Operations & Material Management

Transcription Document

Unit 1 – Video 1: Understanding Value Adding Processes

Note: This transcription document is a text version of the video. It is not meant to be read
independently but can be used to complement your video watching experience.

Speaker: Dr. Rajesh Gupta

Let us try to understand the terms ‘process’ and ‘value adding process’ and try to relate it to
operations. What exactly is operations? We have been talking of operations management a lot. In
any organization, you come across a number of functions. You find a marketing function, you find a
finance function, you find a maintenance function, you see an HR function. And essentially, there is
one function within the organization which we call as production system or production function or
operations function. As you understand, every organization has certain objective of creating a
product or service. Operations function is that part of the organization which creates a product or
service by making use of the resources. The resources might include man, material, machine,
methods, electricity and many others.

Now, what exactly is this operation? As we understand it, is creation of an output by making use of
various inputs. This part of the organization, we are making use of the word ‘process’ here. Now,
what exactly is process? So, process is something which has an input, which has an output and which
has a transformation system for converting input to output. The transformation system might be a
sequence of machines if I'm talking of a manufacturing company. The transformation system could
be a sequence or a gathering of various people. What is important to understand is that in the
organizations, we find processes everywhere, and these processes taken together, convert the input
into the output, which is then delivered to the customer. But in the organizations, we are interested
only in value adding processes. We are not interested in those processes which do not add a value.

Now, for example, if I talk of a garment company, the raw material or the material is fabric and the
output is the garment and in between, there is a large sequence of machines. If I talk of a hospital,
the input is a patient and output is the same patient who has become healthy and everything that
was done on that patient within the hospital, it might be giving medicines, it might be diagnosis, it
might be X ray, it might be operation. Everything that was done on that patient, it was a part of
operations. If I talk of an Airlines. In the Airlines, what is the input? Input is the passenger, and then
what is the output? Output is again the passenger. And what is the process involved? What is the
transformation system? Transformation system is every aspect, every job that is done to make sure
that the passenger reaches his destination. It might be ticketing. It might be issuing boarding card. It
might be security check. It might be boarding the aircraft. It might be flying the aircraft. All these all
these processes, they are a part of the transformation system of the Airlines. If I look at a cement
company. Now for the cement company, the basic raw material is limestone, and of course, the
output is cement. But in between, how the limestone is converted to cement by making use of a
series of machines. This series of machines is the transformation system.

So, every process, every operation contains processes, and all these processes convert input to
output. It is applicable to services as well as to the manufacturing, as we have seen in various
examples. Now, if I talk of manufacturing, what could be a value adding process? And what do we
Operations & Material Management
Transcription Document
mean by a non-value adding process? Let
me take a simple example. If there is a craftsman who is building a statue from a stone, now what is
the input? The input is the stone and output is the statue. And what is the transformation system?
Transformation system is chiselling, hammering, whatever the craftsman does for converting a piece
of stone to the statue. Now, whether the value of the statue is more than the value of stone? Of
course, yes. That means value of output is more than the value of input. But let us take one more
example. Let's go reverse. If somebody is breaking a statue into pieces of stones by hammering, can
we call it a process? Of course, we can, because the input would be a statue, output would be the
pieces of stone and the transformation process would be hammering. But whether the value of the
output is more than the value of input, in this case, not at all. The value of broken pieces of stone
cannot be equal to or cannot be more than the statue itself. And that's why this is a non-value
adding process.

In the organizations, we are always interested in the value adding processes. Now, if I talk of a
manufacturing company, what could be the various forms of value adding processes? Well, it could
be alter the shape. Now, for example, if a sheet of metal is converted to pipes, well, the shape has
been altered, but these pipes can be put to further use. And that's why the value of pipes would be
more than the value of the sheet of metal. So that's a value adding process by means of altering the
shape. It could be inspection. If we inspect a group of products and we segregate good from bad,
naturally, the value of the segregated lot is better than the value of non-segregated lot.
Transportation could be evaluating process. The raw material transported from its source to the
destination. That means to the factory where it is going to be used. Now, whether this
transportation, anything financially to the cost of the raw material, the cost remains same. But the
value increases. Why value increases? Because now the raw material is closer to its place of use.
That's why its value increases. The raw material or the material is now closer to the customer, closer
to reaching the customer. So, its value increases. So that's a value adding process in the nations. We
are always interested in managing value adding processes and eliminating nonvalue adding
processes.