OPERATIONS MANAGEMENT

Course manager : Assefa Balda (Ph.D)

Contents of the course

Chapter One: Introduction to Operations Management

Chapter Two: Operations strategy, competitiveness, and
productivity
Chapter Three: DESIGN OF THE OPERATION SYSTEM
Chapter Four:Forecasting and Capacity planning
Chapter Five: Facility locations, layout decisions and line
balancing
Chapter SIX:Production planning and control
Chapter seven: Quality management
Chapter One: Introduction to Operations Management:

 The term operations management is composed of two words-

operations and management.
 Operation is concerned with the transformation of a range of
inputs into the required output (services) having the requisite
quality level.
 Management is the process of planning, organizing, leading, and
controlling an organization’s human and capital resources in order
to accomplish its objectives.
 Therefore, what is operations management? It is :

• The administration of process that transforms inputs of labour, capital and

materials in to output bundles of products and services that are valued by
customers.
• The coordination of an organization’s resources and a transformation process
that will end up with the production of goods and services.
•
• In nut shell, all definitions consider operations management as the management
of transformation process that converts input into output.

• By and large, managing operation is crucial to each area of an organization

because only successful management of resources (people, capital, information,
and materials) can meet its goals.
 Cont…

 Operations is the part of a business organization that is

responsible for producing goods and/or services.
• Goods are physical items that include raw materials,
parts, and subassemblies
• Services are activities that provide some combination of
time, location, form, or psychological value.
 Cont…

• Business organizations have three basic functions:

• Finance- budget, investment & etc

• Operations – transforming Input-Output
• Marketing - need + sales
• Thus, Operations Management is the management of systems
and processes that create goods and/or provide services.
 Cont…

The transformation of I-O in the operations

process is aimed to value addition.

The transformation process can be storing,

transporting and repairing or any other that can
add value.
The Transformation Process of Operations
 Cont…

• Value-added is the difference between the cost

of inputs and the value or price of outputs.
• The price is the one the customer is willing to
pay.
• Value can be monetary, non monetary and
psychological like branding.
 1.2 Historical Development of OM

Industrial revolution Late 1700s

 Scientific management Early 1900s
Human relations movement 1930s-60s
Management science 1940s-60s
 Computer age 1960s
Environmental Issues 1970s
JIT & TQM* 1980s
 Cont…

 For over two centuries operations and production management

has been recognised as an important factor in a country’s
economic growth.
 Its roots however go back to the concepts of division of labour
advocated by Adam Smith in his book “the Wealth of Nations”
in 1776.
 He recommended breaking of jobs down into subtasks and
 Recognises workers to specialised tasks in which they would
become highly skilled and efficient.
 Cont…

• In the early twentieth century, F.W. Taylor

implemented Smith’s theories and developed scientific
management.
• From then till 1930, many techniques were developed
prevailing the traditional view.
• Brief information about the contributions of various
individuals to operations management is shown in the
Table1.1.
Table 1.1 Historical summary of operations
management

Date Contribution Contributor

1776 Specialization of labor in manufacturing Adam Smith
1799 Interchangeable parts, cost accounting Eli Whitney and
others
1832 Division of labor by skill; assignment of jobs by skill; basics Charles Babbage
of time study
1900 Scientific management, time study and work study Frederick W.
developed; dividing planning and doing of work
Taylor
1900 Motion of study of jobs Frank B. Gilbreth
1901 Scheduling techniques for employees, machines jobs in Henry L. Gantt
manufacturing
1915 Economic lot sizes for inventory control F.W. Harris
1931 Statistical inference applied to product quality: quality W.A. Shewart
control charts
1935 Statistical sampling applied to quality control: inspection H.F. Dodge & H.G.
sampling plans
Roming
 Cont…
Date Contribution Contributor
1940 Operations research applications in World War II P.M. Blacker and others.
processes & others
1946 Digital computer John Mauchlly and
J.P. Eckert
1947 Linear programming G.B. Dantzig,
Williams & others
1950 Mathematical programming, on-linear and stochastic A. Charnes, W.W.
Cooper
1951 Commercial digital computer: large-scale computations Sperry Univac.
available
1960 Organizational behavior: continued study of people at L. Porter
work
1970 Integrating operations into overall strategy and policy, W. Skinner J.
Computer applications to manufacturing, Scheduling Orlicky and G.
and control, Material requirement planning (MRP) Wright
1980 Quality and productivity applications from Japan. W.E. Deming
 Cont…
Production management becomes the acceptable term from
1930s to 1950s.
As F.W. Taylor’s works become more widely known, managers
developed techniques that focussed on economic efficiency in
manufacturing.
Workers were studied in great detail to eliminate wasteful
efforts and achieve greater efficiency.
At the same time, psychologists, socialists and other social
scientists began to study people and human behaviour in the
working environment.
 Cont…

 In addition, economists, mathematicians, and computer

socialists contributed newer, more sophisticated analytical

approaches.

 In 1970s as service sector became more prominent, the change

from ‘production management’ to ‘operations management’

emphasized the broadening the field to service organizations.

 1.3. Manufacturing operation Vs Service operation

Similarities between manufacturing and services

 Every organization whether manufacturing or service giving,
has processes (transform input in to output) that must be
designed and managed effectively.
 Every organization have some type of technology be it manual
or computerized must be used in each process.
 Every organization is concerned about quality, productivity,
and the timely response to customers.
 Cont…

A service provider, like a manufacturer, must make

choices about the capacity, location, and layout of its
facility.
Ever organization deals with suppliers of outside
services and materials, as well as scheduling problems.
Finally, matching staffing levels and capacities with
forecasted demand is universal problems.
 Differences between manufacturing and services……
Manufacturing Organization Service Organization

 Tangible, durable product  Intangible perishable product

 Output that can be inventoried  Output that can’t be inventoried

 Low customer contact  High customer contact

 Long response time  Short response time

 Regional, national or international market  Local market

 Large facilities  Small facilities

 Capital intensive  Labor intensive

 Quality and productivity easy to measure  Quality and productivity is difficult to measure

 High degree of uniformity of input &  High degree of variety of input and- high degree of
output variety of out put
 Ease to automate etc.  Difficult to automate etc.
 Goods-service continuum

Goods Services

Surgery, teaching
Songwriting, software dev’t
Computer repair, restaurant
Automobile repair, fast food
Home remodeling, retail sales
Automobile assembly,
steelmaking
 1.4 PROCESS MANAGEMENT
A process consists of one or more activities that
transform inputs into outputs.
 In essence, the central role of all management is
process management, particularly:
Upper-management processes. These govern the
operation of the entire organization.
Operational processes: core processes that make
up the value stream. E.g procurement,
production, marketing, & sales.
Supporting processes: these support the core
processes. Eg. accounting, HR, & IT.
 Cont…

• Generally speaking, Business Process

Management (BPM) activities include:
a. process design,
b. process execution, and
c. process monitoring.
• The basic aspects of operations and supply
chain management are:
I. managing processes to meet demand and
II.dealing with process variability.
 I. Managing a Process to Meet Demand
Ideally, the capacity of a process will be such that
its output just matches demand.
Excess capacity and little capacity are wasteful
and costly, respectively.
Therefore, having the right capacity requires:
 having accurate forecasts of demand,
 the ability to translate forecasts into capacity
requirements, and
 a process in place capable of meeting expected
demand.
 II. Process Variation

Variation occurs in all business processes. It can

be due to variety (diversity) or variability
(inconsistency).

For example, random variability is inherent in

every process; it is always present.

Variation can occur as the result of deliberate

management choices to offer customers variety.
 Cont…

Variations can be disruptive to operations &

supply chin (SC) processes.
Variations result in additional cost, delays and
shortages, poor quality, and inefficiency

Poor quality and product shortages or service

delays can lead to dissatisfied customers.

 Therefore, the ability to deal with variability is

necessary.
 Cont…

There are four basic sources of variation:

1. The variety of goods or services being offered:
The greater the variety of goods and services, the
greater the variation in production or service
requirements.
2. Structural variation in demand:
These variations are trends and seasonal variations,
which are predictable.
They are particularly important for capacity planning.
 Cont…
3. Random variation:
It is natural variability & present in all processes,
as well as in demand for services and products.
It cannot generally be influenced by managers.

4. Assignable (Transferable) variation:

Caused by defective inputs, incorrect work
methods, out-of-adjustment equipment, and etc.
 It can be reduced or eliminated by
analysis/diagnosis and corrective action.
 1.5 THE SCOPE & FUNCTIIONS OF OM

Scope: It is ranges across the organization.

Operations managers are involved in:
 product and service design,
 process selection,
 selection and management of technology,
 design of work systems,
 location planning,
 facilities planning, and
 quality improvement of the organization’s
 Cont…

• Functions: the operations function includes

many interrelated activities, such as:
 forecasting,
 capacity planning,
 scheduling,
 managing inventories,
 assuring quality,
 motivating employees,
 Facilities location decision, and more.
 1.6 ROLES OF OPERATIONS MANAGER

The Operations function consists of all activities

directly related to producing goods or providing
services.

A primary function of the operations manager is

to guide the system by decision making.
A. System Operations Decisions
B. System Design Decisions
 Cont…

A. System Operations Decision

These are generally tactical and operational decisions
Management of personnel
Inventory management and control
Scheduling
Project management
Quality assurance
 Operations managers spend more time on system
operation decision than any other decision area
They still have a vital stake in system design
 Cont…

B. System Design decisions includes:

Capacity
Facility location
Facility layout
Product and service planning
Acquisition and placement of equipment
•These are typically strategic decisions that
• usually require long-term commitment of resources
• determine parameters of system operation
 1.7 OPERATIONS MANAGMENT DECISION MAKING

The chief role of an operations manager is that

of planner/decision maker. i.e it affects the
realization of the goals of organizations.
Decisions involve alternatives that have quite
different impacts on costs or profits.
Hence, it is important to make informed decision.
OM professionals make a number of key
decisions: What, when, where, how, and who?
An operations manager’s daily concerns include
costs (budget), quality, and schedules (time).
 1.7.1 Analysis of Trade-Offs
• OM personnel encounter decisions that have
trade-off effect.
• Eg., in deciding on the amount of inventory stock: the
increased level of customer service that the additional inventory
would yield verses the increased costs required to stock that
inventory and the time required to serve customers.
Quality

Cost Time
 1.7.2 A systems Approach

It emphasizes on the interrelationships among

subsystems, but its main theme is that the whole is
greater than the sum of its individual parts .
Hence, from a systems viewpoint, the output
and objectives of the organization as a whole
take precedence (priority) over those of any one
subsystem.
An alternative approach is to concentrate on
efficiency within subsystems and thereby
achieve overall efficiency, optimization.
 Cont…

But that approach overlooks the facts that

organizations must operate in an environment
of scarce resources and that sub-systems are
often in direct competition for those scarce
resources, so that an orderly approach to the
allocation of resources is called for.
 1.7.3 Establishing Priorities

Virtually, every situation managers discover

that certain issues or items are more important
than others.
Recognizing this enables the managers to direct
(focus) their efforts to where they will do the
most good.
Pareto phenomenon (80/20) rule: A few
factors account for a high percentage of the
occurrence of some few event(s).
 Cont…
Pareto Principle & the 80/20 Rule (Updated for 2021):
 The Pareto Principle, named after esteemed an Italian economist
Vilfredo Pareto (1848-1923), specifies that 80% of consequences
come from 20% of the causes, asserting an unequal relationship
between inputs and outputs.

 ... The Pareto Principle is also known as the Pareto Rule or the
80/20 Rule.
 It states that for many phenomena 80% of the result comes from
20% of the effort.

 It’s not a new concept that many natural as well as man-made

phenomena are distributed unequally.
 Cont…
The 80/20 Rule—Examples from Various Fields
 80% of tax money comes from about 20% of society.
 80% of project management effect results from 20% of the effort.
 Businesses get 80% of their income from 20% of their customers.
 80% of IT system crashes are caused by 20% of bugs (Viruses).
 80% of car accidents are caused by 20% of young people
 80% of lottery tickets are bought by 20% of society
 80% of air pollution is caused by 20% of the population
 80% of all firearms are used by 20% of the population
 80% of all Internet traffic belongs to 20% of websites
 80% of car crashes happen within the first 20% of the distance
covered
 80% of mobile phone calls come from 20% of the population
 80% of the time people use 20% of the tools at their disposal
Source: https://resumelab.com/career-advice/pareto-principle
 1.8 OPERATIONS TODAY (CONTEMPORARY
ISSUES IN OM)

Advances in IT & global competition have had a

major influence on OM.
Technology: the application of scientific
discoveries to the development and improvement
of goods and services.
E-business: Use of the Internet to transact
business.
E-commerce: Consumer-to-business
transactions.
 Cont…

It can involve knowledge, materials, methods,

and equipment.
High technology refers to the most advanced
and developed machines and methods.
OM is primarily concerned with three kinds of
technology:
A. Product and service technology,
B. Process technology, and
C. Information technology (IT).
 Cont…

A. Product and service technology refers to the

discovery and development of new products and
services.
Researchers and engineers use scientific
approach to develop new knowledge and translate
that into commercial applications.
B. Process technology refers to methods,
procedures, and equipment used to produce
goods and provide services.
They include not only processes within an
organization but also Supply Chain processes.
 Cont…

C. Information technology (IT) refers to the science

and use of computers and other electronic
equipment to store, process, and send
information.
Information technology is heavily ingrained
(inbuilt) in today’s business operations.
This includes electronic data processing, the use
of bar codes to identify and track goods,
obtaining point-of-sale information, data
transmission, Internet, e-commerce, e-mail &
etc
 Cont…

• Competitive pressures and changing economic

conditions have caused business organizations to
put more emphasis on:
Operations strategy.
Working with fewer resources.
Revenue management.
Process and quality improvement (Six sigma).
Agility.
Lean production.
 Cont…
Six sigma: is a statistical measure of variation.
 The full six sigma equals 99.9997% accuracy.
It is a methodology for improving key processes
 Its main objective is to implement a vigorous (strong)
process to systematically eliminate defects and
inefficiency. That means to deliver high performance,
value, and reliability to the customer.
 It is a process for reducing costs, improving quality,
and increasing customer satisfaction.
 Cont…

 Six sigma is summarized as a method that provides

organizations tools to improve the capability of their business
processes. This increase in performance and decrease in process
variation helps (lead) to defect reduction and improvement in
profits, employee morale, and quality of products or services.

Six sigma history:

 In the early 1980’s that Bill Smith at Motorola developed this

concept in order to measure defects and improve overall quality.
 General Electric (GE) was the first to use Six Sigma in its
operations in order to reduce waste, improve the quality of the
product and in turn save money.
 Cont…

Agility: is the ability of an organization to

respond quickly to demands or opportunities.

Lean system: is a system that uses minimal

amounts of resources to produce a high volume
of high quality goods with some variety.
 1.9 ENVIRONMENTAL CONCERNS

Concern about global warming and pollution

has had an increasing effect on how
businesses operate.

Sustainability: Using resources in ways that

do not harm ecological systems that support
human existence.
 Cont…

All fall within the realm of operations, OM is

central to dealing with these issues: such as
Referred to as “green initiatives”: reducing
packaging, materials, water and energy use.
Other possibilities include reconditioning used
equipment (e.g., printers and copiers) for resale,
and recycling.
 Further, a Vegetarian versus non-vegetarian diet and
the Environment
 Value engineering and/or value analysis
 1.10 ETHICAL CONDUCT
• The need for ethical conduct in business is becoming
increasingly obvious, given numerous examples of
questionable actions of the past.
• Ethics: is a standard of behavior that guides how one
should act in various situations.
• Managers must consider how their decisions will affect:
 shareholders,
 management & employees,
 customers,
 the community at large, and
 the environment.
 Cont…

Balancing the interests of all stakeholders is

challenging, but it should be the managers’ goal.

But, even managers with the best intentions will

sometimes make mistakes.

If mistakes do occur, managers should act

responsibly to correct those mistakes as quickly
as possible, and to address any negative
consequences.
 Cont…

Santa Clara University identifies five principles

for thinking ethically:
1. The Utilitarian Principle: is that the good done
by an action or inaction should outweigh any
harm it causes or might cause. Ex. not allowing a
person who has had too much to drink to drive.

2. The Rights Principle: is that actions should

respect and protect the moral rights of others.
Ex. not taking advantage of a vulnerable person.
 Cont…
3. Fairness Principle: is that equals should be held
to, or evaluated by, the same standards.
Ex. an equal pay for equal work.
4. Common Good Principle: is that actions should
contribute to the common good of the community.
Ex. an ordinance/ rule/regulation/order on noise
abatement/reduction.
5. Virtue Principle: is that actions should be
consistent with certain ideal virtues.
Ex. include honesty, compassion/ sympathy, generosity/kindness, tolerance,
fidelity/faith fullness, integrity, and self-control.
 Cont…

An ethical framework is a sequence of steps

intended to guide thinking and subsequent
decisions or actions.
Operations managers, have the responsibility
to make ethical decisions.
Ethical issues arise in many aspects of OM,
including:
Financial statements: accuracy.
Worker safety: training, equipment condition
 Cont…

Product safety: risk of injury to users or env’t.

Quality: honoring warranties, avoiding hidden
defects.
The environment: not harming the
environment.
The community: being a good neighbor.
Hiring and firing workers: avoiding false
promises
Closing facilities: honoring commitments.
Workers’ rights: dealing with workers’ problems
quickly and fairly.