OM Chapter 1

Operations Management
Course Description
• This course discusses the following concepts
– Nature of production/operations management
– Product design, location and facilities layout, capacity planning
– Aggregate production/operations planning
– MRP (Material Requirement planning)
– PAC (Production Activity Control)
– Total Quality Management (TQM)
– Just in Time (JIT).
– PERT, CPM, Gantt Chart ……
Course Objectives
• Upon completion of this study you are expected to:
– Describe operations management, its scope, & its activities.
– Understand the ten OM strategic, tactical, and operational
Decision Making areas
– Understand BPR…..
– Appreciated, initiate, and implement TQM programs
– Develop and implement effective maintenance program
Course Objectives
• Upon completion of this study you are expected to:
– Describe operations management, its scope, & its
activities.
– Understand the ten OM strategic, tactical, and operational
Decision Making areas
– Understand BPR…..
– Appreciated, initiate, and implement TQM programs
– Develop and implement effective maintenance program
Learning Methods
• Lecture
• Group Discussion
• Case Study
• Project work
Text Book
• Biruk Tesfaye, production and Operations Management
– A Complied Material
Reference Book
Reference Book
Reference Book
Reference Book
Introduction to
Operations Management
 You should be able to:
1. Define the term operations management
2. Identify the three major functional areas of organizations and describe how they
interrelate
3. Identify similarities and differences between production and service operations
4. Describe the operations function and the nature of the operations manager’s job
5. Summarize the two major aspects of process management
6. Explain the key aspects of operations management decision making
7. Briefly describe the historical evolution of operations management
8. Characterize current trends in business that impact operations management
Your Idea!
• What is organization?
What is OM?
• Definition of Management?
– Planning, organizing, staffing, Direction, & Controlling
• Management ……Efficient and effective utilization
of organizational recourses
 What is operations?
 The part of a business organization that is responsible for producing goods
or services
 How can we define operations management?
 The management of systems or processes that create goods and/or provide
services
 The business function responsible for planning, coordinating, and
controlling the resources needed to produce a company’s products and
services
Good or Service?
• Goods are physical items that include raw materials, parts, subassemblies, and
final products.
– Automobile
– Computer
– Oven
– Shampoo
• Services are activities that provide some combination of time, location, form
or psychological value.
– Air travel
– Education
– Haircut
– Legal counsel
Supply Chain
• a sequence of activities and organizations involved in producing
and delivering a good or service
What is OM?
• To produce a certain product on schedule and at
minimum cost
• Effectiveness and efficiency
OM as a System
• OM is a set of component whose functional are to convert a
set of input/resources into some desired output through
transformation process.
OM as a System
Feedback = measurements taken at various points in the transformation process
Control = The comparison of feedback against previously established standards to determine if corrective
action is needed.
OM as a System
• Key Terms in OM as a System
– Resources/Inputs
– Components
– Systems design
– Transformation
– Outputs
– Systems of control
OM as a System
• Systems
– a set of things working together as parts of a mechanism or an
interconnecting network;
– a complex whole.
– arrangements of components designed to achieve objectives.
OM as a System
• Systems
– OM involves hierarchical nature of subsystems within it we find
line of command (president/manager-supervisor-workers) and
staff who play advisory role.
OM as a System
• Component
– Machine
– Person
– Tool
– Management systems/process
OM as a System
• Transformation
– involves value adding activities to produce product having higher
value than its original state .
– It may take form:
• Physical: as in manufacturing operations
• Location: as in transportation operations
• Exchange: as in retail operations
• Physiological: as in health care
• Psychological: as in entertainment
• Informational: as in communication
• Storage as in warehousing
POM as a System
• Example
OM as a System
• System design:
– predetermined arrangement of components
– establishes the relationship between inputs,
transformation activities and outputs in order to achieve
objectives of a system
OM as a System
• Systems Control:
– Consists all actions necessary to ensure that the activities
confirm the predetermined plan/goal in terms of
parameters such as
• cost, quality, inventory,… .
– It includes four Phases
• Setting standards in terms of quantity, quality, time, cost, etc
• Measuring actual performance
• Compare actual performance against standards
• Take action
Manufacturing Operations & Service Operations
• Similarity
– What is done
– Design of operations
– Operating Decisions
• Plant
• Location
• Schedule and Control Operations
• Allocate resources
• Difference
– How it is done
Continuum of Characteristics of Manufacturing and Service Processes
Why We Study OM?
• It lies at the heart of all business activities (Technical core)
• We want to know how goods and services are produced
• To know what operations managers do so that we develop skills
– Career Opportunity
• Operations represent such costly part of the organization
Evolution of Operations Management
• POM is as old as human being started to produce goods & services
• Let’s examine what have been done in the last 200 years
Era Events/Concepts Dates Originator

Steam engine 1769 James Watt
Industrial
Division of labor 1776 Adam Smith
Revolution
Interchangeable parts 1790 Eli Whitney
Principles of scientific
1911 Frederick W. Taylor
management
Frank and Lillian
Scientific Time and motion studies 1911 Gilbreth
Management
Activity scheduling chart 1912 Henry Gantt
Moving assembly line 1913 Henry Ford


Hawthorne studies 1930 Elton Mayo
Human 1940s Abraham Maslow
Relations Motivation theories 1950s Frederick Herzberg
1960s Douglas McGregor
Linear programming 1947 George Dantzig
Digital computer 1951 Remington Rand
Simulation, waiting
Operations Operations research
line theory, decision 1950s
Research groups
theory, PERT/CPM
1960s, Joseph Orlicky, IBM
MRP, EDI, EFT, CIM
1970s and others

JIT (just-in-time) 1970s Taiichi Ohno (Toyota)
TQM (total quality W. Edwards Deming,
1980s
management) Joseph Juran
Quality Strategy and Wickham Skinner,
1980s
Revolution operations Robert Hayes
Michael Hammer,
Reengineering 1990s
James Champy
Six Sigma 1990s GE, Motorola

Internet Internet, WWW, ERP, 1990s ARPANET, Tim
Revolution supply chain management Berners-Lee SAP,
i2 Technologies,
ORACLE, Dell
E-commerce 2000s Amazon, Yahoo,
eBay, Google, and
others
Globalization WTO, European Union, 1990s China, India,
Global supply chains, 2000s emerging economies
Outsourcing, Service
Science

Green Global warming, An Today Numerous
Revolution Inconvenient Truth, Kyoto scientists,
statesmen and
governments
• Steam engine
– Human Power vs Machine Power
– is a heat engine that performs mechanical work using steam as its working fluid.
– Using boiling water to produce mechanical motion
– In 1781 James Watt
– Watt's engines were faster, more efficient and required less fuel.
• Division of labor/Specialization
– is the specialization of cooperating individuals who perform specific tasks and roles.
– the specialization of the labor force, essentially the breaking down of large jobs into
many tiny components.
– associated with the growth of total output and trade, the rise of capitalism, and of
the complexity of industrialized processes.
– Adam Smith's The Wealth of Nations
• Division of labor/Specialization
–Charles Babage
• expanded on these ideas in his study of pin manufacturing
• He noted that specialization not only increases productivity but also
makes it possible for only the specific skills required.
• How do you see division of labor/specialization in

todays environment?
• Interchangeable parts (Eli Whitney, 1790)

– are parts (components) that are, for practical purposes,
identical.
– They are made to specifications that ensure that they are so
nearly identical that they will fit into any assembly of the
same type.
– One such part can freely replace another, without any custom
fitting (such as filing).
– This interchangeability allows easy assembly of new devices, and easier
repair of existing devices, while minimizing both the time and skill
required of the person doing the assembly or repair.
• Scientific Management
• Fredrick W. Taylor
– Time study …..one best way of doing things
• using systematic analysis to identify the best methods;
– scientifically selecting, training, and developing workers;
– promoting cooperation between management and labor;
– developing standardized approaches and tools;
– setting specific tasks or goals and then rewarding workers with
financial incentives; and
– giving workers shorter work hours and frequent breaks.
– Divide the work b/n management and lobor
• Scientific Management
• Frank and Lillian Gilbreth
– motion study…….identified 17 motions
• Therbligs
– “speed work’, and the speed came not from rushing the workers to work faster but from
cutting down unnecessary motions.
– adapt and design machines so that handicapped workers could use them
– human side of work …. industrial psychology…to improve office communication, incentive
programs, job satisfaction, and management training.
• Motion study: Breaking each task or job into its

separate motions and then eliminating those that are
unnecessary or repetitive
– Gilbreth
• Time study: Timing how long it takes good workers
to complete each part of their jobs.
– Taylor
• Activity scheduling chart

–Henry Gantt (1861–1919)
• Gantt chart
–Scheduling Production
• pay-for-performance plans and
• the training and development of workers
• Moving assembly line ……Henry Ford

– An assembly line is a manufacturing process in which
parts are added to a product in a sequential manner to
create a finished product much faster than with
handcrafting-type methods.
• Davison of Labor + Standardization of parts

– Central to Ford's ability to produce an affordable car was
the development of the assembly line that increased the
efficiency of manufacture and decreased its cost.
– Prior to the introduction of the assembly line, cars were
individually crafted by teams of skilled workmen - a slow
and expensive procedure.
– The assembly line reversed the process of automobile
manufacture.
– Instead of workers going to the car, the car came to the
worker who performed the same task of assembly over and
over again.
• Human Relations Movement

– highlighted the central importance of
motivation and human element in work design
• Elton Mayo
• Abraham Maslow
• Frederick Herzberg
• Douglas McGregor
• Hawthorne Studies: Elton Mayo

– ways to increase productivity and also to improve
worker satisfaction and working conditions.
– the need for a greater and deeper understanding of
the social and behavioral aspects of management
• Motivation theories
– 1940s Abraham Maslow
• hierarchy of needs
– 1950s Frederick Herzberg
• famous for introducing job
enrichment and
the Motivator-Hygiene theory
– 1960s Douglas McGregor
• Theory X and Theory Y
• Decision Models
– used to present a productive system in
mathematical terms.
– is expressed in terms of performance measures,
constraints, and decision variables.
– The purpose of such a model is to find optimal or
satisfactory values of decision variables which
improve systems performance with in the
applicable constraints.
– These models can then help guide management
• Decision Models
–Economic Order Quantity (EOQ) formula for
inventory management
• One of the first uses of this approach occurred in
• E. W. Harris developed it 1915
–Statistical Quality Control work
• Shewhart in 1931,
• Linear programming…. George Dantzig

– is a mathematical method for determining a way to achieve the best outcome
(such as maximum profit or lowest cost) in a given mathematical model for some
list of requirements represented as linear relationships.
– Linear programming is a specific case of mathematical programming
(mathematical optimization)
– known for his development of the simplex algorithm, an algorithm for solving linear
programming problems, and his work with linear programming.
• Digital computer
–A computer is a general purpose device that
can be programmed to carry out a set of
arithmetic or logical operations.
–Since a sequence of operations can be
readily changed, the computer can solve
more than one kind of problem.
–The first electronic digital computers were
developed between 1940 and 1945
Operations Research
• Simulation
– is the imitation of the operation of a real-world process
or system over time
• Waiting line theory
– also known as queuing theory, is the mathematical
study of waiting lines.
– This theory can be used to model and predict wait times
and number of customer arrivals.
Operations Research
• Decision theory
– concerned with identifying the values,
uncertainties and other issues relevant in a given
decision, its rationality, and the resulting optimal
decision.
• PERT…. Program/Project Evaluation & Review
Technique
– is a statistical tool, used in project management,
– that is designed to analyze and represent the
tasks involved in completing a given project
Operations Research
• CPM…. Critical path method
– an algorithm for scheduling a set of project activities
• MRP…. Material requirements planning
– is a production planning and inventory control system used to
manage manufacturing processes.
– An MRP system is intended to simultaneously meet three
objectives:
• Ensure materials are available for production and products are
available for delivery to customers.
• Maintain the lowest possible material and product levels in store
• Plan manufacturing activities, delivery schedules and
purchasing activities
Operations Research
• EDI…. Electronic data interchange
– is a document standard which when implemented acts as
common interface between two or more computer
applications in terms of understanding the document
transmitted.
• EFT……..Electronic funds transfer
– is the electronic exchange, transfer of money from one
account to another, either within a single financial
institution or across multiple institutions, through
computer-based systems.
• CIM
Operations Research
• EDI…. Electronic data interchange
– is a document standard which when implemented acts as common
interface between two or more computer applications in terms of
understanding the document transmitted.
• EFT……..Electronic funds transfer
– is the electronic exchange, transfer of money from one account to
another, either within a single financial institution or across multiple
institutions, through computer-based systems.
• Just-in-time…..JIT……….. Taiichi Ohno

– is a production strategy that strives to improve a business
return on investment by reducing in-process inventory and
associated carrying costs.
– An inventory strategy companies employ to increase
efficiency and decrease waste by receiving goods only as
they are needed in the production process, thereby
reducing inventory costs.
– This method requires that producers are able to accurately
forecast demand.
• Total Quality Management

– an approach to improve the effectiveness and flexibility of
business as a whole.
– It is essentially a way of organizing and involving the
whole organization, every department, every activity, every
single person at every level.
– is based on the premise that the quality of products and
processes is the responsibility of everyone involved with
the creation or consumption of the products or services
Operations Function and its Environment
• Environment
–Internal:
• Marketing, Finance, Procurement, HR,
Accounting, Engineering, etc.
–External:
• Economic, Natural, Political/legal, Market,
Supply, Labor, etc.
Operations Function and its Environment
OM Decision Making Areas
Operation vs, Marketing
• The marketing department constantly influences the management of
production by delivering information concerning the following:
– Sales forecasts of future levels of demand ….to plan how much to produce.
– Data on sales orders which helps to determine what to produce.
– Customer quality requirement that helps to determine which machines, workers ,
tools, processes can fit this quality.
– New products and processes.
• New product and process ideas can radically change the production system.
– Customer feedback of products.
Operation vs. Accounting

• The function of Accounting Department is collecting, summarizing and
interpreting financial information for management decisions.
• Thus, accountants need to understand the basics of
– inventory management,
– capacity utilizations and
– labor time standards
to develop accurate cost data , performs audits, and prepare financial reports.
Operation vs. Finance

• Finance involves the provision of and management of money and other assets.
• Information to the Production Department from Finance can be conceived as
follows :
– Budgetary information
– Analysis of investment:
• …..investments in equipment and inventories, rate of returns, depreciation, sinking funds,
payback periods, compound interest, etc.
– Provision of money for improvements: ……funds available
– Provision of information on the general condition of the firm
Operation vs, Procurement & Purchasing

• The procurement function deals with the acquisition of proper materials,
equipment, service and supplies of the right qualities, in the right quantities, for the
right price s, at the right time, and from the right place.
• The information to exchange between the procurement and production functions
is:
• Determination of items to be purchased
• Determination of delivery schedules
• The discovery of new products, materials , and processes:
• Inventory control
Operation vs. Engineering
• Engineering develops product-service designs and develop
production methods.
• The Engineering functional unit supports Operations
Managers in the following areas:
–Method analysis
–Work measurement information
–Plant layout and material handling information
–Plant maintenance information
• Operations management professionals make a number of key decisions that affect
the entire organization.
• These include the following:
– What: • Where:
• What resources will be needed, and in what • Where will the work be done?
amounts? • How:
– When: • How will the product or service be designed?
• When will each resource be needed? • How will the work be done (organization,
• When should the work be scheduled? methods, equipment)?
• When should materials and other • How will resources be allocated?
supplies be ordered? • Who:
• When is corrective action needed? • Who will do the work?
• What Operations Managers Do?

–Three Categories of OM Decisions
•Strategic
•Operating
•Controlling
POM Decision Making Areas
• What Operations Managers Do?

–Basic Management Functions
• Planning
• Organizing
–Staffing
• Leading
• Controlling
• Mission
– The reason for the existence of an organization.
– States the purpose of an organization.
• Goals
– Provide detail and scope of the mission.
• Strategies
– Plans for achieving organizational goals.
• Tactics
– The methods and actions taken to accomplish strategies.
• Mission:
– Live a good life.
• Goal:
– Successful career, good income.
• Strategy:
– Obtain a college education.
• Tactics:
– Select a college and a major; decide how to finance college.
• Operations:
– Register, buy books, take courses, study.
• Strategic
–Long term and strategic in nature
–Includes decisions related to:
• New product design and development
• Process design and selections
• Facility locations
• Facility layout
• Long range capacity planning
• Operating Decisions
– Include decisions relating to planning and implementing production to
meet an estimated demand for intermediate period
– Example:
• Production planning
• Manufacturing resource planning (MRP II)
• Materials requirement planning (MRP I)
• Shop-floor planning
• Scheduling-service and production
• Inventory planning
POM Decision Making Areas
• Controlling Decisions
–Concerned about the day-to-day activities of operations
which includes:
•Quality management and control (TQM)
•Productivity measurement
•Project management
•Maintenance
Steps in Decision Making
• Decision making
– the process of selecting the best course of action among given
alternatives.
–is complex as the systems with which manager deal are
complex and involves multiple goals & criteria
1. Defining the problems and its parameters (relevant variables) .

– Identification of the relevant cause instead of symptoms
2. Establishing decision criteria/objectives
– It reflects the goals/purposes of work efforts
– It could be
• maximizing profit,
• minimizing cost,
• achieving high productivity,
• stability,
• increasing market share,
• growth
3. Formulation of decision model

 It lies at the heart of decision making process
 Models are abstractions of the reality
 i.e. describing the essence of the problem or relationship by abstracting relevant
variables
 a simplified representation of something
 They develop relationship which is expressed in testable form and studied in
isolation
Types of Models
– Verbal models:
– Physical models:
– Schematic models:
Types of Models
–Verbal models:
• express relationship among variables in words
–Physical models: …. look like their real-life counterparts
• scaled down version of things
• their visual correspondence with reality
• Examples include
–miniature cars, trucks, airplanes, toy animals and trains, and scale-
model buildings.
Types of Models
–Schematic models:
• show pictorial relationship among variables
• are more abstract than their physical counterparts
• they have less resemblance to the physical reality
• they are often relatively simple to construct and change
• they have some degree of visual correspondence
• e.g., graphs and charts, blueprints, pictures, and drawings
Types of Models
• Probabilistic models:
–statement of relationship among variables and constant in which
statistical probabilities are associated with one or more of the variables
–Applied when risk exists
–Involves the use of empirical probabilities (based on observed data) or
subjective probabilities (based on personal experience or judgment).
Types of Models
• Mathematical model:
– A statement expressed as equation of relationship among
the variables and constants associated with a problem It
may incorporate factors that cannot readily be visualizes
– Symbols such as x, y, a, b, … are used
Types of Models
3. Formulation of decision model

4. Generate alternatives by varying the values of the
parameters
- Evaluation of alternatives & select the best one
5. Implementation & monitoring .
 It is not strictly part of the decision process, but they are
essential for completing the management activities
 Greater cautions must be taken during implementation
OM for Competitiveness
• Competitiveness
–How effectively an organization meets the wants and needs
of customers relative to others that offer similar goods or
services.
–Core competencies
•those special attributes or abilities possessed by an
organization that give it a competitive edge
OM for Competitiveness
• Operations has a major influence on competitiveness through
– product and service design,
– Cost of an organization’s output is a key,
– Location……in terms of cost and convenience for customers,
– quality,
– response time……Quick response,
– Flexibility….. the ability to respond to changes,
– Inventory management ….effectively matching supplies of goods with demand
– Supply chain management ….. coordinating internal and external operations.
– Service might …. after-sale activities customers perceive as value-added, …extra attention
– Managers and workers ….. competent and motivated
Competitive Dimensions of OM
• How operations functions contribute to the

company’s competitive position?
– Cost: Make it Cheap
• Lean production
– Waste elimination
» relentlessly pursuing the removal of all waste
– providing low costs through disciplined operations
• Examination of cost structure
– looking at the entire cost structure for reduction potential

– Speed: Make it fast
• fast moves, fast adaptations
• Delivery speed
• New product introduction speed
– Quality: Make it good
• Provide the maximum value as perceived by customer.
• Minimizing defect rates or conforming to design specifications;
please the customer

– Flexibility
• Ability to provide variety
• ability to adjust to changes in product mix, production volume, or
design
– Reliability
• Quality reliability-deliver product as promised
• Delivery reliability-deliver product when promised

– Service: Support it
• After sale service

– Service: Support it
• After sale service
Productivity Measurement
• What is productivity?
– Productivity is the ratio of outputs (goods and services)
divided by the inputs (resources such as labor and capital)
– The goal of productivity management is to make the ratio
as large as practical
𝑼𝒏𝒊𝒕𝒔 𝒑𝒓𝒐𝒅𝒖𝒄𝒆𝒅
– Productivity=
𝑰𝒏𝒑𝒖𝒕 𝒖𝒔𝒆𝒅
– Outputs and Inputs must be quantifiable measures to
obtain meaningful productivity ratio.
– Productivity is a common measure of how well a country,
industry, or business organizations using its resources.
• Output
– Desired result
– Sales made, products produced, customers served, meals
delivered, or calls answered
• Input
– Resources used
– labor hours, investment in equipment, material usage,
space usage, and/or energy usage
• Productivity represents output relative to input

• The most common factor which affect
competitiveness of a company as well as a
nation
• Only through productivity increases can our
standard of living improve
• Measures of Productivity
– Single-factor (Partial) productivity
– Multi-factor productivity
– Total factors productivity
• Single-factor (Partial) productivity

– Measures the productivity of a single resource used in
production
– The productivity of labor, materials, energy, space,
capital etc. will be measured separately
– Labor Productivity
=
𝑳𝒂𝒃𝒐𝒓 − 𝒉𝒐𝒖𝒓𝒔 𝒖𝒔𝒆𝒅
• Single-factor (Partial) productivity

– Material Productivity
=
𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 𝒖𝒔𝒆𝒅
– Machine Productivity
=
𝑴𝒂𝒄𝒉𝒊𝒏𝒆 𝒉𝒐𝒖𝒓𝒔 𝒖𝒔𝒆𝒅
– Space Productivity
=
𝑺𝒑𝒂𝒄𝒆 𝒇𝒐𝒐𝒕𝒂𝒈𝒆 𝒖𝒔𝒆𝒅
Some examples of partial productivity measures

• Labor productivity
– Units of output per labor hour
– Units of output per shift
– Value-added per labor hour
– Birr value of output per labor hour
• Machine productivity
– Units of output per machine hour
– Birr value of output per machine hour
Some examples of partial productivity measures

• Capital productivity
– Units of output per birr input
– Birr value of output per birr input
• Energy productivity
– Units of output per kilowatt hour
– Birr value of output per kilowatt hour
• Multi-factor productivity
– Relates output to a combination of inputs, such as
(labor + capital) or (labor + capital + energy)
– Example: productivity of labor, materials, an energy
=
𝑳𝒂𝒃𝒐𝒓+𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍+𝑬𝒏𝒆𝒓𝒈𝒚
• Total factors productivity

– Compares the total quantity of goods or services
produced with all the inputs used to produce them
=
𝑳𝒂𝒃𝒐𝒓+𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍+𝑬𝒏𝒆𝒓𝒈𝒚+𝑪𝒂𝒑𝒊𝒕𝒂𝒍+𝑴𝒊𝒔𝒄𝒆𝒍𝒍𝒂𝒏𝒆𝒐𝒖𝒔
• Total factors productivity

– Compares the total quantity of goods or services
produced with all the inputs used to produce them
=
𝑳𝒂𝒃𝒐𝒓+𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍+𝑬𝒏𝒆𝒓𝒈𝒚+𝑪𝒂𝒑𝒊𝒕𝒂𝒍+𝑴𝒊𝒔𝒄𝒆𝒍𝒍𝒂𝒏𝒆𝒐𝒖𝒔
• Summary
• Example
– Units Produced: …….….100,000
– Labor hours used: ….…10,000
– Machine hours: ………..5,000
– Cost of materials: ….…..Birr 35,000
– Cost of energy: ………...Birr 15,000
– Cost of labor per hour: ..Birr 20
– Cost per machine hour: .Birr 10
– Selling price per unit: ….Birr 100
From the data above, calculate:
A. Single factor or partial productivity of Labor and Machine
B. The multifactor productivity of labor, machine, and materials
C. The total factor productivity
A. Single factor or partial productivity of Labor and Machine
Labor Productivity =
𝑳𝒂𝒃𝒐𝒓−𝒉𝒐𝒖𝒓𝒔 𝒖𝒔𝒆𝒅
𝟏𝟎𝟎,𝟎𝟎𝟎
= = 𝟏𝟎 𝒖𝒏𝒊𝒕𝒔/𝒍𝒂𝒃𝒐𝒓 Hr
𝟏𝟎,𝟎𝟎𝟎
Machine Productivity =
𝑴𝒂𝒄𝒉𝒊𝒏𝒆−𝒉𝒐𝒖𝒓𝒔 𝒖𝒔𝒆𝒅
𝟏𝟎𝟎,𝟎𝟎𝟎
= = 𝟐𝟎 𝒖𝒏𝒊𝒕𝒔/𝒎𝒂𝒄𝒉𝒊𝒏𝒆 Hr
𝟓𝟎𝟎𝟎
B. The multifactor productivity of labor, machine, and
materials
• Productivity =
𝑳𝒂𝒃𝒐𝒓+𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍+𝑴𝒂𝒄𝒉𝒊𝒏𝒆
• Productivity =
𝑳𝒂𝒃𝒐𝒓 𝒄𝒐𝒔𝒕 +𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 𝒄𝒐𝒔𝒕 +𝑴𝒂𝒄𝒉𝒊𝒏𝒆 𝒄𝒐𝒔𝒕
𝟏𝟎𝟎,𝟎𝟎𝟎
• Productivity =
(𝟏𝟎,𝟎𝟎𝟎×𝟐𝟎)+𝟑𝟓,𝟎𝟎𝟎+(𝟓,𝟎𝟎𝟎×𝟏𝟎)
𝟏𝟎𝟎,𝟎𝟎𝟎
Productivity = = 𝟎. 𝟑𝟓 units/Birr spent on labor hr, machine hr,
𝟐𝟖𝟓,𝟎𝟎𝟎
and material
Productivity Measurement (cont.)
OR
Value of Output
Productivity =
Cost of labor, machine, and
materials
100,000 X birr100
Productivity =
(10,000 X 20) + 35,000 + (5,000 X 10)
10,000,000
= = birr35.09/birr spent on labor-hour
285,000 machine-hour, and material
C) The total factor productivity
Value of Output
Productivity = Cost of all factors of
production used
Value of Output
Productivity = Cost of labor + cost of
machine + cost of materials +
cost of energy
10,000,000
Productivity = 200,000 + 50,000 + 35,000 +
15,000
10,000,000
= = birr33.33/birr spent on total factors
300,000
• Exercise 1: Delux Wood and Metal Workshop is engaged in the production of office furniture. The
basic inputs used by the workshop are: Raw materials, labor, supplies and capital (i.e., depreciation).
The total out put in the year 2007 was birr 100,000. The previous trend shows that out put of the
firm has been growing by 20% annually. The productivity of each input, however, was assumed to
remain constant over the years. Thus, the
• The multi-factor productivity for materials, labor and supplies is expected to be 2 for the year
2008
• Partial productivities of supplies and raw materials are 10 and 6 for the year 2008 respectively
• Based on the above information compute
A. Total cost of labor, raw materials and supplies for the year 2008
B. Productivity of labor for the year 2008
C. Total factor productivity for the year 2008 if depreciation for the 2008 is estimated to be Birr
15,000
Solution for Exercise 1
• Given
• Total out put for 2007= Birr 100,000
• Total out put for 2008=20%
Based on the above information compute
• Total cost of labor, raw materials and supplies for the year 2008 (ans.
Birr 60,000)
• Productivity of labor for the year 2008 (ans. 4.29)
• Total factor productivity for the year 2008 if depreciation for the 2008
is estimated to be birr 15,000 (ans. 1.6)
Exercise 2
 Based on the following data answer the questions that follow
 Output (selling price) Birr 400,000
 Inputs used for the given output
 Raw materials 8000 units
 Labor hours 2000 hours
 Machine hours 4000 hours
 Hourly cost of labor is Birr 2, which is twice that of machine. The raw
material cost incurred per single labor hour is Birr 20. Calculate
A. Single factor productivity of raw material = 10
B. Multifactor productivity of labor and machine = 5
C. Total measure of productivity = 8.3
Heizer & Render
• Labor,
– which contributes about 17% of the annual increase.
• Capital,
– which contributes about 17% of the annual increase.
• Management,
– which contributes about 66 % of the annual increase.
• Labor
– Improvement in the contribution of labor to productivity is the result of a
healthier, better-educated, and better-nourished labor force.
– Three key variables for improved labor productivity are:
• Basic education appropriate for an effective labor force.
• Diet of the labor force.
• Social overhead that makes labor available, such as transportation and sanitation.
– Improvements in labor productivity are possible; however, they can be expected to
be increasingly difficult and expensive.
• Labor
– Overcoming shortcomings in the quality of labor is a major
challenge,
– improvements can be found not only through increasing
competence of labor but also via better utilized labor with a
stronger commitment, Training, motivation, team building,
and other HR strategies.
– improved education, may be among the many techniques
that will contribute to increased labor productivity.
• Capital
– Capital investment provides those tools used
• Raw Materials, Building, Machinery
– Inflation & tax increase the cost of capital
– When the capital investment per employee drops, results
drop in productivity
• Management/ Leadership
– is responsible for ensuring that labor and capital are effectively used
– accounts for over half of the annual increase in productivity.
– This increase includes improvements made through the use of knowledge and
the application of technology.
Improving Productivity
• Develop productivity measures
• Determine critical (bottleneck) operations
• Develop methods for productivity improvements
• Establish reasonable goals
• Get management support
• Measure and publicize improvements
• Don’t confuse productivity with efficiency
Ways of Making the Productivity Ratio Bigger
There are 5 ways to make the ratio bigger

1. Make the output larger for the same input
2. Make the input smaller for the same output
3. Increasing the output while decreasing the input
4. Increasing the output greater than the input increase
5. Decreasing the output lesser than the input decrease
Thank You!

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Operations Management

Era Events/Concepts Dates Originator

Moving assembly line 1913 Henry Ford

Era Events/Concepts Dates Originator

Era Events/Concepts Dates Originator

Era Events/Concepts Dates Originator

Era Events/Concepts Dates Originator

• How do you see division of labor/specialization in

• Interchangeable parts (Eli Whitney, 1790)

• Motion study: Breaking each task or job into its

• Activity scheduling chart

• Moving assembly line ……Henry Ford

• Davison of Labor + Standardization of parts

• Human Relations Movement

• Hawthorne Studies: Elton Mayo

• Linear programming…. George Dantzig

• Just-in-time…..JIT……….. Taiichi Ohno

• Total Quality Management

Operation vs. Accounting

Operation vs. Finance

Operation vs, Procurement & Purchasing

• What Operations Managers Do?

• What Operations Managers Do?

1. Defining the problems and its parameters (relevant variables) .

3. Formulation of decision model

3. Formulation of decision model

• How operations functions contribute to the

• How operations functions contribute to the

• How operations functions contribute to the

• How operations functions contribute to the

• How operations functions contribute to the

• Productivity represents output relative to input

• Single-factor (Partial) productivity

• Single-factor (Partial) productivity

Some examples of partial productivity measures

Some examples of partial productivity measures

• Total factors productivity

• Total factors productivity

C) The total factor productivity

There are 5 ways to make the ratio bigger

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