TOPIC I

INTRODUCTION TO OPERATIONS MANAGEMENT

What Is Operations Management?

Operations management is the administration of business practices to create the highest level of
efficiency possible within an organization. It is concerned with converting materials and labor into
goods and services as efficiently as possible to maximize the profit of an organization. Operations
management teams attempt to balance costs with revenue to achieve the highest net operating profit
possible.

 Operations management is the administration of business practices to create the highest level
of efficiency possible within an organization.
 Operations management is concerned with converting materials and labor into goods and
services as efficiently as possible.
 Corporate operations management professionals try to balance costs with revenue to
maximize net operating profit

Understanding Operations Management

Operations management involves utilizing resources from staff, materials, equipment, and
technology. Operations managers acquire, develop, and deliver goods to clients based on client
needs and the abilities of the company.
Operations management handles various strategic issues, including determining the size of
manufacturing plants and project management methods and implementing the structure of
information technology networks. Other operational issues include the management of inventory
levels, including work-in-process levels and raw materials acquisition, quality control, materials
handling, and maintenance policies.
Operations management entails studying the use of raw materials and ensuring minimal waste
occurs. Operations managers utilize numerous formulas, such as the economic order quantity
formula to determine when and how large of an inventory order to process and how much inventory
to hold on hand.
 What is operations management?

Operations management designs and operates productive systems- systems for getting work done.
The food you eat, the movies you watch, the stores from which you shop, and this module you are
reading are provided to you by the people in operations. Operations managers are found in banks,
hospitals, factories, and government, among many others.

They design systems, ensure quality, produce products and deliver services. They work with
customers and suppliers, the latest technology, and global partners. They solve organizational
problems, reengineer processes, innovate and integrate.

Thus, Operations management is the term used for the activities which produce and deliver
products and services. Operations is more than planning and controlling; it is doing. Whether it is
superior quality, speed-to-market, customization, or low cost, excellence in operations is critical to
any firm’s success.

Operations is often defined as a transformation process. As shown in the figure below, inputs (such
as materials, machines, labour, management and capital) are transformed into outputs (goods and
services). Requirements and feedback from customers are used to adjust factors in the
transformation process, which in turn, may alter inputs. In operations management we try to ensure
that the transformation process is performed efficiently and that the output is of greater value than
the sum of the inputs. Thus the role of operations is to create value. The transformation process
itself is a series of activities along a value chain extending from the supplier to the customer. Any
activities that do not add value are superfluous and should be eliminated.

Figure: Operations as a transformation process.

 INPUT OUTPUT
Transformatio
Material n Process
Machines Goods
Labor and
Management Services
Capital

Feedback

Requirements

The important things to remember about operations management are,

 All types of organisation must ‘do’ operations management because all organisations
produce some mixture of products and services. Remember though that in many
organisations the term ‘operations management’ will not be used. In many smaller
organisations operations management may be done by people who perform many other types
of task such as marketing and accounting.

 Operations management is important. The decisions it makes have a major impact on both
the cost of producing products or services and how well the products and services are
produced and delivered which has a major impact on the revenue coming into the
organisation. So, operations management has an important impact on both revenue and cost
and therefore profits. This also applies to not-for-profit organisations. In a local government
service, for example, good operations management can produce services which satisfy the
community and are produced efficiently. So the community are getting value for money
from their local services.
 Operations management also has strategic importance.

What are the similarities between all operations?

This part of Lecture 1 is mainly devoted to categorising the types of resources and processes which
are found in operations. The intention is to demonstrate these standard categorisations of resources
and processes are to be found in any sort of organisation. So for example, the table below shows
what would constitute the two types of transforming resources (facilities and staff) in three very
different types of operation.

The facilities and staff transforming resources of three operations

   Ferry company Paper manufacturer Radio station

Ships on-board Pulp-making vats Broadcasting

Types of facilities
navigation Paper-making equipment
Reeling equipment machines Studios and studio
Dry docks Slitting equipment equipment
Materials-handling Packing machinery Transmitters
equipment Warehouses Outside broadcast
Steam-generating vehicles
boilers
On-shore buildings
Computerized
reservation systems
Warehouses

Sailors Operators Disc jockeys

Types of staff
Engineers Chemists and Announcers
Catering staff chemical engineers Technicians
On-board shop Process plant
assistants engineers
Cleaners
Maintenance staff
Ticketing staff

Transformed resources in operations are some mixture of materials, information and customers.
The important issue here is that, although most types of operation process all three types of
transformed resource, one is usually the most important. So, for example, a hospital will process
information in the form of patients’ medical records. It will also devote some of its resources to
processing materials, for example in the way it produces meals for patients. The main operations
task of a hospital, however, is to process customers in a way which satisfies its patients, maximises
their health care and minimises its costs. It is predominantly a customer processing operation.

Similarly, most operations produce some mixture of products and services. This emphasises one of
the core philosophies of operations management.

The distinction between manufacturing and service is becoming increasingly irrelevant.

Even government statistics cannot cope with the distinction any longer. For example, if you buy
software on a disc it is classed as a product, but if you download it over the internet (legally of
course) it is classed as a service.

Micro-operations and the internal customer concept

The idea of a hierarchy of operations processes within an organisation has had a significant effect
on management thinking over the last few years. It has highlighted the issue of how different
processes or micro-operations relate to each other within an organisation. This is sometimes called
the internal customer concept. It has also helped to underpin the idea of ‘business process
reengineering’ which became fashionable in many businesses during the 1990s. One can consider
the internal customer concept and business process reengineering as being alternative approaches to
solving the same problem. This problem is that within any organisation different sections or
departments find it difficult to interface with each other. This may be because they are too busy with
their own tasks to worry about other parts of the organisation, or it may be that they have (or regard
themselves as having) different interests and objectives.

The internal customer concept advocates that each micro-operation should identify its internal
customers and internal suppliers and formally talk to them about what they need and what they can
offer. In other words, to treat internal suppliers and customers as if they were independent external
organisations.

Business process reengineering is more radical and advocates that all the resources and activities
necessary to do everything required for an ‘end-to-end business process’ should be put within the
same unit or department. In other words, the organisation should be reconfigured around these key
processes.

Buffering the operation

The turbulent environment in which most organizations do business means that the operations
function has to adjust continually to changing circumstances. For example, a food-processing
operation might not be able to predict exactly when some foods will be harvested (bad weather
might totally disrupt the supply to a factory for weeks). Demand could also be prone to disruption.
Unpredictable changes in the weather, a ‘health scare’ story in the press, and so on, can all introduce
turbulence. One way in which operations managers try to minimize ‘environmental’ disruption is by
buffering or insulating the operations function from the external environment. It can be done in two
ways:
  physical buffering – designing an inventory or stock of resources either at the input side of
the transformation process or at the output side;
 organizational buffering – allocating the responsibilities of the various functions in the
organization so that the operations function is protected from the external environment by
other functions.

Physical buffering

Physical buffering involves building up a store of the resources so that any supply disruptions will
(initially at least) be absorbed by the store. The operation is storing its input transformed resources
before it ‘transforms’ them. The store of input resources are being used as ‘buffer stocks’ to protect
the operation. Similarly, buffering can be applied at the output end of the transformation process. A
manufacturer could make its products and put them into a finished goods inventory (output stocks
are not usually relevant to people-processing operations). Often operations do not need to have
output stocks; they could react to each customer’s request as it was made. Yet by stocking their
output, the operation is given much more stability when demand is uncertain.

Organizational buffering

In many organizations the responsibility for acquiring the inputs to the operation and
distributing its outputs to customers is not given to the operations function. For example, the
people who staff the operation are recruited and trained by the personnel function; the process
technology for the operation is probably selected and commissioned by a technical function; the
materials, parts, services and other bought-in resources are acquired through a purchasing
function; and the orders from customers which trigger the operation into activity will come
through the marketing function. The other functions of the organization are, in effect, forming a
barrier or buffer between the uncertainties of the environment and the operations function.
These relationships have developed partly for stability which allows the operation to organize
itself for maximum efficiency.
  What is Operations strategy?
Companies and organisations making products and delivering, be it for profit or not for profit rely
on a handful of processes to get their products manufactured properly and delivered on time. Each
of the process acts as an operation for the company. To the company this is essential. That is why
managers find operations management more appealing. We begin this section by looking at what
operations actually are.

Understanding operations strategy

Have you ever imagined a car without a gear or the steering wheel? Whilst, what remains of an
utmost importance to you is to drive the locomotive from one location to another for whatever
purpose you wish, but can only be made possible with each and every part of the car working
together and attached.

Organisations behave in the same manner. The company has an ultimate goal of delivering goods to
a client, but the processes of designing, manufacturing, analysing and then finally being delivered
are the driving forces for the company's success. All these chunks of works processes that
collectively define a bigger purpose, the operations for that particular organisation. The more
effective these processes or operations would be, the more productive and profitable the business
would be.

Definition

According to Slack and Lewis, operations strategy holds the following definition: Operations
strategy is the total pattern of decisions which shape the long-term capabilities of any type of
operations and their contribution to the overall strategy, through the reconciliation of market
requirements with operations resources.

Operations strategy is the tool that helps to define the methods of producing goods or a service
offered to the customer

Content and Process

The content of operations strategy is concerned with the specific decisions which shape and
develop the long-term direction of the operation. Think of content as the building blocks of an
operations strategy. The process of operations strategy refers to the procedures which are used to
formulate operations strategies. It is the way we go about the activity of devising strategy. Think of
operations strategy content as what the organisation is deciding to do and process as how the
organisation has made that decision.

Obviously operations strategy is a huge subject. And although this module takes a slightly more
strategic view in the area, the lecture can only ‘scratch the surface’ of the subject. The first part of
the lecture looks at the content of operations strategy by taking four, quite distinct perspectives. The
second part of the lecture looks at the process of operations strategy, mainly by describing two
relatively well-known processes for devising an operations strategy.3.5 Top-down versus bottom-up
perspectives of operations strategy

One view of operations strategy (the more traditional one) is that operations strategy is one of
several functional strategies which are governed by decisions taken at the top of the organisational
tree. According to this ‘top-down’ approach, overall business strategy sets the general direction of
the organisation, this is then interpreted by the different functional areas of the company
(marketing, finance, operations, etc.) in their functional strategies. By contrast, the ‘bottom-up’
view of operations strategy is to see strategic decision making as an accumulation of practical
experiences. After all, organisations would find it difficult to ‘invent’ strategies in a total vacuum.
Their ideas are formed from their previous experience of dealing with customers, suppliers and their
own processes. This is the idea behind emergent strategies. These are strategic ideas which emerge
over time as an organisation begins to understand the realities of their situation.

When thinking about top-down versus bottom-up perspectives of operations strategy, remember that
they are not ‘rival’ ideas. In reality we can see both top-down and bottom-up influences on strategy
making. What is important to remember is that the pure ‘top-down’ view of operations strategy is
simplistic in the sense that it does not recognise the importance of learning through experience.

Market requirements versus operations resources

The lecture goes on to propose another apparent clash of perspectives – that between market
requirements and operations resources. Again, it is a comparison between what has been the
orthodox view (market requirements perspective) and what is a more recent view (the operations
resource perspective). Again also, it is not a real clash in the sense that neither perspective is right or
wrong.

The market requirements perspective starts from the commonsense notion that any operations
strategy should reflect what the organisation is trying to do in its markets. Companies compete in
different ways, some may compete primarily on cost, others on the excellence of their products or
services, others on high levels of customer service, others on customising their products and
services to individual customer needs, and so on. The operations function therefore must respond to
this by providing the capabilities which allow it perform in an appropriate manner to satisfy the
requirements of its market. In some ways this is a ‘translation’ task because the techniques and
language used by marketing managers to understand the requirements of markets are different to the
language and techniques used by operations managers to manage their productive resources. So, for
example, Figure 3.6 shows how competitive factors can be ‘translated’ into performance objectives.
Different ways of competing imply different competitive factors and therefore different
performance objectives.

Operations strategy influences performance objectives

To some extent all the decisions made in all strategy areas will exert some influence on all the
performance objectives of the operation. Some strategies, however, are particularly influential on
certain objectives. The table below highlights those objectives which will be particularly influenced
by each strategy (though remember that the important links between strategies and objectives will to
some extent depend on the type of operation and the circumstances in which it finds itself).

Strategies of performance objectives

New product/service development strategy

Vertical integration strategy

Facilities strategy

Technology strategy

Workforce and organization strategy

Capacity adjustment strategy

Supplier development strategy

Inventory strategy
Planning and control systems strategy

Improvement strategy

Failure prevention and recovery strategy

What is Process design?

A process is a group of related tasks with specific inputs and outputs. Processes exist to create value
for the customer, the shareholder or society. Process design defines what tasks need to be done and
how they are to be coordinated among functions, people, and organizations. It refers to those
activities involved in determining the workflows and implementation requirements for a particular
process. Large-scale business processes such as product development, order fulfillment, supply
chain management, and customer service, cut across functional lines, departments and
organizations. Planning, analyzing, and improving these processes is the essence of operations
management.
There is no simple definition of design. But design,
 must reflect the needs of customers;
 applies to products, services and processes;
 can be managed as an operations transformation process in is own right; and
 starts with something very abstract (a concept) and ends with something very specific (the
final design).

Process strategy is an organization’s overall approach for physically producing goods and
providing services. Process decisions should reflect how the firm has chosen to compete in the
marketplace, reinforce product decisions, and facilitate the achievement of corporate goals. A firm’s
process strategy defines its:-
 Capital intensity: The mix of capital and labor resources used in the production process;
 Process flexibility: The ease with which resources can be adjusted in response to changes in
demand, technology, products or services, and resource availability;
 Vertical integration: The extent to which the firm produce the inputs and control the outputs
of each stage of the production process; and
 Customer involvement: The role of the customer in the production process.
Product/service design and process design are interrelated

The relationship between designing products and services on one hand and designing the processes
that make them is an important point to consider. While it is possible to separate product design and
process design in manufacturing, it is impossible in practice to separate service design and process
design. This is because many services (especially high visibility services) are such that the service
and the process are the same thing. Even in manufacturing industries there has recently been
considerable effort put into examining the overlap between product and process design. There is a
growing recognition that the design of products has a major effect on the cost of making them.
Many of the decisions taken during the design of products (for example, choosing the material from
which the product is going to made, or the way in which the various components are fastened
together) will all define much of the cost of making it. The figure below shows how the costs of the
design process itself grow quite slowly, especially at the start of the design activity, but the cost to
which the design is committing the organisation grown very quickly. It makes sense, therefore, to
evaluate the various choices which the designer faces in terms of their effect on manufacturing cost
as well as on the functionality of the product itself. Also, the way in which product and process
design overall has a significant effect on the time between starting the initial concept design for the
product and eventually getting it to market.

The design activity as a transformation process

Some operations do nothing but design products and services. They simply exist to design products
and services for other companies. Quite clearly then, the design activity can be regarded as an
operation in its own right. This point is made in Figure 4.3. So many of the issues covered in the
later lectures of the module can apply to the design activity. Indeed any company must decide
whether it is going to do its own design or subcontract some parts of its to specialists. Well, the
demand for designs within a business will fluctuate, so how do they manage the capacity of their
design activity? Similarly, the design activity will need to be planned, controlled and improved.
Environmentally sensitive design
The design of operations processes and products and services should take into consideration
environmental issues.
Volume-variety and design
In lecture 1 the four V’s of operations were described. These were volume, variety, variation and
visibility. The first two of these – volume and variety – are particularly important when considering
design issues in operations management. Not only do they usually go together (high variety usually
means low volume, high volume normally means low variety) but together they also impact on the
nature of products and services and processes which produce them.
The volume and variety of an operation’s activities are particularly influential in determining the
way it thinks about its performance objectives. The figure below illustrates how the definitions of
quality, speed, dependability, flexibility and cost are influenced by the volume-variety position of
the operation.

 Quality

Quality in a low volume-high variety process such as an architects’ practice, for example, is largely
concerned with the final aesthetic appearance of the building and the appropriateness of its detailed
design. In an exceptionally high volume-low variety process, such as an electricity supply company,
quality is exclusively concerned with error-free service – electricity must be constantly available in
the correct form (in terms of voltage, frequency, etc.). The meaning of quality has shifted from
being concerned primarily with the performance and specification of the product or service towards
conformity to a predefined standard, as we move from low volume-high variety operations through
to high volume-low variety operations.
 Speed
Speed for the architects’ practice means negotiating a completion date with each client, based on the
client’s needs and the architects’ estimates of how much work is involved in each project. Speed is
taken to its extreme in the electricity utility where speed means literally instant delivery. No
electricity company could ask its customers to wait for their ‘delivery’ of electricity. Speed therefore
means an individually negotiated delivery time in low volume-high variety operations, but moves
towards meaning ‘instant’ delivery in some high volume-low variety operations.
 Dependability
Dependability in processes such as the architects’ practice means keeping to each individually
negotiated delivery date. In continuous operations, dependability often means the availability of the
service itself. A dependable electricity supply is one which is always there. So dependability has
moved from meaning ‘on-time delivery’ in low volume-high variety operations to ‘availability’ in
high volume-low variety operations.
 Flexibility
Flexibility in low volume-high variety processes such as the architects’ practice means the ability to
design many different kinds of buildings according to its clients’ various requirements. With the
electricity company’s process, the need for product flexibility has disappeared entirely (electricity is
electricity, more or less) but the ability to meet almost instantaneous demand changes through
volume flexibility is vital if the company is to maintain supply. Flexibility has moved from meaning
product flexibility in low volume-high variety operations to volume flexibility in high volume-low
variety operations.
 Cost
Cost, in terms of the unit cost per product or service, varies with both the volume of output of the
operation and the variety of products or services it produces. The variety of products or services in
low-volume operations is relatively high, which means that running the operation will be expensive
because of the flexible and high skill levels employed. Further, because the volume of output is
relatively low, a few products or services are bearing the operation’s high cost base. Also, and more
significantly for the operation, the cost of each product or service is different. At the other end of
the scale, high-volume operations usually produce similar products or services, output is high, so
that whatever the base cost of the operation, it is shared among a high number of products or
services. Cost per unit of output is therefore usually low for operations such as the electricity utility
but, more significantly, the cost of producing one second of electricity is the same as the next
second. Cost is relatively constant.
CRITICAL COMMENTARY

The whole concept of buffering the operations function is not without its critics. Buffering may
promote stability but, partly due to other influences of operations practice, we can now see several
problems with over-protecting operations from their environment:

 The time lag of communicating between the insulating function and the operations function
slows down decision-making. By the time the insulating function has responded, operations
has ‘moved on to the next problem’.
 Operations which never interact with the environment never develop an understanding of the
environment (e.g. labour or technological markets) which would help them exploit new
developments.
 Operations managers are not required to take responsibility for their actions. There is always
another function to blame.
 Physical buffering often involves tolerating large stocks of input or output resources. These
are both expensive (see, Inventory planning and control) and prevent the operation
improving (see, Just-in-time planning and control).
 Physical buffering in customer-processing operations means making the customer wait for
service, which in turn could lead to customer dissatisfaction.

For all of these reasons, it is better gradually to expose the operations function to its environment.
Only then will it learn to develop the necessary flexibility to respond to and understand what is
really happening with its customers and suppliers.

The approach which many companies have taken to the idea of ‘buffering’ their operations says a
lot about how the role of operations management has changed over the last few years. Traditionally,
operations managers were seen as being unable to cope with disruption from outside the
organisation. Wildly fluctuating demand levels required physical buffering in the form of finished
product inventories so that demand could be satisfied, even if the operation could not flex its output
levels to cope with changing demand. Nor were operations regarded as being capable of expertise
outside their core area of producing goods and services. So, for example, a personnel department
would deal with the labour market, recruit staff and look after much of their welfare while they
worked in the operation. While operations are still buffered in most organisations, it happens far
less. This is because over protecting an operation can deprive it of an opportunity to learn how to
cope with changes in the business environment, or learn the skills necessary to manage its own
resources.
The two figures below illustrate the idea of physical buffering and organisational buffering.

How are operations different from each other?

This lecture differentiates between different types of operation by using four dimensions – it calls
these the four Vs of operations. They are,
 Volume – how many products or services are made by the operation?
 Variety – how many different types of products or services are made by the operation?
 Variation – how much does the level of demand change over time?
 Visibility – how much of the operation’s internal working are ‘exposed’ to its customers?
The figure below gives some examples of operations at each end of these four dimensions. In most
industries one can find examples at either end of each dimension. So, for example, in transport, a
taxi service is low volume while a bus service or mass rapid transport is high volume. In accounting
firms, corporate tax advice is high variety because all large corporations have different needs, while
financial audits, which have to be carried out to comply with financial reporting legislation, are
relatively standardised. In food manufacture, the demand for ice-cream varies considerably
depending on the weather, while the demand for bread is far steadier and more predictable. In the
dental care industry, dentists operate high visibility operations (it’s difficult to work on your teeth if
you are not there) but rely on dental technicians in factory-type laboratories to make false teeth etc.

These dimensions are most useful in predicting how easy it is for an operation to operate at low
cost. Figure 1.10 in the module indicates that operations whose profiles occupy the right-hand
extreme of the dimensions (high volume, low variety, low variation and low visibility) tend to
operate at lower cost than those at the other end of the dimensions.

When operations processes do differ they do so mainly in terms of their volume, variety, variation
and visibility. But not everyone agrees that these dimensions are sufficient. Operations processes,
they say, differ in far more ways that the four V’s suggest. At the very least more dimensions are
needed, for example the relative complexity which processes have to cope with, or the degree of
discretion or decision making required by the staff with the process, or the risk of things going
wrong in the process, or the value of each product or service produced, and so on.

What responsibilities do operations managers have?

The module divides the responsibilities of operations managers into,
 Direct responsibilities – the activities which are directly related to producing and delivering
products and services.
 Indirect responsibilities – the activities involved in interfacing with other parts of the
organisation.
 Broad responsibilities – a wider set of tasks that involve scanning the business, social and
political environment in which the organisation exists in order to understand its context.

Naturally the vast majority of operations management is concerned with the direct responsibilities
of operations managers. However, both the indirect responsibilities of communicating with other
functions and (especially) the broad responsibilities are becoming increasingly important to
operations managers. This relates back to the idea of buffering. As the traditional barriers between
the operations function and the other functions of the business and the business environment in
general are being lowered, so operations manager must make decisions in the light of the their
internal and external environments.

What operations managers actually do

In all of operations management’s direct and indirect activities there is a need to communicate both
with internal staff and with external customers, suppliers and the broader community. One survey
carried out by Professor Arnoud De Meyer shows how much of a factory manager’s time is spent on
different activities, and how the importance of each is changing (see the Table below).

Consulting and communicating with operations staff clearly takes up a large amount of these
operations managers’ time. But the proportion of their time spent communicating with people
outside the operations function and even outside the organization appears to be gaining in
importance. This means, says Professor De Meyer, that operations managers are evolving to be
more ‘... managers of interfaces, as opposed to a caretaker of an isolated manufacturing function’.

Degree of change
Activity % of time
(1 = spending less
time,

7 = spending more
time)
Direct supervision and support 22 3.5

Consulting with plant staff 16 3.9

Consulting with upper management 12 4.0

Consulting with sales and marketing 10 4.8

Communicating with customers 7 4.8

Communicating with suppliers 7 4.4

Consulting with Research and Development 5 4.7

Dealing with the community 5 4.5

Training (as trainer) 4 4.6

Training (as trainee) 4 4.6

Source: De Meyer A. (1993) ‘Creating the Virtual Factor’, EFME Conference, LBS.

The role of the operations function

"The role of the operations function means something beyond its obvious responsibilities and tasks
– it means the underlying rationale of the function, the very reason that the function exists."

The idea of role is important. As individuals we all play roles in our everyday life. Sometimes we
are colleagues of other people on our course. At other times we are friends of the people we grew
up with. At other times the children of our parents. Each is a different role. The important point is
that we behave differently depending on which role we are in at any time. It is the same for the
operations function. Depending on its role, it will behave differently. This lecture identifies three
roles for operations management. They are not exclusive in the sense that an operation has to be one
of them, but they all contribute to making up the way an operation behaves. The three roles are:

 The implementer of business strategy.

  The supporter of business strategy.
 The driver of business strategy.

Two things are important in understanding these roles. First, they are stated in order of difficulty
and in order of importance. Implementing business strategy is a very basic responsibility for
operations, supporting business strategy is what most operations should aspire to, but driving
business strategy is only possible if the operation really does have unique capabilities. Second, they
are cumulative in the sense that an operation cannot be a supporter of business strategy unless it has
skills as an implementer, and cannot drive business strategy unless it has the skills to support the
business strategy.

Operations performance objectives

The first point made in this section of the lecture is that operations objectives are very broad.
Operations management has an impact on the five broad categories of stakeholders in any
organisation. Stakeholders is a broad term but is generally used to mean anybody who could have
an interest in, or is affected by, the operation. The five groups are:

 Customers – These are the most obvious people who will be affected by any business. What
the lecture goes on to call the five operations performance objectives apply primarily to this
group of people.
 Suppliers – Operations can have a major impact on suppliers, both on how they prosper
themselves, and on how effective they are at supplying the operation.
 Shareholders – Clearly, the better an operation is at producing goods and services, the more
likely the whole business is to prosper and shareholders will be one of the major
beneficiaries of this.
 Employees – Similarly, employees will be generally better off if the company is prosperous;
if only because they are more likely to be employed in the future. However operations
responsibilities to employees go far beyond this. It includes the general working conditions
which are determined by the way the operation has been designed.
 Society – Although often having no direct economic connection with the company,
individuals and groups in society at large can be impacted by the way its operations
managers behave. The most obvious example is in the environmental responsibility
exhibited by operations managers.

After making this general point about operations objectives, the rest of the lecture goes on to look at
the five performance objectives of quality, speed, dependability, flexibility, and cost.
The objectives performance
Quality: Quality is placed first in our list of performance objectives because many authorities
believe it to be the most important. As far as this introduction to the topic is concerned, quality is
discussed largely in terms of it meaning ‘conformance’. That is, the most basic definition of quality
is that a product or service is as it is supposed to be. In other words, it conforms to its specifications.
There are two important points to remember when reading the section on quality as a performance
objective.

 The external effect of good quality within in operations is that the customers who ‘consume’
the operations products and services will have less (or nothing) to complain about. And if
they have nothing to complain about they will (presumably) be happy with their products
and services and are more likely to consume them again. This brings in more revenue for the
company (or clients satisfaction in a not-for-profit organisation).
 Inside the operation quality has a different effect. If conformance quality is high in all the
operations processes and activities very few mistakes will be made. This generally means
that cost is saved, dependability increases and speed of response increases. This is
because, if an operation is continually correcting mistakes, it finds it difficult to respond
quickly to customers requests. See the figure below.

Speed: Speed is a shorthand way of saying ‘Speed of response’. It means the time between an
external or internal customer requesting a product or service, and them getting it. Again, there are
internal and external affects.

 Externally speed is important because it helps to respond quickly to customers. Again, this is
usually viewed positively by customers who will be more likely to return with more
business. Sometimes also it is possible to charge higher prices when service is fast. The
postal service in most countries and most transportation and delivery services charge more
for faster delivery, for example.
  The internal effects of speed have much to do with cost reduction. The lecture identifies two
areas where speed reduces cost (reducing inventories and reducing risks). The same thing
applies to both manufacturing and service operations. Usually, faster throughput of
information (or customers) will mean reduced costs. So, for example, processing passengers
quickly through the terminal gate at an airport can reduce the turn round time of the aircraft,
thereby increasing its utilisation. What is not stressed in the lecture is the effect the fast
throughput can have on dependability. This is best thought of the other way round, ‘how is it
possible to be on time when the speed of internal throughput within an operation is slow?’
When materials, or information, or customers ‘hangs around’ in a system for long periods
(slow throughput speed) there is more chance of them getting lost or damaged with a knock-
on effect on dependability. See the figure below.

Dependability: Dependability means ‘being on time’. In other words, customers receive their
products or services on time. In practice, although this definition sounds simple, it can be difficult
to measure. What exactly is on time? Is it when the customer needed delivery of the product or
service? Is it when they expected delivery? Is it when they were promised delivery? Is it when they
were promised delivery the second time after it failed to be delivered the first time? Again, it has
external and internal effects.

 Externally (no matter how it is defined) dependability is generally regarded by customers as

a good thing. Certainly being late with delivery of goods and services can be a considerable
irritation to customers. Especially with business customers, dependability is a particularly
important criterion used to determine whether suppliers have their contracts renewed. So,
again, the external effects of this performance objective are to increase the chances of
customers returning with more business.
 Internally dependability has an effect on cost. The lecture identifies three ways in which
costs are affected – by saving time (and therefore money), by saving money directly, and by
giving an organisation the stability which allows it to improve its efficiencies. It is important
 to stress that highly dependable systems can help increase speed performance. Once more,
think about it the other way round – ‘how can an operation which is not dependable ever
promise its customers fast response?’ See the figure below.

Flexibility: This is a more complex objective because we use the word ‘flexibility’ to mean so
many different things. The important point to remember is that flexibility always means ‘being able
to change the operation in some way’. The lecture identifies some of the different types of
flexibility (product/service flexibility, mix flexibility, volume flexibility, and delivery flexibility). It
is important to understand the difference between these different types of flexibility, but it is more
important to understand the effect flexibility can have on the operation. Guess what! There are
external and internal effects.

 Externally the different types of flexibility allow an operation to fit its products and services
to its customers in some way. Mix flexibility allows an operation to produce a wide variety
of products and services for its customers to choose from. Product/service flexibility allows
it develop new products and services incorporating new ideas which customers may find
attractive. Volume and delivery flexibility allow the operation to adjust its output levels and
its delivery procedures in order to cope with unexpected changes in how many products and
services customers want, or when they want them, or where they want them.
 Once again, there are several internal effects associated with this performance objective. The
lecture deals with the three most important, namely flexibility speeds up response, flexibility
saves time (and therefore money), and flexibility helps maintain dependability. See the
figure below.
Cost: The lecture makes two important points here. The first is that the cost structure of different
organisations can vary greatly. Second, and most importantly, the other four performance objectives
all contribute, internally, to reducing cost. This has been one of the major revelations within
operations management over the last twenty years.
"If managed properly, high quality, high speed, high dependability and high flexibility can not only
bring their own external rewards, they can also save the operation cost."

The polar representation of performance objectives

The lecture finishes with a useful way of illustrating the relative importance of the five performance
objectives – the polar diagram. It is particularly useful for illustrating the difference between
different products or services.

The polar diagram below illustrates the relative importance of each of the performance objectives
for two services. Technical Services which hires out equipment is, for some of its equipment, in a
relatively competitive market and must keep its prices competitive, therefore cost is relatively
important to it. So is dependability, failure to deliver a piece of equipment would have serious
consequences for the customer. Occasionally also speed can be important. Quality means making
sure that the equipment is in good working order every time it is sent out. Flexibility is relatively
unimportant because customers know exactly what it required and if the equipment is not available
there is nothing much that the firm can do about it. Production Services, on the other hand, is in a
less price sensitive market. Customers give the firm the business primarily because of the high
quality and flexibility they show in devising imaginative high quality sets. Speed is not always a
major issue unless the clients are themselves late in their planning. Dependability, of course, has to
be high because if the set was not finished on time the stage production or exhibition could not go
ahead as planned.

The main point here is that the two types of service offered by the company have very different
characteristics in terms of which performance objectives are important. Any company must
understand how its different products and services require different objectives.
SCOPE OF OPERATIONS MANAGEMENT

Operations Management is an area of management which is concerned with the government of

system, processes and functions that manufacture goods and renders services to the end user, to
provide desired utilities to them while adhering to other objectives of the concern, i.e.
efficiency, effectiveness, and productivity.

The scope of operations management based on the interrelationship of three aspects, namely:

 Structural aspects, in the form of input that will be transformed according to criteria of the
desired products, machinery, equipment, formulas and models.

 Functional aspects, namely the link between the component input, with interaksinyamulai of
the planning, implementation, control, and improvements to obtain optimum performance,
so that operations can be run continuously.

 Environmental aspects, is the tendency that occurs outside the system, such as community,
government, technology, economics, political, social, cultural, demonstrated ability to adapt.

Scope of Operations Management

 Location of Facilities: The most important decision with respect to the operations
management is the selection of location, a huge investment is made by the firm in acquiring
the building, arranging and installing plant and machinery. And if the location is not suitable,
then all of this investment will be called as a sheer wastage of money, time, and efforts.

So, while choosing the location for the operations, company’s expansion plans,
diversification plans, the supply of materials, weather conditions, transportation facility and
everything else which is essential in this regard should be taken into consideration.

 Product Design: Product design is all about an in-depth analysis of the customer’s
requirements and giving a proper shape to the idea, which thoroughly fulfils those
requirements. It is a complete process of identification of needs of the consumers to the final
creation of a product which involves designing and marketing, product development, and
introduction of the product to the market.
 Process Design: It is the planning and decision making of the entire workflow for
transforming the raw material into finished goods, It involves decisions regarding the choice
of technology, process flow analysis, process selection, and so forth.
  Plant Layout: As the name signifies, plant layout is the grouping and arrangement of the
personnel, machines, equipment, storage space, and other facilities, which are used in the
production process, to economically produce the desired output, both quality wise and
quantity wise.
 Material Handling: Material Handling is all about holding and treatment of material within
and outside the organisation. It is concerned with the movement of material from one
godown to another, from godown to machine and from one process to another, along with
the packing and storing of the product.
 Material Management: The part of management which deals with the procurement, use
and control of the raw material, which is required during the process of production. Its aim is
to acquire, transport and store the material in such a way to minimize the related cost. It
tends to find out new sources of supply and develop a good relationship with the suppliers to
ensure an ongoing supply of material.
 Quality Control: Quality Control is the systematic process of keeping an intended level of
quality in the goods and services, in which the organization deals. It attempts to prevent
defects and make corrective actions (if they find any defects during the quality control
process), to ensure that the desired quality is maintained, at reasonable prices.
 Maintenance Management: Machinery, tools and equipment play a crucial role in the
process of production. So, if they are not available at the time of need, due to any reason like
downtime or breakage etc. then the entire process will suffer.

Hence, it is the responsibility of the operations manager to keep the plant in good condition,
as well as keeping the machines and other equipment in the right state, so that the firm can
use them in their optimal capacity.

In operations management, the operations manager plays an effective role as a decision maker, with
respect to the decisions regarding – What resources are needed and in what amounts? Where will
the process take place? Who will perform the work? When are the resources required? How will the
products be designed and developed?

Each manager will carry out basic functions of management processes. Management process
consists of planning, organizing, setting up employees, directing, and controlling. Operations
managers to implement these management processes in decision making in operations management
functions.
Based on the aspects mentioned above, the scope of operations management is defined to be ten
important decisions in operations management which includes the following:
 The design of products and services
  manage the quality
 the strategy process
 strategic location
 Layout strategy
 Human resources
 Supply chain management
 inventory management
 scheduling
 maintenance

how does the surveillance of the scope important?

What are the challenges involved.

CLASSIFICATIONS UNDER DIFFERENT HEADINGS TO DEFINE SECTOR
ENVIRONMENT
Processes fall into four different categories for operations management based on the nature of their
function. Some processes relate primarily to a product’s cost structure; others address the
company’s product standardization needs, output volume, or production flexibility. Take a look at
processes that focus on these types of business considerations and review general guidelines on how
to best select a process to meet the requirements of your product.

Before you dive into classifying a process, consider the nature of the product it’s intended to
produce. After all, creating a unique item, such as an interstate highway bridge, is wildly different
from producing a million bottles of contact-lens solution or thousands of socks in two different
colors. Here are common process classifications, arranged according to fixed costs (lowest to
highest):

Process Classifications

 Projects: These generally result in an output of one. Examples include constructing a

building or catering a party. Although the result of a project is one deliverable, the process of
creating the item can be duplicated with modifications for other projects.

 Job shops: This type of process produces small batches of many different products. Each
batch is usually customized to a specific customer order, and each product may require
different steps and processing times. Examples of job shop products include a bakery that
specializes in baking and decorating wedding cakes, each one customized for a bride, or a
programmer that creates customized websites for his clients.

 Batch shops: These produce periodic batches of the same product. Batch shops can produce
different products, but typically all the products they produce follow the same process flow.

A facility producing shirts of different sizes and colors or a bakery preparing different
flavors of cakes or types of cookies are examples of batch shops. These processes make one
type of shirt or cookie in a batch and then switch to a different type, but all types follow the
same flow.

Batch shops usually require some setup time — time required to prepare resources to
produce a different type of product.

 Flow lines: This type of process consists of essentially independent stations that produce the
same or very similar parts. Each part follows the same process throughout the process.
 Output on a flow line is dictated by the bottleneck, or the slowest operation. The flow line is
similar to the assembly line but the parts don’t move at a constant rate dictated by the line
speed.

 Assembly lines: These produce discrete parts flowing at controlled rates through a well-
defined process. The line moves the parts to the resources, and each resource must complete
its task before the line moves on. This requires a balanced line, meaning that each operation
completes its task in a similar amount of time. The line moves at the speed of the slowest
operation, or bottleneck.

 Continuous flow processes: As the name implies, these processes produce items
continuously, usually in a highly automated process. Examples include chemical plants,
refineries, and electric generation facilities. A continuous flow process may have to run 24/7
because starting and stopping it is often difficult.

Operations Management Strategies

Today’s operations managers are deeply involved in strategy, along with their daily production role.
Here are several key strategy and tactics points:

 Use of Data: Analytics are essential for strong planning, adjustments, and decision making.
Two common types are efficiency metrics and effectiveness metrics.
 Inventory Analysis: To manage inventory in the supply chain, ABC analysis (also called
Pareto analysis) comes into play. It divides inventory into three categories A, B, and C; “A”
has the most value and tightest controls, and “C” has the least.
 Data Challenges: Data is often soiled, which makes it difficult to compare. But newer
systems and setups are making this easier and helping analysts and managers examine data
in new, helpful ways.
 Process Design: Researching, forecasting, and developing a sound process takes expertise
and energy, but the results can be lasting.
 Forecasting and Goal Setting: The best forecasting often combines a look at historical data
with analysis of changing conditions.
 Collaboration Among Departments: With good communication and collaboration,
operations management can work effectively with finance, sales, marketing, human
resources, and other departments.
 Being Green: Ecological soundness has become a strategic and legal necessity at companies
nowadays, especially in manufacturing.
  Managing People: With all the advancements in machinery and technology, people remain
critical to the equation, though often in different types of jobs.

Business owners and operations managers must have a strong understanding of various types of
cost-effective operational activities, which represent the cornerstone of successful operations
management in every business organization.

All Operational Activities can be classified into several types as illustrated below. These activities
represent the core of any organization, irrespective of its size, volume of business, type of
operations, or location. For this reason, business owners and managers must develop an excellent
understanding regarding the nature of their specific operational activities to succeed in a
competitive business environment.

In fact, one of the main reasons of business failure is ineffective operational management and poor
operational performance. So, now you have an opportunity to get a better understanding of what
Operations Management really is, and how you can improve your company’s operational
performance and succeed in the challenging business environment.

CLASSIFICATION OF OPERATIONAL ACTIVITIES

 Manufacturing Operations
 Service Operations
 Merchandising Operations
 Project Management Operations
 Contract Management Operations

MANUFACTURING OPERATIONS
Manufacturing Operation entails the process of converting raw materials into semi-finished or
finished products through the utilization of plant and equipment, tools, labor, and various
production facilities. This process is known as the Manufacturing Process.
There are three traditional Manufacturing Methods frequently used by various manufacturing
companies, as outlined below.

Three Traditional Manufacturing Methods

they include

Job shop production

Under this there is :
  Custom-designed products, Special purpose machinery, Tool making manufacturing,
General engineering shop, Model manufacturing, Handmade products
Batch Production
This may include the following:
 Bakery, Clothing, Chemical products, Electrical products, Fasteners, Footwear, Furniture,
Jewelry, Machinery, Metal products, Plastic products, Printing, Sheet metal products
Note:
Large quantities of these products can be manufactured in a flow production environment

Flow Production
This includes:
 Appliances, Brewery, Brick and tile, Cable and wire, Chemicals, Cosmetics, Food, Glass,
Newspapers, Paint, Paper mill, Pharmaceuticals, Refinery, Soft drinks, Textile mill, Tobacco
products, Vehicles.

Job shop production

Job Shop Production, or an Open Job Shop, is the intermittent manufacturing process in which each
assignment is performed in accordance with a specific customer's order.
The Job Shop, in essence, offers manufacturing facilities and skilled labor to customers at short
notice. A job shop operation, such as a general engineering shop or a custom-designed furniture
manufacturer, maintains production capability but does not offer a particular product for sale.
Several characteristics of a job shop production are outlined below

Characteristics of job shop production

 Manufacturing a broad range of non-standard products in small quantities, often on a one-off
basis, according to specific customer requirements.

 Job shop production requires substantial capital investment in general purpose plant and
machinery and high plant set-up costs

 Job shop production requires highly skilled and versatile labor and management supervision

 Irregular flow of work necessitates effective implementation of operations planning and

control procedures.
  Job shop production requires to carry only those raw materials inventory and supplies that
are frequently used

Batch Production
Batch Production, or a Closed Job Shop, is another intermittent manufacturing process whereby
various customers' requirements are grouped into batches on a similar product basis.
Batch production remains a popular method utilized by many small and medium-sized
manufacturing companies. Several characteristics of a batch production are outlined below.

The characteristics of Batch production

 A batch production operation is geared to produce small and average quantities, or batches,
of products on repetitive and non-repetitive basis.
 Batch production method requires that specific raw materials are purchased in advance, and
certain components and finished goods are kept in stock in optimal quantities.
 Batch production combines versatile manufacturing capabilities and offers operational
capacity and skilled labor to customers at a reasonable notice period.
 Products may be manufactured in batches of tens, hundreds, thousands, or more depending
upon the specific production requirements.
 The length of production runs may fluctuate in relation to the quantities manufactured and
the cost per product unit may vary accordingly.
 Batch production may accommodate the manufacturing requirements of a broad range of
standard and non-standard products.
 Batch production method requires a flexible approach and effective planning and control of
the manufacturing operations.
 Batch production requires high capital investment in plant and equipment, and average plant
set-up costs
 Batch production requires general and special purpose machinery and skilled labor to
operate them

Flow Production
Flow Production, also known as Continuous Production or Mass Production, is the
manufacturing process during which the work content of the product continually increases with
time.
A typical example of flow production is a conveyor line or an assembly line. Large companies
frequently utilize flow production methods to manufacture standard products in a make-to-stock
operation.
However, the arrival of Lean/Just-In-Time (JIT), Kaizen, Total Quality Management (TQM),
and Supply Chain Management (SCM) methodologies and their influence in the manufacturing
environment caused substantial changes in the flow production methodologies. Each methodology
is discussed in detail in this Tutorial.
Several characteristics of flow production are outlined below.
 In a flow production environment, as the work on each operation is completed, the work-in-
process is passed to the next manufacturing stage without waiting for completion of the
entire batch
 Smooth performance of flow production necessitates that all manufacturing operations last
the same period of time, known as the cycle time, and that no deviation from the standard
manufacturing cycle is allowed.
 The flow production method is characterized by a large volume of identical products that
undergo repetitive and highly mechanized manufacturing processes.
 Flow production is also characterized by specialized equipment, long production runs, and
average labor skill requirements.
 The flow production method requires detailed planning of all operations well in advance.
 Operations control in a flow production environment remains relatively simple since all
operational instructions are incorporated into the manufacturing process at the planning
stage.
Manufacturing Method
The job shop, batch production, and flow production methods are not necessarily associated with
any particular manufacturing volume. Some companies often start the manufacturing process as a
job shop, and proceed to batch production methods as volume increases. Finally, upon further
increase of the production demand, they may introduce flow production techniques, if required.
The selection of the most suitable Manufacturing Method may entail a number of steps illustrated
below.
How to select a Suitable Manufacturing Method
 Make Initial Selection Of A Suitable Manufacturing Method.

You and your management team must decide on a specific manufacturing or operational method
which will be most appropriate and cost-effective for your types of products or services.

 Evaluate The Selected Method.

Once you select a particular method, it will need to be evaluated in light of your company's ability
to compete in the existing marketplace
  Select New Manufacturing Method If Necessary.

If you find that the selected method does not produce the desired results, you should identify, select,
and implement more suitable methods without delay

Non-Manufacturing Operations
Non-Manufacturing Operations include four categories

 Service Operation

 Merchandising Operations

 Project Management Operations

 Contract Management Operations

the examples of the non manufacturing operations includes the following

 Service Operations

Under service operation, there is the Standard Service and the customer service.

 The standard service includes: Banking, Child day care, Communication, Education,
Entertainment, Equipment rental, Restaurant.

 The customer service includes: Accounting, Advertising, Architectural, Catering, Cleaning,

Consulting, Electrical, Electroplating, Engineering, Financial Planning, Health care,
Insurance, Legal, Limousine service, Maintenance, Musicians, Plumbing, Psychotherapy,
Repair shop, Photography, Secretarial, Search Engine, Optimization (SEO), Transportation
service.

 Merchandising Operations

Under merchandising operation there is retail operation and Wholesale Operation

 the whole sale operation includes: Export agency, Import agency, Product wholesaler.
 The retail operations includes: Gas station, Food market, Retail store, Supermarket, Travel
agency.

SERVICE OPERATIONS
A Service Operation is a non-manufacturing activity in which each assignment results in
completing a specific type of work or, simply, satisfying a customer's need

Types of Service Operations

 Custom Services
Custom Service, also known as Specialized Service, similar to a job shop, is characterized by a
specialized service-to-order operation.

This includes such services as secretarial, plumbing, electrical, repairs, maintenance, catering,
medical, legal, insurance, consulting, accounting, and photographic services. Each of these services
is provided in accordance with the particular customer's requirements and it differs from one
customer to the next.
The majority of small and medium-sized companies provide custom service to their customers.

 Standard Services
This entails rendition of services on a continuous process basis irrespective of a specific customer's
order. Such services include education, banking, entertainment, communication, and transportation.

Standard services are generally provided by larger organizations, although many small
organizations also provide such services, e.g. kindergarten, pre-school, small transportation
company, limousine services.

MERCHANDISING OPERATIONS
Merchandising Operation represents another type of a non-manufacturing activity. Merchandising
operation, in essence, is based on buying and selling of products or merchandise at a profit.
There are two basic types of merchandising operations
 Wholesale Operation
A Wholesale Operation entails the purchase of large quantities of highly specialized materials and
goods for resale to the retail trade. Wholesalers usually carry a limited number of product lines and
sell a high volume of products at a reasonable profit markup

 Retail Operation
A Retail Operation entails the purchase of small to average quantities of products for resale to the
general public. Retailers often specialize in particular product lines such as food, appliances,
clothing, or furniture and normally carry a large variety of products in that line. These products are
sold to individual customers in small quantities at higher profit markups

PROJECT AND CONTRACT MANAGEMENT

Project And Contract Management represents another important category of non-manufacturing
operational activities. These activities include developing and managing a specific project or
completing a particular contract for a client or for investment purposes.

Many companies specialize in project and contract management and provide a wide range of
products and services to their clients such as preparation of architectural blueprints for a new house,
writing a script for a new movie, developing an advertising campaign, composing a new song for an
advertising campaign, developing land, and building new homes.

Characteristics of Project Management and Contracting

 These activities are performed in accordance with particular contractual obligations
undertaken by certain companies or individuals. Architects, for example, are engaged in
designing commercial and residential buildings and single family homes. Building and civil
engineers, and contractors, on the other hand, are engaged in erecting buildings and homes,
building roads, and constructing bridges.
 Each project entails a large number of operations and requires heavy planning and
equipment, substantial volume of material, and a large number of employees.
 Special projects may involve such activities as writing a book, designing new product,
conducting scientific research, or making a new film.
 These projects usually require special types of skills, may involve a substantial budget, and
may last for long periods of time

The control of the activities involved in producing goods and providing services, and
the study of the best ways to do this.”

In essence, the role of operations management is crucial to any business.

Imagine this: you’re a plastic manufacturer and supply various companies with packaging. You’ve
just brought a new client on board and they’re looking to launch their goods within a month or so.
Where do you start? Well, the operations manager will ensure that the correct budget is allocated,
the right people are on the job, and to make sure that everyone involved is aware of the roles they
play. This will help to ensure that the deadline is met and within budget.
Effective operations management also helps with employee engagement and defines the roles and
responsibilities within an organisation. No matter what obstacle an organisation faces, a strategic
operations management plan in place will ensure that employees’ workflow and company
production remain unaffected

Merits of Operations Management

A smooth operations management process has many benefits for an organisation, including:

Product/service quality

How do you ensure that your product/service is of the best quality? Having a checklist that meets
the objectives and goals of the company as well as meeting the customer’s needs.
The operations manager will have a set list of processes and a checklist to determine that everything
is in order during the pre-production process. This includes making sure that everyone is aware of
what the product/service needs and informing everyone of the product/service objectives.
Once the final product has been created, the operations manager will assess to ensure it meets the
organisation goals and that the customer’s needs are met. Thereafter, the operations manager will
review the pre-production process to ensure efficiency for the next creation.

Customer satisfaction

A customer review can make or break a business. If a negative word spreads, it could be a challenge
to retain clients. This is why it’s important to ensure that your customers’ needs are at the forefront
of your product or service.
The operations manager will conduct a quality management process, a methodology uses to create a
product/service that will meet the customers’ needs. If the organisation is a service provider, the
customer is the lifeblood. The operations manager will have processes in place to make sure that the
service quality is the best. A returning customer means more for the bottom line.
The elements used to help gain a satisfactory customer includes:
Quality management: To ensure the organisation maintains a consistent and good service.
Employee capacity: Making sure the right people are in the right roles, which helps produce a
good product/service.
Planning: To make sure that there is no lapse in production and that goods/services are on time.
Enough inventory: To keep up with customer demand.
With these four elements in mind, the operations manager can meet the customers’ needs.

Revenue Increase

An organisation will have a good reputation thanks to great product/service quality and customer
satisfaction. This leads to increased revenue from a new customer base. The revenue growth could
help with the launch of new and innovative products/services or an increase in resources and
technology.
Competitive advantage

An effective operations management plan also means a business could be ahead of its competition.
If internal and external factors are managed well within an organisation, it could mean a good
standing within the market.

Compliance

There are certain rules and regulations an organisation needs to adhere to. The operations manager
will have certain controls in place to avoid fines and to make sure the organisation is running within
a lawful manner.

Motivated employees

Overall, the operations manager ensures that employees know the roles within a company. This is
important because often, employees feel left out and demotivated if they feel they’re not
contributing in a meaningful way. An operations manager helps define these roles to ensure that
production is maximised and efficient.
 PRODUCTION FORECASTING

Meaning of Production Forecasting

Production forecasting means to estimate the future demand for goods and services. It also
estimates the resources which are required to produce those goods and services. These resources
include human resources, financial and material resources. So, production forecasting means to
estimate the 6M's of management.
The production manager first estimates the future market or demand for the companies goods and
services. Then he estimates the Men (human resources), Money (financial resources), Materials,
Machines and Methods, which will be required to produce those goods and services.
Production forecasting estimates the future technological developments. It estimates the customers
needs and preferences along with competitors' strategy in the future. So, production forecasting is
an estimation of a wide range of future events, which affect the production of the organization.
First production manager studies all the past and present events. Then he makes estimations about
the future. So, most of the production forecasts are made for existing goods and services. However,
some new products will be introduced into the market in an upcoming future. Forecasts for these
new products are called predictions.
Production forecasting requires a lot of skill, experience and judgement of the production manager.
He must use many statistical techniques and tools to make his forecasts accurate.
Production forecasting is a combination of objective calculations and subjective judgements. That
is, it involves systematic collecting and analyzing past and present data. This is done objectively
with the help of statistical techniques and tools. Production forecasting also involves subjective
judgement of the production manager. That is, he has to use his intuition and judgement for
forecasting.
The success or failure of an organization depends upon the accuracy of its production forecasts. All
the plans and strategies of the organization are based on the production forecasts. Production
forecasts help to reduce the business risks.

How well production levels match actual demand is an important factor in company performance. If
production is too low, the company can't meet demand, has dissatisfied customers and loses sales. If
production is too high, the company must store surplus production in inventory, delaying payment
and adding storage costs. In both cases, company profitability is less than if production forecasts
had been accurate.
Forecasting Methods for Production

Trend
You can forecast production based on a steady trend. If you see production levels have increased 1
percent per month for the past two years, you can forecast a 1 percent increase for next month.
Forecasting on the basis of trends is only accurate if the trend is stable. Sometimes increases vary,
but you can still find an underlying trend. If, over the past two years, monthly changes ranged from
minus 1 percent to plus 3 percent without any pattern, calculate an average of the increases to find
the trend.

Pattern
If you can find a pattern to the monthly changes, you can make a more accurate forecast. Patterns
are often seasonal or related to other forces, such as the weather. For example, you may have to
increase production levels by 25 percent per month for October and November each year to prepare
for the holiday season. A cold winter may influence your production levels in the northeastern
United States. When you see a pattern in the production levels over the past several years, you can
forecast that the pattern will repeat in the coming year.

Cycles
Cycles are longer-term variations based on the economy. If you are at the beginning of a cycle of
economic expansion, and such cycles have resulted in a doubling of the demand over two years in
the past, you can forecast a similar increase for this cycle. Because the influences of economic
cycles are usually superimposed on shorter-term variations, for monthly forecasts, you have to add
these influences to the factors related to trends and patterns to get an accurate estimate for demand
and the required production levels.

Inventory
Your production forecast methods have to include the influence of inventory. A minimum level of
inventory is required to meet short-term demand variations, but if inventory is too high, your
production must be lower until inventory has decreased to the desired level. With high inventory,
you have to include a planned drawdown of inventory and a correspondingly lower level of
production. Ideally, you use excess inventory to reduce production to a steady level that represents
an efficient use of your facilities.

Forecasting in Strategic Management

To develop strategies for the management of your business, you have to evaluate your present
position and forecast how it will change during your planning period. Such forecasts guide you in
specifying strategic objectives, and the validity of your strategy depends on the accuracy of your
forecasting. Depending on the type of strategy you are developing, you have to choose the
forecasting techniques that will best allow you to predict how the business will evolve.

Qualitative
An effective way of developing accurate forecasts for strategic management is to use several
methods and verify that they give similar results. A qualitative approach is excellent for initial
guidance and is based on the judgment of those closest to the markets. Start by asking sales and
marketing employees for their opinions on how the markets you are interested in will change. Input
from suppliers and customers is also useful. When you assemble the information from different
sources and find that it is consistent, you have a good qualitative forecast. If there are major
inconsistencies, you have to find additional sources to make your forecast more reliable.

Historical
To check your qualitative forecast and increase its accuracy you need objective information. An
accurate and simple method of quantitative forecasting is to extrapolate historical data. If your sales
have been rising 5 percent per year for the past three years, you can forecast another 5 percent rise
for next year with confidence. This method is especially useful in stable situations and if it confirms
your qualitative analysis. If your business environment has changed, the historical data may no
longer be applicable, and if your forecast doesn't match your qualitative figures, you have to use
additional forecasting methods.

Patterns
Sometimes your strategy calls for monthly forecasts, but the historical data varies irregularly on a
monthly basis. You can still use such historical data if you can detect a pattern. Many business
variables depend on annual or seasonal influences that are predictable and make variable historical
data relevant. For example, your sales may increase by 20 percent every December, or products that
are needed in the summer may have the bulk of their sales in April and May. If you can detect a
regular pattern for such variations, you can include it in your forecasts and get accurate monthly
results.

Cause and Effect

If there has been a major change in your business situation, you may have to make adjustments to
your historical data. For example, if a new competitor enters your market, you may forecast reduced
profits. If you introduce a new product, you will have product launch costs that will initially depress
your profits but eventually increase your sales. If you can identify the cause for a variation in your
historical data, you have to include the effect in your forecasts to make them reflect the changed
situation of your company in the market.

Principles
 At any point in time, there is only one best estimate forecast for a project that reflects the
current understanding of subsurface uncertainty and best development and commercial
assumptions.
 This forecast should always be accompanied by an uncertainty range.
 The forecast uncertainty range should always have remaining reserves or EUR as an
objective function.
 The forecast and uncertainty range should be based on defined projects, with incremental
forecasts for subsequent projects.
With these principles, forecasting is part of asset management throughout the year. It may be
envisaged as a continuous loop through the whole upstream lifecycle. Forecast updates are triggered
by reserves and corporate planning, but also by ad hoc changes and events, such as studies and
subsurface information and development plan updates. Note that for the official forecasts (reserves
and corporate planning), reasonable freeze dates should be agreed upon for input data and should be
adhered to. Subsequent changes due to new wells, workovers or wells failing should be reflected in
the ad hoc updates, The forecast model is kept up-to date and consistent with the latest surveillance
data and development assumptions and when reserves or corporate forecast need to be updated, it
may simply be derived from the latest model.

The importance of Forecasting in Production

If there’s one thing today’s planners and managers wish they had to ensure their planning and
production strategies, it would be a crystal ball. A magical ability to glimpse into the future in order
to cut the complexity and uncertainty of modern manufacturing and provide a path of stability and
certainty in a variant-rich value stream. While a crystal ball is obviously an impossibility, planners
and managers do have a critical tool to help predict future planning and production needs while at
the same time managing inventory levels and job allocation strategies for maximum efficiency and
productivity.
Forecasting. Or, in other words, the ability to see into the future and make educated predictions
about any number of production elements such as material sourcing, job allocation, transport
logistics, and more. In fact, forecasting is such an increasingly valuable proposition for
manufacturing companies that a 2016 study by Gartner indicated forecasting (and the accuracy
thereof) and demand variability were two of the greatest obstacles manufacturing companies
encounter when overseeing their supply streams.
In addition, this same report indicated accurate forecasting was one of the top most priorities for
manufacturing companies as modern manufacturing continues to develop, diversify, and expand to
new regions of the world. Whether you’re concerned with demand forecasting (projections based on
current industry demand or level of use for a given product) or supply forecasting (data about
current production trends and the factors that might influence or impact these trends), companies
need to be aware of how and why forecasting is such a critical operations.
With this mind, let’s examine a handful of ways forecasting is a critical value proposition for
planning and production in today’s modern manufacturing landscape.

More effective production scheduling

So much of contemporary demand planning strategy can be compared to looking in a rearview
mirror. Yes, where you’ve been can often help determine where you’re going, but that doesn’t
necessarily help you avoid a multiple-car accident on the freeway. However, forecasting gives
companies the ability to see into the future to avoid this hypothetical accident via more effective
production scheduling to meet customer demands and market forces, and to align with the
availability of raw materials and component parts. Because forecasting gives manufacturing
companies a leg-up on these elements of planning and production cycles, companies can operate
with more agility, transparency, and flexibility to adapt to changing production environments or
schemes.

Inventory management and reduction

If a manufacturer can better understand and predict demand or orders for certain products, then they
can more effectively work with suppliers to achieve optimal inventory levels to reduce the
likelihood of part overages or shortages. Forecasting capabilities provide manufacturing companies
the clarity of supply situations to more accurately evaluate the level of customer demand versus the
volume of component parts necessary to successfully fill orders and ensure scheduled delivery
windows. Not only does inventory reduction decrease the amount of warehousing or container
space, it also helps companies streamline their operations by eliminating costly losses by
significantly reducing the amount of time unused inventory sits in a warehouse.  

Cost reduction
We just discussed how forecasting reduces the costs associated with unused materials or
components parts, but forecasting also helps companies reduce costs by providing companies the
foresight to not order more stock than necessary to fulfill customer orders. In addition, forecasting
helps reduce costs associated with a number of other critical production tasks such as job allocation
and management, sourcing raw materials, and even some front-office or customer-facing duties.
Because forecasting impacts the production cycle from start to finish (and because production
cycles impact each touch point of the value chain), a more efficient and cost-effective production
platform means a more efficient and cost-effective manufacturing company.

Optimized transport logistics

Imagine Manufacturing Company A is reviewing their transport logistics only to reveal massive
costs associated with transporting a certain volume of product to a certain location. In order to curb
or even reduce these costs, this company tries to combine shipments or methods of transit, or
perhaps even alter delivery dates based on customer demand. While these might be decent options,
forecasting allows companies to take this one step further and systematically analyze their
transportation strategy to identify areas where efficiencies can be increased and redundancies
eliminated. Because effective transport logistics are about the fastest and most efficient way to
move products from Point A to Point B, forecasting allows companies to see when, where, how, and
why the most strategic transport decisions can be executed and the value these actions add to their
supply logistics.

Increased customer satisfaction

Customer satisfaction in today’s global manufacturing industry is really about making sure the
customer has the right product in their hands at the right time and how this product arrives to meet
the customer’s needs. If we take forecasting to be a holistic method of refining, streamlining, and
enhancing a manufacturing company’s operational, logistics, and production cycle platforms, then it
makes sense how forecasting works to increase customer satisfaction and promote growth and
expansion in the short, mid, and long-term.
 Appraise the strategic relationship between the operations function and other main
functions within the organization:

The organisational/management function varies in accordance of its use. Every organisation have
different functional area of management require for planning of activities, organisation of resources,
establishment of communication system, leading and motivation of people, and control of
operations for the realisation of its goals or objectives

The ideal situation for a business organization is to achieve an economic match of supply and
demand. The key functions on the supply side are operations and supply chains, and sales and
marketing on the demand side.

While the operations function is responsible for producing products and/or delivering services, it
needs the support and input from other areas of the organization. Business organizations have three
basic functional areas,
Finance, marketing, and operations. It doesn’t matter whether the business is a retail store, a
hospital, a manufacturing firm, a car wash, or some other type of business; all business
organizations have these three basic functions.
Financial Management:

According to Boward and Upton – ‘Financial Management is the application of planning and
control of the financial functions’. It deals with different financial aspects and issues. Financial
management is an indispensable organ and have a wide scope of business management. It is more
analytical and less descriptive. It helps the top management in determining policies and plans as
well as in decision making also. Today the business performance is measured on the basis of
financial results.

Finance is responsible for securing financial resources at favourable prices and allocating those
resources throughout the organization, as well as budgeting, analyzing investment proposals, and
providing funds for operations.

Financial management deals with arrangement of sufficient capital for the smooth running of
business. It also tries to ensure that there is proper utilisation of resources. It takes many important
decisions such as raising capital from various sources of finance, investment of funds in productive
ventures, and levels of inventory of various items.

Functional Area of Financial Management:

Financial management seeks to ensure the right amount and type of funds to business at the right
time and at reasonable cost. Financial management means planning, organizing, directing and
controlling the financial activities such as procurement of funds and utilisation of funds of the
enterprise. It means applying general management principles of financial resources of the
enterprise.
The financial manager of an organisation or business enterprise has to manage various aspect of the
finance which determines the scope of his duties.
Financial management ensures the flow of funds in the business with suitable and fruitful financial
policies.
It involves the following activities:
i. Estimating the volume of funds required for business.
ii. Determining the appropriate sources of funds.
iii. Raising the required funds at the right time.
iv. Ensuring proper utilization and allocation of raised funds so as to maintain safety and liquidity of
funds.
v. Administration of earnings.
The various functions are discussed below:
(i) Formulation of Objective:
The foremost function of the finance department is the formulation of objective. This objective
refers to those activities which are correlated with organisation objectives and helps in the
fulfillment of goals of the organisation for the accomplishment of finance department goals, it is
necessary to have coordination with other various functional departments.
(ii) Estimation of Capital Requirements:
A finance manager has to make estimation with regards to capital requirements of the company.
This will depend upon expected costs and profits and future programmes and policies of a concern.
Estimations have to be made in an adequate manner which increases the earning capacity of
enterprise.
(iii) Determination of Capital Structure:
Once the estimation has been made, the capital structure have to be decided. This involves short-
term and long-term deft equity analysis. This will depend upon the proportion of equity capital a
company is possessing and additional funds which have to be raised from outside parties.
(iv) Choice of Sources of Funds:
For additional funds to be procured, a company has many choices like:
(a) Issue of shares and debentures.
(b) Loans to be taken from banks and financial institutions.
(c) Public deposits to be drawn like in form of bonds. Choice of factor will depend upon the relative
merits and demerits of each source and period of financing.
(v) Investment of Funds:
The finance manager has to decide to allocate funds into profitable ventures so that there is safety
on investment and regular returns is possible. The funds procured from various sources are to be
prudently invested in various a sets so as to optimise the return on investment. While investment
decision, management should be guided by three important principles-safety, profitability and
liquidity.
(vi) Disposal of Surplus:
The net profits decision has to be made by the finance manager.
This can be done in two ways:
(a) Dividend Declaration – It includes identifying the rate of dividends and other benefits like
bonus.
(b) Retained Profit – The volume has to be decided which will depend upon expansional,
innovational, diversification plans of the company.
(vii) Management of Cash:
Finance manager has to make decisions with regards to cash management. Cash is required for
many purposes like payment of wages and salaries, payment of electricity and water bills, payment
to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw materials,
etc. In order to know the need of cash during different periods, the management should prepare a
cash flow statement in advances.
(viii) Financial Controls:

The finance manager has not only to plan, procure and utilize the funds but he also has to exercise
control over finances. This can be done through many techniques like ratio analysis, financial
forecasting, cost and profit control, etc.

 Marketing Management is responsible for assessing consumer wants and needs,

and selling and promoting the organization’s goods or services.

According to Stanton – ‘Marketing is total system of interacting business activities designed to

plan, price, promote and distribute want satisfying products to target markets to achieve
organisational objectives’. There are different functions like product planning, standardisation,
procurements, warehousing, logistic, retailing, pricing, promotion, personal selling, buying and
selling and market segmentation which are being performed at the marketing management scenario.

It is concerned with distribution of goods and services produced by production department. A

business can perform this function efficiently only if it is able to satisfy the needs of the customers.
For this purpose, the marketing department guides the production department in product planning
and development. It fixed the prices of various products produced by the business. It promotes the
sale of goods through advertisement and sales promotion devices such as distribution of samples
and novelty items, holding contests, organising displays and exhibitions, etc.

Marketing management includes the identification of consumer’s needs and supplying them the
products and services which can satisfy those needs.
It includes the following activities:
i. Marketing research to determine the needs and expectations of consumers.
ii. Planning and developing suitable products.
iii. Fixation of appropriate prices.
iv. Selection the right channels of distribution, and

v. Promotional activities through advertising and salesmanship to communicate with the customers.

Functions of Marketing Management:

The major function of marketing department is to generate revenue for the business by selling want
satisfying goods and services to the customers.
In order to achieve this purpose, the marketing manager performs the following functions:
i. Marketing Research:
Marketing research is the function that links the customer, consumer and public to the marketer
through information used to identify and define marketing opportunities and problems, generate,
refine, and evaluate marketing actions, monitor marketing performance and improve understanding
of marketing as a process.
Marketing research specifies the information required to address these issues, designs the method
for collecting information, manages and implements the data collection process.
ii. Product Planning and Development:
A product is something which is offered by a business firm to customers to satisfy their needs. It has
great importance in all other areas of marketing management. For instance, marketing research is
mainly directed towards knowing the needs of the customers and increasing the sale of the product,
storage and transportation activities depend upon the nature of the product. Therefore, it is
necessary to plan and develop products which meet the specification of the customers.
iii. Buying and Assembling:
Procurement of raw materials, semi-finished or finished products has gained great importance for
the modern industrial and commercial enterprises. Raw materials are purchased for production by
the industrial enterprises and finished goods are purchased for resale by the commercial enterprises.
Purchasing is different from assembling. Purchasing involves determination of requirements,
finding the sources of supply, planning the order and receiving the goods. But assembling means
collection of goods already purchased from different sources at a common point.
iv. Selling:
Selling is providing the customer with the products that they want. Examples- Retail stores and
sales people. Sale may take the form of (a) a negotiated sale, and (b) an auction sale. In case of
negotiated sale, the terms and conditions between the buyer and the seller are arrived at by
bargaining or haggling.
But in case of auction sale, there is no scope for negotiation between the seller and buyer. The
buyers assembled at the place of auction and bid against one another for the goods are sale.
v. Financing:
Financing involves getting the money that is necessary to operate a business. Business raise money
by selling shares, selling their products and taking out loans. This is the preliminary function. Total
budgeting is going to be done while planning for marketing the goods and services.
vi. Pricing:
Pricing a product is perhaps the most important part of the marketing functions. Pricing a product
involves choosing a price where the profit generated from a product would be at its maximum. This
is based on the competitors, prices and how much the consumer would want to pay for the product.
Price of a product is influenced by the cost of product and services offered. Profit margin desired,
prices faced by the rival firms and government policy, sound pricing policy are an important factor
for selling the products to the customers.
vii. Promotion:
Promotion of a product is crucial to a product’s success in the market. Efforts to try and convince
consumers through communication to buy the product are generally called promotions. Promotion
is one of the four elements of marketing mix (product, place, promotion place).

It is the communication link between sellers and buyers for the purpose of influencing, informing or
persuading a potential buyer’s purchasing decision.

Operations are responsible for producing the goods or providing the services offered by the
organization.

The production management is needed by the manufacturing organisations. These organisations

change the form of the raw material and make it more useful.
This functional area of production management includes the following activities:
(i) To anticipate the production activities,
(ii) To determine the kind and quantity of the goods to be produced,
(iii) To make provision for the raw material well in time,
(iv) To plan and control production,
(v) To determine the need of the employees of the production department and arrange for the
recruitment and selection process,
(vi) To conduct the time and motion study,
(vii) To determine the method of production,

(viii) To control the quality of the goods produced, etc.

As far as manufacturing organization is concerned, production is a core function. The entire

production operations are to be planned, organized, directed, coordinated and controlled.
The production activities encompass the following:
i. Product designing.
ii. Acquisition of materials.
iii. Storage of materials.
iv. Planning and controlling of factory operations.
v. Repairs and maintenance.
vi. Inventory and quality control.

vii. Research and development.

Operations and supply chains are intrinsically linked, and no business organization could exist
without both. A supply chain is the sequence of organizations—their facilities, functions, and
activities—that are involved in producing and delivering a product or service. The sequence begins
with basic suppliers of raw materials and extends all the way to the final customer, as seen in Figure
2

Facilities might include warehouses, factories, processing centres, offices, distribution centres, and
retail outlets. Functions and activities include forecasting, purchasing, inventory management,
information management, quality assurance, scheduling, production, distribution, delivery, and
customer service.
The creation of goods or services involves transforming or converting inputs into outputs. Various
inputs such as capital, labour, and information are used to create goods or services using one or
more transformation processes. To ensure that the desired outputs are obtained, an organization
takes measurements at various points in the transformation process ( feedback ) and then compares
them with previously established standards to determine whether corrective action is needed
( control ).
The essence of the operations function is to add value during the transformation process: Value-
added is the term used to describe the difference between the cost of inputs and the value or price of
outputs.
In nonprofit organizations, the value of outputs (e.g., highway construction, police and fire
protection) is their value to society; the greater the value-added, the greater the effectiveness of
these operations.
In for-profit organizations, the value of outputs is measured by the prices that customers are willing
to pay for those goods or services. Firms use the money generated by value-added for research and
development, investment in new facilities and equipment, worker salaries, and profits.
Consequently, the greater the value-added, the greater the number of funds available for these
purposes. Value can also be psychological, as in branding. Many factors affect the design and
management of operations systems.
Among them are the degree of involvement of customers in the process and the degree to which
technology is used to produce and/or deliver a product or service. The greater the degree of
customer involvement, the more challenging it can be to design and manage the operation.
Technology choices can have a major impact on productivity, costs, flexibility, and quality and
customer satisfaction.
Note
The class challenge

 list the main functions within the organisation.

 Identify the relationship between the operations function and other main functions within
the organization: