19-01-2023

INTRODUCTION TO
OPERATIONS MANAGEMENT
Dr. Navneet Bhatt

1
 19-01-2023

What are Operations?

The aspects of business organization that is
responsible for producing goods and services

A function or system that

transforms inputs into outputs of
greater value

OPERATIONS MANAGEMENT
DEALS WITH:

 The design and management of:

 Products
 Processes
 Services
 Supply Chains

2
 19-01-2023

What Is Operations
Management?
Production is the creation of goods and
services
Operations management (OM) is the set of activities
that create value in the form of goods and services by
transforming inputs into outputs
The business function responsible for planning,
coordinating and controlling resources needed to
produce products and services for a company.

THE TRANSFORMATION PROCESS

Inputs Value-Added Outputs

Land, People, Transformation/Conversion Goods

Labor, Process and
capital, services
management,
Material

Measurement Measurement
and Feedback and Feedback

Control

3
 19-01-2023

Why Study OM?

1. OM is an integrative body of knowledge, whose skills
are needed in industries as diverse as health care,
education, telecommunication, hospitality, food,
service, banking, consulting and manufacturing.

2. OM is one of three major functions of any organization,

and its integrally related to all other business functions
3. To know how goods and services are produced
4. To understand what operations managers do

ORGANIZING TO PRODUCE GOODS AND

SERVICES
 Essential functions:
1. Marketing – generates demand
2. Production/operations – creates the product
3. Finance/accounting – tracks how well the organization is
doing, pays bills, collects the money

4
 19-01-2023

ORGANIZATIONAL CHARTS

Figure 1.1

ORGANIZATIONAL CHARTS

Figure 1.1

5
 19-01-2023

ORGANIZATIONAL CHARTS

Figure 1.1

QUESTION

 Figure 1.1 outlines the operations, finance/accounting, and marketing functions of

three organizations. Prepare a chart similar to Figure 1.1 outlining the same
function (for operations) for one of the following:
 a newspaper
 a drugstore
 a retail store
 a college library
 a college event
 a summer camp
 a small costume-jewelry factory
 any other

6
 19-01-2023

EXAMPLE
Newspaper

Operations Finance Marketing

• Editorial department • Accounting department • Advertising department

• IT department
• Printing department
• Store department

CASE: WHY OM YIELDS THE GREATEST

IMPROVEMENT IN CONTRIBUTION
 Fisher Technologies is a small firm that must double its dollar
contribution to fixed cost and profit in order to be profitable enough to
purchase the next generation of production equipment. Management
has determined that if the firm fails to increase contribution, its bank will
not make the loan and the equipment cannot be purchased. If the firm
cannot purchase the equipment, the limitations of the old equipment
will force Fisher to go out of business and, in doing so, put its employees
out of work and discontinue producing goods and services for its
customers.

7
 19-01-2023

CASE (CONT.)

Table 1.1 shows a simple profit-and-loss statement

CURRENT Three strategic options (marketing, finance/accounting, and

Sales $100,000 operations) are available for the firm.
• The first option is a marketing option , where excellent marketing
Cost of goods –80,000 management may increase sales by 50%.
• The second option is a finance/accounting option , where finance
Gross margin 20,000
costs are cut in half through good financial management.
Finance costs –6,000 • The third option is an OM option , where management reduces
production costs by 20%
Subtotal 14,000

Taxes at 25% –3,500

Which option yields the greatest improvement in contribution?
Contribution $ 10,500

OPTIONS FOR INCREASING CONTRIBUTION

TABLE 1.1

FINANCE
MARKETING /ACCOUNTING
OPTION OPTION OM OPTION

REDUCE REDUCE
INCREASE SALES FINANCE COSTS PRODUCTION
CURRENT REVENUE 50% 50% COSTS 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of goods –80,000 –120,000 –80,000 –64,000

Gross margin 20,000 30,000 20,000 36,000

Finance costs –6,000 –6,000 –3,000 –6,000

Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% –3,500 –6,000 –4,200 –7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

8
 19-01-2023

OBJECTIVES OF OPERATIONS MANAGEMENT

Minimising Achieving Increasing

Improving
Operating Optimal Capacity Customer
Quality
Expenses Utilisation Satisfaction

 Reducing waste  Efficient planning  Conducting quality  Providing excellent

 Improving process and scheduling of audit customer service
efficiency production  Implementing  Offering a good product
 Negotiating better  Effective inventory quality control or service
prices with management procedures  Keeping promises
suppliers  Use of technology  Training employees  Resolving problems
quickly

HERITAGE OF OPERATIONS MANAGEMENT

 1800 Eli Whitney  Interchangeable Parts/ Standardized

Parts
 Scientific Management
 1881 Frederick W.
Taylor

 1913 Henry Ford  Assembly line

Charles Sorensen

 1924 Walter Shewhart  Statistical Quality Control (SQC)

9
 19-01-2023

SIGNIFICANT EVENTS IN OM

SCOPE OF OPERATIONS MANAGEMENT

 Design of goods and services

 Managing quality
 Process strategy
 Location strategy
 Layout strategy
 Supply-chain management
 Inventory management
 Production planning & control
 Maintenance

10
 19-01-2023

4 M'S OF OPERATIONS

 The 4 M’s of Operations Managements:

 Manpower
 Manpower talks about human labor force involved in the manufacture of
products. It is measured. as the most serious and main factor of production.
 Machine
 The basic tools to produce goods or to generate services. Selection of an
appropriate machine not only enhance efficiency but also saves time &
increase revenue
 Method
 A set of procedure and instructions. Plans, Policies, Procedures, and Data
 Material
 It is a basic ingredient in management be it a service a product industry.
 Most of the industries locate them self nearby to the availability of material.

PRODUCTIVITY CHALLENGE

Productivity is the ratio of outputs (goods and

services) divided by the inputs (resources
such as labor and capital)

The objective is to improve productivity!

Important Note!
Production is a measure of output only
and not a measure of efficiency

11
 19-01-2023

PRODUCTIVITY

Units produced
Productivity =
Input used

▶ Measure of process improvement

▶ Represents output relative to input
▶ Only through productivity increases
can our standard of living improve

IMPROVING PRODUCTIVITY AT STARBUCKS

A team of 10 analysts
continually look for ways
to save time. Some
improvements:
Stop requiring signatures Saved 8 seconds
on credit card purchases per transaction
under $25
Change the size of the ice Saved 14 seconds
scoop per drink
New espresso machines Saved 12 seconds
per shot

12
 19-01-2023

IMPROVING PRODUCTIVITY AT STARBUCKS

A team of 10 analysts
continually look for ways
to save time. Some
improvements:
Operations improvements have
helped StarbucksSaved
Stop requiring signatures increase yearly
8 seconds
revenue per outlet
on credit card purchases bytransaction
per $250,000 to
under $25 $1,000,000 in six years.
Change the size Productivity
of the ice has improved
Saved 14by 27%, or
seconds
scoop about 4.5% per year.
per drink
New espresso machines Saved 12 seconds
per shot

PRODUCTIVITY CALCULATIONS

Labor Productivity
Units produced
Productivity =
Labor-hours used

1,000
= = 4 units/labor-hour
250

One resource input  single-factor productivity

13
 19-01-2023

MULTI-FACTOR PRODUCTIVITY

Output
Productivity =
Labor + Material + Energy +
Capital + Miscellaneous
► Also known as total factor productivity
► Inputs are often expressed in dollars

Multiple resource inputs  multi-factor productivity

EXAMPLE
COLLINS TITLE INSURANCE LTD.

 Collins Title Insurance Ltd. wants to evaluate its labor and multifactor
productivity with a new computerized title-search system.
 The company has a staff of four, each working 8 hours per day (for a
payroll cost of $640/day) and overhead expenses of $400 per day.
 Collins processes and closes on 8 titles each day.
 The new computerized title-search system will allow the processing of 14
titles per day.
 Although the staff, their work hours, and pay are the same, the overhead
expenses are now $800 per day.
 Compute single & multifactor productivity and the increase.

14
 19-01-2023

COLLINS TITLE PRODUCTIVITY

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

productivity =
32 labor-hrs

COLLINS TITLE PRODUCTIVITY

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

productivity = = .25 titles/labor-hr
32 labor-hrs

15
 19-01-2023

COLLINS TITLE PRODUCTIVITY

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old labor 8 titles/day

productivity = = .25 titles/labor-hr
32 labor-hrs

New labor 14 titles/day

productivity =
32 labor-hrs

COLLINS TITLE PRODUCTIVITY

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old labor 8 titles/day

productivity = = .25 titles/labor-hr
32 labor-hrs

New labor 14 titles/day

productivity = = .4375 titles/labor-hr
32 labor-hrs

16
 19-01-2023

COLLINS TITLE PRODUCTIVITY

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity =
$640 + 400

COLLINS TITLE PRODUCTIVITY

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = = .0077 titles/dollar
$640 + 400

17
 19-01-2023

COLLINS TITLE PRODUCTIVITY

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = = .0077 titles/dollar
$640 + 400

New multifactor 14 titles/day

=
productivity $640 + 800

COLLINS TITLE PRODUCTIVITY

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = = .0077 titles/dollar
$640 + 400

New multifactor 14 titles/day

productivity = = .0097 titles/dollar
$640 + 800

18
 19-01-2023

PRODUCTIVITY GROWTH RATE IS:

 The productivity growth rate is:

𝑃 −𝑃
𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒 =
𝑃

 𝑃 is the productivity at a given time

 𝑃 is the productivity of an earlier period
 Collins Title Productivity:
 Labor productivity has increased from .25 to .4375.
. .
 The change is = 0.75, or a 75% increase in labor productivity.
.
 Multifactor productivity has increased from .0077 to .0097.
(. .
 This change is = 0.26, or a 26% increase in multifactor productivity.
.

QUESTION

 Productivity can be measured in a variety of ways, such as by labor, capital,

energy, material usage, and so on. At Modern Lumber, Inc., Art Binley, president
and producer of apple crates sold to growers, has been able, with his current
equipment, to produce 240 crates per 100 logs.
 He currently purchases100 logs per day, and each log requires 3 labor-hours to
process.
 He believes that he can hire a professional buyer who can buy a better-quality log
at the same cost.
 If this is the case, he can increase his production to 260 crates per 100 logs. His
labor-hours will increase by 8 hours per day.
 What will be the impact on productivity (measured in crates per labor-hour) if the
buyer is hired?

19
 19-01-2023

QUESTION

 Art Binley has decided to look at his productivity from a multifactor (total factor
productivity) perspective. To do so, he has determined his labor, capital, energy,
and material usage and decided to use dollars as the common denominator.
 His total labor-hours are now 300 per day and will increase to 308 per day.
 His capital and energy costs will remain constant at $350 and $150 per day,
respectively.
 Material costs for the 100 logs per day are $1,000 and will remain the same.
 Because he pays an average of $10 per hour (with fringes), determines the
productivity and it’s increase.

20