. Quality
iv. Lead time: (time that takes during the conversion process.
v. Capacity utilization: it denotes the percentage of utilization of
available resources.
vi. Flexibility: refers to capacity of the organization to satisfy a variety
of customer needs.
2. Cost Objectives
vii. Explicit cost: material cost, labor cost, maintenance cost.
viii.Implicit cost: cost of stock, storage, delaying delivery, opportunity
costs, cost of grievances or dissatisfaction.
 1.4 Heritage/historical development of operations management
• Industrial revolution (1770’s)
It included going from hand production methods to machines, new chemical
manufacturing and iron production processes, the increasing use of steam
power and water power, the development of machine tools and the rise of
the mechanized factory system. The Industrial Revolution also led to an
unprecedented rise in the rate of population growth.
• Adam Smith’s wealth of Nations (1776) proposed the division of labor in which
production process was broken down into a series of small task, each
performed by different workers.
• Scientific management theory of F.W. Taylor (1900s)
– Matching employees to the right job
– Providing the proper training
– Providing proper work methods and tools
– Establishing legitimate incentives for work to be accomplished
• Mass production: used by American manufacturer. It
refers to high volume production of a standard product for
a mass market.
• Influence of Japanese Production system (its three major
principles are:
 Quality comes first
 Improve product and process quality continuously
 Eliminate all forms of waste
• OM- Today
Today’s consumer market is characterized by product
proliferation (different types of similar product), shortened
product life cycles, shortened product development times,
changes in technology, customized product (delivering
wide-market goods and services) and segmented market.
 1.5 Operations in service sector
Services: Manufacturers/goods:
•Intangible product •Tangible product
•Cannot be stored •Can be stored
•High customer •Low customer
contact contact
•Short response time •Longer response time
•Labor intensive •Capital intensive
Similarities between goods and services
• Both use technology
• Both have quality, productivity, & response
issues
• Both must forecast demand
• Both will have capacity, layout, and location
issues
• Both have customers, suppliers, scheduling and
staffing issues
• Manufacturing often provides services
• Services often provides tangible goods
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 Hospital Process

Inputs Processing Outputs

Doctors, nurses Examination Healthy

Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy
 Challenges of Managing Services
• Service jobs are often less structured than
manufacturing jobs
• Customer contact is higher
• Worker skill levels may vary
• Services hire many low-skill, entry-level workers
• Employee turnover is higher
• Input variability is higher
• Service performance can be affected by worker’s
personal factors
 1.6 Trends in operations management
1. Flexibility: in terms of volume of demand, product mix demand, product design,
delivery schedule etc.
2. Total Quality Management: by a never ending quest for improving the quality of
goods and services
3. Time Reduction: of manufacturing cycle, speed to market
4. Worker Involvement : in decision making
5. Business Process Re-engineering/redesign: refers starting from scratch in
redesigning
6. Global Market Place
7. Operations Strategy
8. Lean production: aims to cut costs by making the business more efficient and
responsive to market needs.
9. Just in time production
10.Computer Aided Manufacturing
11.Computer Aided Design
12.E-Supply Chain Management
13.Environmental Issues
 1.7 Productivity challenges

Productivity:
Definition:
Is the quantitative relation between what we produce
and what we use as a resource to produce them.
Mathematically
P = O/I
Productivity is an indicator of how well the factors of
production (land, capital, labor and energy) are
utilized.
 Systems Concept

inputs outputs
transformations Customers
Land Goods
people and
SYSTEM
capital services
facilities
equipment
tools O
energy I
materials
information productivity
 Difference between Production and Productivity
Production Productivity
It is the transformation process of It is the relationship between output and
resources /inputs into desired goods and resources used to generate the output i.e. goods
services. and services
It can be measured in terms of units like It is also measurable in terms of ratio likes sales
weight, size, and height. per employees, production per hour etc.

Function which determines the quality and Technique which measures efficiency and
quantity of goods and services of effectiveness of organization.
organization.
Direct relationship between outputs and Inverse relationship between productivity and
resources/inputs. resources used for production.

Can be increased in many ways. One of There are many reasons for increasing
them, the higher productivity is a factor for productivity, higher production may or may not
increasing production. ensure the higher productivity.
If it is increased, it also increases profit. It may or may not generate profit in the short run
but ensures higher profit in the long run.
 Types of Productivity

1. Partial Productivity: ratio of output to partial

input.
Total output/ Partial input
(Partial inputs can be labor, capital, energy,
machinery and materials etc.)
2. Total Factor Productivity:
Total output /labor input + capital input
3. Total Productivity: Uses all “I” factors.
Total output/ total input (labor, material, energy,
capital, miscellaneous)
1. Partial Productivity:
Total output/ Partial input
i. Material productivity = Output/ Material input
ii. Labor productivity = Output/ Labor input
iii. Capital productivity = Output/ Capital input
iv. Energy Productivity = Output/ Energy input
v. Other productivity = Output/ Other expenses
input
Merits and demerits of partial productivity
Merits
• Easy to understand and obtain data.
• A good diagnostic tool to pinpoint areas for productivity
improvement.
• It is easy to compute productivity indices.
Demerits
• It does not explain overall cost.
• Control through partial productivity measure can be a hit
and miss approach (something that might be good sometimes and bad others ).
• It is misleading and may lead to costly mistakes if it is
used alone.
2. Total Factor Productivity:
Total output /labor input + capital input
Merits
• The data are relatively easy to obtain.
• It is usually used from an economics viewpoints.
Demerits
• Only labor and capital inputs are considered in total
factor.
• It does not consider the impact of material and energy.
• It is not appropriate when material cost form a sizable
portion of total cost.
3. Total Productivity: Total output/ total input (labor,
material, energy, capital, miscellaneous)
Merits
• It considers all quantifiable factors and output.
• It is more accurate to represent real economic condition.
• Control through total productivity measures is a
tremendous benefit to top management.
• It is easy to relate with total cost.
Demerits
• Data computations are relatively difficult.
• It does not consider intangible factors of outputs and
inputs like partial and total factors productivity measures.
 Factors affecting productivity
1. External factors
i. Structural adjustment: eg. Economic changes, demographic
changes, social changes
ii. Natural resources: land, energy, raw material etc.
iii. Government and infrastructure: practices of government
agencies, rules and regulations like pricing, income, and wages
policies, power supply, financial measures and incentives such
as interest rates and tax rates.
2. Internal factors
iv. Hard factors: product, plant and equipment, technology,
material and energy
v. Soft factors: manpower, organization and systems, work
methods, management styles.
 1.8 Ethics and social responsibility

• Financial statements
• Worker safety
• Product safety
• Quality products.
• Environment protection
• Fulfillment responsibility towards Community
• Hiring/firing workers
• Worker’s rights
• Honor stakeholder commitments