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Understanding Operations

 Consider the ingredients of your breakfast

this morning.
 Unless you live on a farm and produced
them yourself, they passed through a number
of different processing steps between the
farmer and your table and were handled by
several different organizations.
 Similarly, your morning newspaper was
created and delivered to you through the
interactions of a number of different
Understanding Operations

 Every day, we use a multitude of physical

objects and a variety of services.
 Most of the physical objects have been
manufactured and most of the services have
been provided by people in organizations.
 Just as fish are said to be unaware of the
water that surrounds them, most of us give little
thought to the organizational processes that
produce these goods and services for our use.
 The study of operations deals with how the
goods and services that you buy and consume
every day are produced.
Why Study OM?
1. OM is one of four major functions of any
organization; we want to study how
people organize themselves for
productive enterprise.
2. We want (and need) to know how
goods and services are produced.
3. We want to understand what
operations managers do.
4. OM is such a costly part of an
Why do we study OM?

In most organizations, Operations

– Uses most of the fixed assets,
– Manages most of the employees,
– Uses most of the materials,
– Incurs most of the fixed and variable costs.
Improving operations management is
often the fastest way to reduce costs
and increase profits.
Organizing to Produce Goods and
 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. Human Resources – provides labor,
wage and salary administration
and job evaluation.
Profit & loss a/c of a manufacturing Co.
(Rs. in lakhs)
A. Net Sales 2339.00
B. Cost of goods sold 1929.00 (82.5%)
C. Gross profit (A-B) 410.00
D. Less, Selling& adm. expenses 240.00
E. Operating Income (C-D) 170.00
F. Add other income 15.00
G. EBIT (E+F) 185.00
H. Less, Interest 60.00
I. PBT (G-H) 125.00
J. Provision for Tax (@33%) 42.00
K. PAT (I-J) 83.00
Statement of Cost of goods sold
Raw Material 1587.00 (in Lakhs)
Direct labour 138.00
Depreciation 23.00
Other manuf. Expenses 205.00
Add, opening stock 57.00
Less, closing stock in process 85.00
Cost of production 1925.00
Add, opening finished stock 151.00
Less, closing finished stock 147.00
COST of Goods sold 1929.00
An operation is …

… the process of changing

inputs into outputs
through some type of
transformation system,
thereby adding value.
Operations function

Value Added

Inputs: Outputs:
Land Transformation Goods
Labour Process Services


Feedback Feedback
The Transformation Process
Goods & Services
• Manufacturing • Services
• Tangible product • Intangible product
• Product can be • Product cannot be
inventoried inventoried
• Low customer contact • High customer contact
• Longer response time • Short response time
• Capital intensive • Labor intensive
• Opportunity to correct • Opportunity to correct
quality problems before quality is low,
delivery to customer is
On the other hand…

• Both use technology,

• Both have quality, productivity, & response
• Both must forecast demand,
• Both will have capacity, layout, and location
• Both have customers, suppliers, scheduling
and staffing issues,
• Manufacturing often provides services,
• Services often provides tangible goods.
Most products
Steel production
Low service content Automobile fabrication include both
High goods content
House building
Road construction

Auto repair
Appliance repair

Maid Service
Manual car wash

Lawn mowing

service High service content

Low goods content
Examples of types of Operations
Types of Operations Examples
Physical Farming, Mining, Construction,
Manufacturing, Power
generation, etc.
Locational Warehousing, Transporting,
Mail service, Taxis, Buses,
Airlines, etc.
Exchange Retailing, Wholesaling, Banking,
Renting or leasing, etc.
Entertainment Films, Radio & Television, Plays,
Concerts, Recording, etc.
Informational Education, Newspapers, Radio
/Communication & Newscasts, Telephone,
Satellites, Internet, etc.
Relationships for Typical Systems
What is Operations Management
(OM) ?
What is Operations Management?

 The Operations management can be defined

as all those business functions that perform
the activities of planning, organizing,
leading, and controlling the resources
(inputs) needed to produce an
organization’s products (goods and services)
in order to create value for satisfaction of
the customers.
Characteristics of OM

• An organization’s core function.

• Exists in every organization whether
Service or Manufacturing, profit or Not for
• Most businesses are supported by the
functions of operations, marketing, and
•The major functional areas must interact
to achieve the organization goals.
Importance of OM
 Operations Management is important, exciting,
challenging, and everywhere you look!

 Important, because it’s concerned with creating all of the

products and services upon which we depend.
Exciting, because it’s at the centre of so many of the
changes affecting the world of business.
 Challenging, because the solutions that we find need to
work globally and responsibly within society and the
 And everywhere, because every service and product that
you use – the cereal you eat at breakfast, the chair you sit
on, and the radio station you listen to while you eat – is the
result of an operation or process.
Operations management is important in all
types of organizations

• Automobile assembly
factory – Operations
management uses machines to
efficiently assemble products
that satisfy current customer

• Physician (general practitioner)

– Operations management
uses knowledge to effectively
diagnose conditions in order to
treat real and perceived patient
Operations management is important in all
types of organizations
• Management consultant –
Operations management uses
people to effectively create the
services that will address
current and potential client
• Disaster relief charity –
Operations management uses
our and our partners’ resources
to speedily provide the supplies
and services that relieve
community suffering.
Operations management is important in all
types of organizations

•Advertising agency –
Operations management uses
our staff ’s knowledge and
experience to creatively
present ideas that delight
clients and address their real
Responsibilities of Operations

 DIRECT RESPONSIBILITY - for the activities

which produces delivers products (goods) and
activities of the other functions of the
 BROAD RESPONSIBILITY - to respond to the
emerging challenges of OM in the future.
OM’s direct responsibilities

 Understanding the strategic objectives of the

 Developing an operation’s strategy for the
 Designing the products, services and
processes for the organization.
 Management tasks for the operations, e.g.,
- planning, controlling, sequencing, etc.
 Improving the performance of operations.
OM’s Transformation Role

• To add value

– Increase product value at each stage,

– Value added is the net increase between

output product value and input material

• Provide an efficient transformation

– Efficiency – means performing activities well

for least possible cost.
Some terms we hear …

• Efficiency is output over input . If we do things

more efficiently, it denotes judicious use of
resources to achieve objectives. If we waste
less in the process then we get more output
for a given amount of input, which means
“doing things right”.
• Productivity is the amount of product made for
a unit of input. # of pieces per hour or per
person. Rate for a unit of some input.
• Effectiveness is the power to get it done to
achieve organizational objectives, which also
means “doing the right things”.
The Ten Critical Decisions

1. Design of goods and services

 What good or service should we offer?
 How should we design these products
and services?
2. Managing quality
 How do we define quality?
 Who is responsible for quality?
The Ten Critical Decisions

3. Process and capacity design

 What process and what capacity will
these products require?
 What equipment and technology is
necessary for these processes?
4. Location strategy
 Where should we put the facility?
 On what criteria should we base the
location decision?
The Ten Critical Decisions

5. Layout strategy
 How should we arrange the facility?
 How large must the facility be to meet
our plan?
6. Human resources and job design
 How do we provide a reasonable work
 How much can we expect our
employees to produce?
The Ten Critical Decisions

7. Supply-chain management
 Should we make or buy this
 Who should be our suppliers and how
can we integrate them into our
8. Inventory, material requirements
planning, and JIT
 How much inventory of each item
should we have?
 When do we re-order?
The Ten Critical Decisions

9. Intermediate and short–term

 Are we better off keeping people on
the payroll during slowdowns?
 Which jobs do we perform next?
10. Maintenance
 How do we build reliability into our
 Who is responsible for maintenance?
OM Across the Organization

• Most businesses are supported by the

functions of operations, marketing, and
• The major functional areas must
interact to achieve the organization
Business Information Flow
OM Across the Organization

• Marketing is not fully able to meet customer

needs if they do not understand what
operations can produce.
• Finance cannot judge the need for capital
investments if they do not understand
operations concepts and needs.
• Information systems enables the information
flow throughout the organization.
• Human resources must understand job
requirements and worker skills.
• Accounting needs to consider inventory
management, capacity information, and labor
New Trends in OM
• Ethics,
• Global focus,
• Environmentally sensitive
• Rapid product development,
• Mass customization,
• Empowered employees,
• Supply-chain partnering,
• Just-in-time performance.
Current issues in OM

• Coordinating the relationships between

mutually supportive but separate
organizations ;
• Optimizing global supplier, production, and
distribution network ;
• Increased co-production of goods &
services ;
• Managing the customer touch points ;
• Raising senior management awareness of
operations as a significant competitive
Operations Strategy
 Corporate Strategy defines the specific businesses
in which the firm will compete & the way in which
resources are acquired & allocated among these
various businesses ;
 Business strategy defines the scope & boundaries
of the SBU, in terms of how it addresses the
specific markets that it serves & the product it
provides ;
 Functional strategy is developed by a function,
within an organization, to support the business
strategy ;
 Operations strategy is concerned with the
development of a long term plan for determining
how to best utilize the major resources of the firm
so that there is a high degree of compatibility
between these resources & the firm’s long-term
corporate strategy.
To Develop a Business Strategy

• Consider these factors and strategic

What business in the company in
Analyze and understand the market
(environmental scanning);
Identify the company strengths (core
Forming Operation Strategies

 It is crucial that structure of operations

determined by the positioning strategy be linked
to product / service plans & competitive priorities
defined in business strategy ;
 Operations strategies must include plans for
modifying production system to a changing set of
competitive priorities as products mature, and
the capital & production technology required to
support these changes must be provided,
 All elements of operations strategy must be
carefully linked with the market strategy.
Developing OM Strategy from Competitive
 The key to developing effective operations
strategy lies in understanding how to create or
add value for customers.
 Specifically, value is added through the
competitive priority or priorities that are
selected to support given strategy.
 These priorities translate directly into
characteristics that are used to describe various
processes by which a company can add value to
the products it provides.
 The priorities are – Quality, Cost, Speed ,
Dependability (delivery), Flexibility.
Competing on Cost

 Offering product at a low price relative to

competition :
• Typically high volume products,
• Often limit product range & offer little
• May invest in automation to reduce unit
• Can use lower skill labor,
• Probably uses product focused layouts,
• Low cost does not mean low quality.
Competing on Quality
 Quality is often subjective;
 Quality is defined differently depending on who is
defining it;
 Two major quality dimensions include :
• High performance design:
Superior features, high durability, & excellent
customer service.
• Product & service consistency:
Meets design specifications,
Close tolerances,
Error free delivery.
 Quality needs to address :
 Product design quality – product/service meets
 Process quality – error free products.
Competing on Speed (Time)

 Time/speed is one of most important

competitive priorities;
 First that can deliver often wins the race;
 Time related issues involve:
 Rapid delivery:
Focused on shorter time between order
placement and delivery.
 On-time delivery :
Deliver product exactly when needed every
 Development Speed is quickly introducing a
new service or product.
Competing on Flexibility
 Company environment changes rapidly;
 Company must accommodate change by being
• Product flexibility:
Easily switch production from one item to
Easily customize product/service to meet
specific requirements of a customer.
• Volume flexibility:
Ability to ramp production up and down to
match market demands.
• Customization means satisfying the unique
needs of each customer by changing the
service or product designs.
Order Qualifiers & Winners

• Order qualifiers are the basic criteria

that permit the firm’s products to be
considered as candidates for purchase
by customers.

• Order winners are the criteria that

differentiate the products and services
of one firm from another.
Order Qualifiers & Winners

• For autos product quality is now an

“order qualifier”.
• “order winners” for autos vary greatly
by the bundle of features desired.
• In general, criteria such as cost or
specific features or capabilities could
be order winners or qualifiers.
Hierarchy of Operational decision-making
• Long term (Strategic ) Planning (About 5 years) :
 Business Forecasting,
 Product/Market planning,
 Process / Technology,
 Capacity,
 Facilities – Location / Layout,
 Manpower planning, etc.
• Mid-term planning ( Average one year) :
 Mid-term forecasting
 Aggregate planning,
 Master Production schedule,
 Rough-cut capacity planning,
 Materials planning.
Hierarchy of Operational decision-making

• Short-term planning & Control ( Daily/ Weekly/

Monthly, etc.) :
 Production & Operations Scheduling
 Quality Control,
 Inventory control,
 Maintenance control,
 Materials control.