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Chapter I:

Introduction to Operations Management


The true goal of any organisation is to profit from its operations. If the
company is not able to generate profit from operations, its existence in the
future is at stake. Like a living organism cannot live through without air, light
and water, similarly an organisation cannot exist without making profit. No
organisation on this mother earth can be propped up and sustained from
outside support. Temporary and initial outside support may at times be
required, but such support cannot be on long-term basis. The company has to
stand on its own legs and walked to make progress. This is possible only when
the company has been able to clock profits.

After India gained political independence, under the Stewardship of


Jawaharlal Nehru, Government of India participated directly in nation
building by setting up several Public Sector Undertakings( PSUs ). These
units, most of them, were not able to make profits, and were supported by
GOI by offering outside financial support. However, today these are being
sold off to the private entrepreneurs on a disinvestments spree. No body
can, therefore, support a loss-making company from outside. To sustain its
operations the organisation has to make profits.

In order to make profits, the company’s sales must be more than its
costs. Operations Management (OM) is defined as the design, operation and
improvement of the systems that create and deliver the firm’s primary
products and services, at its lowest costs so as to maximise the firm’s
profits, which is a prime organisational objective, to ensure that the
organisation exists tomorrow.

Like marketing and finance, OM is a functional field of business with


clear line management responsibilities. This point is important because
operations management is frequently confused with Operations Research
and, Management Science (OR/MS) and Industrial Engineering (IE). The
essential difference is that OM is a field of management, whereas OR/MS is
the application of quantitative methods to decision making in all fields, and
IE, is an engineering discipline. Thus, while operations managers use the
decision making tools of OR/MS (such as critical path scheduling) and are
concerned with may of the same issues as IE (such as factory automation),
OM’s distinct management role distinguished it from these other disciplines.

As shown in Fig.1, OM, is concerned with the management of the


entire system that produces a good, or delivers a product. Producing a
product such as a cell phone or providing a service such as a cellular phone
account, involves a complete service of transformation processes. Fig. 1 is a
supply network for an Original Equipment Manufacturer (OEM ) such the
finish make of cell phones.

Fig. 1: Supply Chain of a Typical Original Equipment Manufacturer:-

Web site Customer


T3
T2 Customer
T3 Wave house
T1
Retailer
T3 T2 Customer
Dealer
T3 T2 T1 OEM Retailer Customer
Distributor
T3 T2 Customer
T1 Manufacturing Retailer
Company Direct Sales
T3 T2 Force Customer
Tier 1 Suppliers
T3 Tier 2 & 3 Suppliers

To actually produce the phones and get them to the customer, many
transformations must take place. For example the suppliers purchase raw
materials and produce the parts for the phone. The Nokia manufacturing
plant takes these parts and assembles the various cell phones that have
become popular. Orders for the phones are taken over the Internet from all
the distributors, dealers and warehouse sites around the world. Local
retailers work directly with customers in setting up and managing cell phone
accounts. OM is concerned with managing all of these individual processes as
effectively as possible.

Within the operations function, management decisions can be divided


in three broad areas:

 Strategic (Long-term) decisions.


 Tactical (intermediate–term) decisions.
 Operational planning and control (short-term) decisions.

The strategic issues are usually abroad, addressing such questions as these:
How will we make the product? Where do we locate the facility, or,
facilities? How much capacity do we need? When should we add more
capacity? Thus, by necessity, the timeframe for strategic decisions is
typically long-usually several years, or more, depending upon the specific
industry.

Operations management decisions at the strategic level impact the


company’s long-range effectiveness in terms of how it can address its
customers’ needs. Thus for a firm to succeed, these decisions must be in
alignment with the corporate strategy. Decisions made at the strategic level
become the fixed conditions, or, operating constraints under which the firm
must operate in both the intermediate and short term.

At the next level in the decision-making process, tactical planning


primarily addresses how to efficiently schedule material and labour within
the constraints of previously made strategic decisions. Issues on which OM
concentrates on this level include these:

How many workers do we need?


When do we need them?
Should we work overtime, or put on a second shift?
When do we have material delivered?
Should we have a finished goods inventory? These tactical decisions,
in turn, become the operating constraints under which operational
planning and control decisions are made.

Management decisions with respect to operational planning and control are


narrow and short-term by comparison. Issues at this level include these:

What jobs do we work on, today, or, this week?


Whom do we assign to what tasks?
What jobs have priority?