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OPERATIONS MANAGEMENT
Compiled and Edited for Classroom Discussion by:
FRINZE AL A. BERNAL, MBA
Instructor I
Department of Management
Cavite State University
Cavite City Campus
LECTURE 2: Introduction to Operations Management
Learning Objectives:
After the completion of the lecture, the students should be able to:
1. define operations management;
2. differentiate goods from services;
3. explain the difference between production and productivity;
4. compute for a single-factor productivity;
5. compute for a multifactor productivity; and,
6. distinguish critical variables to enhance productivity.
It is said that production of goods and services requires operations management
(OM). The effective application of the concepts, tools, and/or techniques of OM that
will be discussed in this course can contribute to the efficient production of goods
and services.
Production refers to the creation of goods and services while operations
management (OM) is the set of activities that creates value in the form of goods
and services by converting inputs or resources to outputs. All activities in the
organization either creates goods or provides service. It is more observable in a
manufacturing organization since they produce tangible products like laptops or
cellphones. On the other hand, in case of service providers, it is less observable to
the public or even to customers. The product of such service providers may take the
form of automated bills payment, bank transfers, heart transplant, provision of
accommodation based on the customers budget, and even students’ education.
Operations encompasses both product and service activities.
Goods and Services Organization
Any organization performs three basic functions to produce goods or services.
These are:
1. Marketing which generates the demand for product or service for an
organization.
2. Operations/production which includes activities that produce products or
provides services.
3. Accounting/finance are activities that tracks how well the organization is
doing in terms of money.
The next figures show examples of an organizations which performs the three
activities. The areas in blue background indicate the significant role that OM plays.
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Figure 1. Organizational chart of a bank which provides services

Figure 3. Organizational chart of a manufacturing company which produces products

Supply Chain
These are a network of organizations and activities that supplies a firm with
goods and services. This means that an organization could not create value for their
customers by themselves, there are other organization that contributes to the value
of product and/or services. Only when other members of the supply chain cooperate
to contribute with the high-level customer satisfaction, would efficiency and
competitive advantage would be achieved.

Figure 2. Organizational chart of an airline company which provides services

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Difference between Production and Productivity

Production is the creation of goods and/or services. A firm may increase
production by hiring more people and employment, but it does not usually imply high
productivity. Productivity is the ratio of outputs (goods and services) divided by the
inputs (resources, such as labor and capital). It is the job of the operations manager
to increase the ratio of outputs to inputs. Improving productivity means improving
efficiency.
Efficiency – doing the job well with a minimum resources and waste
Effective – doing the right thing

Figure 4. Supply chain

Differences between Good and Services

More often the operation activities for goods and services are very similar. For
example, both focus on quality standards, both are being done in schedule to meet
customers demand, and are made in a facility where there are employees. But there
are also clear distinctions between goods and services such as:

CHARACTERISTICS OF SERVICES CHARACTERISTICS OF GOODS

Intangible: Transportation services
Produced and consumed
simultaneously: Salon services
Unique: Investments and legal
consultation
High customer interaction: What
customers is demanding for
(education)
Inconsistent product definition:
Insurance varies by type
Knowledge based: Education, medical
services, legal services etc
Services dispersed: may occur at the
store, local office, phone call or
internet
Quality may be hard to evaluate:
consultation or education
Reselling is unusual: concerts or
medical services
Note: Services are economic activities that typically produce an intangible product
such as education, entertainment, or health services.
Tangible: The vehicle
Products can be kept in inventory
(Salon products)
Similar products produced
(cellphones)
Limited customer involvement in
production
Product standardization: Laptops
Standardize product for automation
Products are manufactured at a facility
Easy to evaluate: the functionality of a
mobile phone
Product often has residual value
Figure 5. An example of the Unites States of America’s economic system
Remember that the economic system adds value through the transformation of
inputs to outputs. The feedback loop evaluates customer satisfaction which the
managers use to control the inputs and transformation process. On the example on
Figure 5, it shows the economic system of the U.S. Productivity is a way to measure
a country’s ability to provide an improving standard of living for its people. It is said
that “only through increases in productivity can the standard of living improve.” Only
when there is an increase in productivity can labor, capital, and management receive
more payment.
Measurement of Productivity
Determining productivity can be very straight forward. An example of which is
using labor hours per ton of a specific product. Aside from labor hours, other inputs
may include capital (money invested), materials use in production, or energy
(kilowatts of electricity).
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Using a single input to measure productivity is called Single-factor
productivity, which indicates the ratio of one input to goods/services produced
(output). Example, cellphone produced = 10,000 and total labor hours consumed in
the production of the cellphones = 2,500.
Productivity = 10,000 / 2,500 = 4 units per labor-hour
On the other hand, the multi-factor productivity (total factor productivity)
combines all the factors in production (inputs). It indicates the ratio of many or all
inputs in the production of outputs. Depending of the available inputs’ available data,
multi-factor productivity is measured using the formula:
Sample problem
Onada Industries wanted to evaluate its labor and multifactor productivity
on a new automated system compared with the old one. The company has a
staff of 5 working at 8 hours a day for P400/day with an overhead cost of
P300/day. The staff could finish 8 workloads in a day. With the new system
installed it is projected that with the same number of staff and work hours, it
would increase the output to 16 per day but with an increase of overhead
expenses to P500/day.
Single-factor productivity
Labor productivity (old system)
= 8 workloads per day / 40 labor hours
= 0.20 per labor hour
Labor productivity (new system)
= 16 workloads per day / 40 labor hours
= 0.40 per labor hour
Note: 40 Labor hours = 5 staff x 8 hours per day
Multi-factor productivity
Old system
= 8 workloads per day / P2,000 labor cost + P 300 overhead cost
OPERATIONS MANAGEMENT
= 0.003 per peso
Labor productivity (new system)
= 16 workloads per day / P2,000 labor cost + P 500 overhead cost
= 0.006 per peso
Note: P2,000 Labor cost = 5 staff x P 400 per staff per day
Based on the computed values, labor productivity increased from 0.20 to
0.40 per labor hour and increase of 100%. While using a multi-factor
productivity, result showed that there is also an increase from .003 to .006 per
peso. The multi-factor measurement provides a bigger picture of the increase in
productivity because it uses all cost in the production of product/service.
Productivity Variables
There are three (3) critical factors towards an improve productivity. Managers
must effectively utilize these factors to achieve an improvement of the firm’s
productivity.
Labor
There are three (3) key variables for improved labor productivity. These are:
1. basic education appropriate for an effective labor force;
2. food/sustenance/diet of the labor force; and,
3. social overhead such as transportation, health care, roads, and
education.
Capital
Capital investment provides tools for production. A higher capital
investment on automation or machinery, can improve productivity but at the
expense of labor. In the long run labor cost becomes expensive and technology
cheap which could lead to higher unemployment. On the other hand, using labor
rather than capital may reduce unemployment but would make salaries and
wages lower, thus may lessen productivity in the long run. Managers must strike
a balance between capital and labor while gearing towards increase in
productivity.
Management
The management of a firm has the responsibility for ensuring that labor and
capital are effectively utilized to increase productivity. Thus, management is one
of the factors of production and an economic resource. Management is
attributed for over a half of the annual increase of productivity using knowledge
and application of technologies. Knowledge and the use of technologies are
essential for postindustrial countries, also known as knowledge societies.
Knowledge societies are those who have seen migration from manual work to
technical and information-processing tasks requiring continuous education.
Management is needed to face the difficult productivity challenge by using
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knowledge and technology effectively. In addition, the more effective use of
capital which contributes to productivity also is a job for the management. High
productivity and high-quality of outputs require high-quality inputs, including
good operations managers.
Challenges in Operations Management
Operations managers work in an environment of a variety of challenging forces,
from globalization of world trade to the transfer of ideas, products, and money at
electronic speeds. Some of the challenges that operation managers face are:
1. Global focus. Operations managers are seeking creative designs, efficient
production, and high-quality goods via international collaboration to compete in
a global scale.
2. Supply-chain partnering. Operations managers are outsourcing and builds long-
term partnerships with suppliers that can contribute unique expertise in the
supply chain.
3. Sustainability. Operations managers continuously seek to improve productivity
which concerns with designing products and processes that are ecologically
sustainable.
4. Rapid product development. With the technology that shortens the product life
cycle, operations managers use new management structures, enhance
collaboration, digital technology, and creative alliances that are more
responsive and effective.
5. Mass customization. Operations managers must have product designs and
flexible production processes that cater to customers’ demands.
6. Just-in-time performance. The inventory in a supply chain requires financial
resources, hides quality issues, and limits response to a shorter product life
cycle. These factors lead operations managers to work with their supply chains
to cut inventories at every level.
7. Empowered employees. There is a need for more competence in the workplace.
Operations managers should enrich jobs and move decision making to the
individual contributor.
Ethics, Social Responsibility, and Sustainability
An operations manager works in an ever evolving physical and social
environment as much as laws and values. These poses different challenges that
may come from different perspectives of stakeholders (i.e. customers, distributors,
suppliers, owners, employees, or community). Stakeholders, as well as government
agencies at various levels, requires constant monitoring and responses.
Note: Stakeholders are those with a vested interest in an organization.
It is not easy for operation managers to identify ethical and social responses
while developing sustainable processes that are effective and efficient, that are also
challenged to:
OPERATIONS MANAGEMENT
1. develop and produce safe, high-quality green products;
2. train, retrain, and motivate employees in a safe workplace; and,
3. honor stakeholder commitments.
Operations managers must have moral awareness and focus on increasing
productivity in their system to successfully address different ethical challenges. It is
in the hope that effective and efficient operations managers must be able to use
fewer resources, their employees more committed, markets are satisfied, and ethical
climate will be promoted.
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