Operation Management 2023

CHAPTER 1: OPERATIONS FUNCTION

Chapter Objective
After completing this chapter, you will be able to:
 Define operations management;
 Describe decisions that operations managers make;
 Describe the differences between service and manufacturing operations;
 Define productivity and identify productivity measures; and
 Compute productivity measures.
1.1. Introduction
Operations management is the management of that part of an organization that is responsible for
producing goods and/or services. There are examples of these goods and services all around
you. Every book you read, every video you watch, every e-mail you send, every telephone
conversation you have, and every medical treatment you receive involves the operations function
of one or more organizations. So does everything you wear, eat, travel in, sit on, and access the
Internet with.
1.2. Definition of Production and Operations Management
The set of interrelated management activities, which are involved in manufacturing certain
products, is called as production management. If the same concept is extended to services
management, then the corresponding set of management activities is called as operations
management. Hence, operations management is the management of systems or processes that
create goods and/or provide services.
Therefore, operation management is a business function responsible for planning, coordinating,
and controlling the resources needed to produce products or services for a company.
Operation Management:
 Operations management (OM) is the business function that plans, organizes, coordinates,
and controls the resources needed to produce a company’s goods and services.
 Operations management is a management function. It involves managing people,
equipment, technology, information, and many other resources. Operations management is
the central core function of every company. This is true whether the company is large or
small, provides a physical good or a service, and is for profit or not for profit. Every
company has an operations management function. Actually, all the other organizational
functions are there primarily to support the operations function. Without operations, there
would be no goods or services to sell.
1.3. Productions Management Vs Operations Management

There are two points of distinction between production management and operations
management.
o First, the term production management is more used for a system where tangible goods are
produced. Whereas, operations management is more frequently used where various inputs are
transformed into intangible services. Viewed from this perspective, operations management
will cover such service organizations as banks, airlines, utilities, pollution control agencies,
super bazaars, educational institutions, libraries, consultancy firms and police departments, in
addition, of course, to manufacturing enterprises.
o The second distinction relates to the evolution of the subject. Operations management is the
term that is used nowadays. Production management precedes operations management in the
historical growth of the subject.

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1.4. Objectives of Operations Management

Objectives of operations management can be categorized into
i. Customer service and
ii. Resource utilization.
i. Customer service
The first objective is the customer service - which means the service for the satisfaction of
customer wants. Customer service is therefore a key objective of operations management. The
Operations Management must provide something to a specification which can satisfy the
customer in terms of cost and timing. Thus, primary objective can be satisfied by providing the
‘right thing at the right price at the right time’.
ii. Resource Utilization
Another major objective is to utilize resources for the satisfaction of customer wants effectively,
i.e., customer service must be provided with the achievement of effective operations through
efficient use of resources.
Operations management is concerned essentially with the utilization of resources, i.e., obtaining
maximum effect from resources or minimizing their loss, underutilization or waste.
 Thus, Operations management is concerned with the achievement of both satisfactory
customer service and resource utilization.
1.5. Scope of Production and Operations Management
Operations Management concerns with the conversion of inputs into outputs, using physical
resources, so as to provide the desired utilities to the customer while meeting the other
organizational objectives of effectiveness, efficiency and adoptability. It distinguishes itself from
other functions such as personnel, marketing, finance, etc. by its primary concern for ‘conversion
by using physical resources’. Following are the activities, which are listed under Production and
Operations Management functions:
i. Location of facilities. v. Production Planning and Control.
ii. Plant layouts and Material Handling. vi. Quality Control.
iii. Product Design. vii. Materials Management.
iv. Process Design. viii. Maintenance Management.

Location
of
Maintenan Facilities Plant Layout
ce &
Manageme Material
nt Handling

Production
Materials
and Product
manageme
Operations Design
nt
Management

Quality Process
Control Design
Production
Planning
and
Control

Fig. 1.1. Scope of production and operations management

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1.6. Operations Management as a study decisions making

Decision-making is an important element of operations management. There are five major
decision responsibilities areas in operations management: process, capacity, inventory,
workforce, and quality.
1. Process: Decisions in this category determine the physical process or facility used to produce
the product or service. The decisions include the type of equipment and technology, process
flows, layout, and all other aspects of the physical plant or service facility.
2. Capacity: Capacity decisions are aimed at providing the right amount of capacity at right
place at the right time. Long-range capacity is determined by the size of the physical facility
which are built. In the short run, capacity can be augmented by subcontracting, extra shifts,
or rental of space.
3. Inventory: Inventory decisions in operations determine what to order, how much to order,
and when to order. Inventory control systems are used to manage materials from purchasing
through raw materials, work in process, and finished goods inventories.
4. Work force: Work force decisions include selection, hiring, firing, training, supervision, and
compensation. Managing the work force in a productive and humane way is a key task for
operations today.
5. Quality: Quality decisions must ensure that quality is built into the product in all stages of
operations, standard must be set, equipment designed, people trained, and product or service
inspected for quality to result..
1.7. Operations as a function
Every business is managed through three major functions: finance, marketing, and operations
management. Other business functions— such as accounting, purchasing, human resources, and
engineering—support these three major functions.
i. Finance is the function responsible for managing cash flow, current assets, and capital
investments.
ii. Marketing is responsible for sales, generating customer demand, and understanding
customer wants and needs. Most of us have some idea of what finance and marketing are
about, but what does operations management do?
iii. Operation management:
o An operation is a major function in any organization, along with marketing and finance.
o Operation is primarily responsible for producing the goods or providing the services
offered by the organization.
o In a manufacturing company, the operations function is typically called the manufacturing
or production department.
o In service organizations, the operations function is called the operations department.
o In general the term “operations” refers to the function that produces goods or services
1.8. Operations as a production system
The transformation systems produce goods and services. Using the systems view, we consider
operations managers as managers of the conversion process in the firm.
Production may be defined as the conversion of inputs – men, machines, materials, money,
methods and management (6 Ms) into output through a transformation process. Output may be,
i. "Goods produced" - is for the manufacturing concerns and
ii. "Services rendered" - is for the service. E.g. operation units such as banks, hospitals,
hotels/restaurants, etc.

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Figure 1.2. The transformation process

Components of transformation model
1. Inputs
Some inputs are used up in the process of creation of goods and services, while others play a part
in the creation process but are not used up. To distinguish between these inputs resources,
usually classified as
o Transformed resources for example material, information
o Transforming resource example staffs, land, building, machines, and equipment
2. Out puts
Output is goods and services resulting from the transformation process. In these OM is
responsible for minimizing wastes, protecting the health and safety of the employees and ethical
behavior in relation to social impact of transformation process.
3. Transformation process
Is any activity or group of activities that takes one or more inputs and transform and add values
to them and provides out puts for customers and clients. Transformation process includes
√ Change in physical characteristics of materials
√ Change in location of materials, information, and customers
Example Airline service, information exchange and etc.
√ Change in ownership of materials or information
√ Storage and accommodation of materials or customers
√ Change in the process or form of information
√ Change in physiological or psychological state of customers
4. Feed back
Information used to control the operation process by adjusting the inputs and transformation
process that are used to achieve desired out comes. It can come from both internal and external
Sources.
 Internal sources: like testing, evaluation, and continuously improving production process.
 External source: it includes those who supply raw materials, customers, government and
other.
1.9. Manufacturing Operations and Service Operations

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Operations in an organization can be categorized into manufacturing operations and service

operations.
 Manufacturing operations is a conversion process that includes manufacturing yields a
tangible output: a product, whereas,
 A Service operation is a conversion process that includes service yields an intangible output:
a deed, a performance, an effort.
Distinction between Manufacturing Operations and Service Operations
Following characteristics can be considered for distinguishing manufacturing operations with
service operations:
Characteristics Manufacturing operations Service operations
Nature of output Tangible outputs intangible outputs
Consumption of output outputs that customers outputs that customers
consume consumes immediately
overtime
Nature of work (job) jobs that use less labour and jobs that use more labour and
more equipment less equipment
Degree of customer contact little customer contact direct consumer contact
Customer participation in no customer participation in frequent customer
conversion the conversion process (in participation in the conversion
production) process
Measurement of performance sophisticated methods for elementary methods for
measuring measuring conversion
production activities and activities and resource
resource consumption as consumption.
product are made

1.10. Productivity
 Productivity is the ratio of outputs (goods and services) divided by the inputs (resources,
such as labor and capital).
 Productivity is defined in terms of utilization of resources, like material and labor.
 In simple terms, productivity is the ratio of output to input. For example, productivity of
labor can be measured as units produced per labor hour worked.
 For survival of any organization, the productivity ratio must be at least 1.If it is more than 1,
the organization is in a comfortable position.
 Productivity can be measured at firm level, at industry level, at national level and at
international level.
 The operations manager’s job is to enhance (improve) this ratio of outputs to inputs.
Improving productivity means improving efficiency.
 This improvement can be achieved in two ways:
 A reduction in inputs while output remains constant, or
 An increase in output while inputs remain constant.
1.10.1. Measurement of Industrial Productivity
Productivity is the ratio of output to input. The general or overall productivity of an industrial
unit can be measured with the help of the following formula.

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O
P= I , where P= Productivity, O= output and I= Inputs
Output:
√ Can be expressed in terms of volume (i.e, the number of units produced).
Input:
√ can be expressed in terms of the amount of inputs used, (i.e., the number of units of materials
used, the amount of capital invested, the number of man-hours worked, the number of
machine hours worked, the area of land used and so on.)
√ It is to be noted that there are practical difficulties in measuring the overall productivity. This
is because one cannot just add the amount of capital invested and number of man-hours
worked, or number of units of raw materials used in producing goods or services. Therefore,
productivity of specific factor of production is usually measured.
1.10.2. Productivity of Specific Factor
Basically, the various factors of production are labor, capital, materials, machines and land. The
productivity of each of these factors can be measured as follows:
a. Labor Productivity: Labor productivity is the relation between output to man-hours
worked. Labour productivity can be expressed as follows
LP = O/MH
Where PL = Labour Productivity
O = Output, and
MH = Man = Man-hours worked
Labor productivity is higher when:
o The output increases with the same man-hours or lesser man-hours.
o The output remains the same with lesser man-hours.
b. Capital Productivity: Productivity of capital is the relation between output and capital
employed. It can be expressed as follows:
CP = O/CE Where CP = Capital Productivity
O = Output
CE = Capital employed
 Capital productivity is said to be higher when:
√ The output increases at the same capital or lower capital cost.
√ The output remains the same at a lower capital cost.
c. Raw Materials Productivity: The productivity of raw materials is the relations between
output to raw materials consumed. It can be expressed as follows:
RMP = O/RMC Where RMP = Raw materials productivity
O = Output
RMC = Raw materials consumed
It is to be noted that the raw materials productivity can be measured in terms of number of units
of raw materials consumed as well as the cost of raw materials.
d. Machines Productivity: The productivity of machines is the relation between output to
machine-hours worked. It can be expressed as follows:
MP = O /MHW Where MP = Machines productivity
O = Output
MHW = Machine-hours worked

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e. Productivity of Land: The productivity of land is the relation between output to area of
land used. It can be expressed as follows:
PL = O /AL Where PL = Productivity of land
O = Output
AL = Area of land used
Total Productivity Vs Partial Productivity
A. Total Productivity
When we compute productivity for all inputs, such as labor, machines, and capital, we are
measuring total productivity. Total productivity describes the productivity of an entire
organization.
For example: Let’s say that the weekly dollar value of a company’s output, such as finished
goods and work in progress is $10,200 and that the value of its inputs such as labor, materials,
and capital is $8,600. The company’s total productivity would be computed as follows:
output $10,200
Total productivity = input = $8,600 = 1.186
B. Partial Productivity
When we compute productivity as the ratio of output relative to a single input, we obtain a
measure of partial productivity also called single- factor productivity. Following are two
examples of the calculation of partial productivity:
Example:

1. A bakery oven produces 346 pastries in 4 hours. What is its productivity?

number pastries 346 pastries
Machine productivity= oven time = 4 hours =86.5 pastries/hour
2. Two workers paint tables in a furniture shop. If the workers paint 22 tables in 8 hours, what
is their productivity?
22 tables
Labor productivity = 2 wor ker s  8 hours =1.375 tables/ hour
Sometimes we need to compute productivity as the ratio of output relative to a group of inputs,
such as labor and materials. This is a measure of multifactor Productivity.
Example 1: let’s say that output is worth $382 and labor and materials costs are $168 and $98,
respectively. A multifactor productivity measure of our use of labor and materials would be

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output $382
Multifactor productivity = labor  materials = $168  $98 =1.436
Note: The unit of measure must be the same for all factors in the denominator.

Example 2: Determine the multifactor productivity for the combined input of labor and machine
time using the following data:

Output Input
7,040 units Labor: $1,000
Materials: $520
Overhead: $2,000
Solution:

Multifactor productivity = Output

Labor + Materials + Overhead
= 7 040 units
$1,000 +$520 + $2,000
= 2 units per dollar input

1.10.3. Factors Affecting Productivity

Economists site a variety of reasons for changes in productivity. However some of the principle
factors influencing productivity rate are:
1. Capital/labour ratio: It is a measure of whether enough investment is being made in plant,
machinery, and tools to make effective use of labour hours.
2. Scarcity of some resources: Resources such as energy, water and number of metals will create
productivity problems.
3. Work-force changes: Change in work-force effect productivity to a larger extent, because of
the labour turnover.
4. Innovations and technology: This is the major cause of increasing productivity.
5. Regulatory effects: These impose substantial constraints on some firms, which lead to change
in productivity.
6. Bargaining power: Bargaining power of organized labour to command wage increases excess
of output increases has had a detrimental effect on productivity.
7. Managerial factors: Managerial factors are the ways an organization benefits from the unique
planning and managerial skills of its manager.
8. Quality of work life: It is a term that describes the organizational culture, and the extent to
which it motivates and satisfies employees

Q.1. What is the meaning of productivity? What is its importance?

Ans: Productivity is defined as the ratio of output and input.
Exercise 1

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1. A company that processes fruits and vegetables is able to produce 400 cases of canned
peaches in one-half hour with four workers. What is labor productivity?
2. A wrapping-paper company produced 2,000 rolls of paper one day. Standard price is $1/roll.
Labor cost was $160, material cost was $50, and overhead was $320. Determine the
multifactor productivity.
3. A health club has two employees who work on lead generation. Each employee works 40
hours a week, and is paid $20 an hour. Each employee identifies an average of 400 possible
leads a week from a list of 8,000 names. Approximately 10 percent of the leads become
members and pay a onetime fee of $100. Material costs are $130 per week, and overhead
costs are $1,000 per week. Calculate the multifactor productivity for this operation in fees
generated per dollar of input.

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