Chapter 1

Introduction to Operations Management

11/8/21 1
11/8/21 2
11/8/21 Tessema T 3
 Before directly proceed to what production
management mean, any one should clearly
understand.
- The purpose of the existence of organization
- Activities that are performed with in the
organization
- The concept of production
- What management mean.

11/8/21 4
• What is organization? is social entity that is goal
directed and deliberately structured.
• Why organization exist?
• An objective of any organization except non profit
organization is gaining profit.
• In order to have profit business should provide goods
and services that satisfies individuals needs and
wants.
11/8/21 5
 Operations Management
• What is operations?
– The part of a business organization that is responsible for producing goods or

services

– Production: is the process of converting raw materials to end products by using the

five M’s of production – Money, Material, Machine, Men, and Methods/ processes

– Production: in general sense refers to the creation of any goods or service people

will buy. That it emphasizes creation of those goods and services, which have

exchange value.

– It is concerned with creation of economic utilities

11/8/21 6
 • Management: is the process of
planning, organizing directing,
staffing and controlling activities
to accomplish a stated objective.

11/8/21 7
 • Plan - A blueprint specifying the resource
allocations, schedules, and other actions
necessary for attaining goals
• Planning – determining the organization’s
goals and the means for achieving them

11/8/21 8
 • Organizing: is the process of
- identifying and grouping the work to be performed
- defining and delegating responsibilities and authority
and
- establishing relationships for the purpose of enabling
people to work most efficiently together to achieve
objectives of the business

• Leading is the ability to influence people toward the

attainment of organizational goals

11/8/21 9
• Control is the systematic process through
which managers regulate organizational
activities to make them consistent with
expectations established in plans, targets, and
standards of performance

11/8/21 10
• How can we define operations management?

– The management of systems or processes that create goods

and/or provide services

• Operations management: is the process where by resources,

flowing with in a defined system, are combined and transformed in
a controlled manner to add value in accordance with policies
communicated by management.

• It involves planning, organizing, directing and controlling the

production process.

11/8/21 Tessema T 11
• 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.

11/8/21 12
 The Production System
Environment
Customers . Competitors .Suppliers
Government regulations . Technology . Economy

Inputs
Transformation
Capital Outputs
Materials System Goods
Equipment  Alteration Services
Facilities Transportation
Suppliers  Storage
Labor  Inspection
Knowledge
Time Action
Data
Data Data
Monitoring &
Action
Control
11/8/21 13
 The Responsibilities of Production
Manager

 Production planning:
 Production control:
 Quality control:
 Plant Layout & Material Handling
 Proper Inventory Control:
 Work Study
 Able to generate the interest of the workers to
increase their efforts

11/8/21 14
 1.2 Historical Development of Operation
Management

 The traditional view of manufacturing

management began in eighteenth century
when Adam Smith recognized the
economic benefits of specialization of
labor.
 F.W. Taylor implemented Smith’s theories
and developed scientific management.

11/8/21 15
 1.3 Manufacturing Operations and
Service Operations
• For all operations, the goal is to create some kind of
value-added, so that the outputs are worth more to
consumers than just the sum of the individual inputs.
• Organizations can be divided into two broad categories:
- manufacturing organizations and
- service organizations,

11/8/21 16
  In manufacturing organizations most customers
have no direct contact with the operation.
Customer contact is made through distributors
and retailers.
However, in service organizations the customers
are typically present during the creation of the
service.

11/8/21 Tessema T 17
 Manufacturing vs Service

Characteristic Manufacturing Service

Output Tangible Intangible
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Measurement of productivity Easy Difficult
Opportunity to correct High Low
quality problems
High

11/8/21 18
 Goods versus Services
Good Service
 Can be resold  Reselling unusual
 Can be inventoried  Difficult to inventory
 Some aspects of quality  Quality difficult to measure
measurable  Selling is part of service
 Selling is distinct from
production

11/8/21 19
 continued
Good Service
 Product is transportable  Provider, not product is

 Site of facility important for transportable

cost  Site of facility important

 Revenue generated for customer contact

primarily from tangible  Revenue generated

product primarily from intangible

service.

11/8/21 20
11/8/21 Tessema T 21
 Scope/functions of Operations Management

 The operations function Consists of all activities directly related

to producing goods or providing services. The operations

function includes many interrelated activities such as:

 Forecasting

 Capacity planning

 Scheduling

 Managing inventories

 Assuring quality

 Motivating employees

 Deciding where to locate facilities

11/8/21 22
 The production management Environment

• The business environment, consists of all those aspects and

forces in the surroundings of business enterprises under
which business operations are to be carried out effectively
and efficiently.
 Generally, production Environment is divide in to two
broad categories.
 These are:

- Internal and External environment

11/8/21 23
 The production Environment cont’d….

A. Internal Environment
 All Subsystems with in the organization are considered as internal
environment
 Internal Environment includes:

– Marketing function
– Finance function
– Human resource
– Purchasing
– Information technology etc.

 All these have a direct relationship with the production system

11/8/21 24
 B. External Environment
 It can be divided in to two these are
– Micro External Environment
–Suppliers
–Customers
–Competitors
–Distributors
Their influence is more nearer to the
organization.
That is why we call them micro-environment .

11/8/21 25
 Macro External Environment
 It includes
–Technological factors
–Economic forces
–Socio-cultural forces
–Demographic factors
–Political and legal Environment

11/8/21 26
 N Making
1.4 Operations Decision

1.4.1 Characteristics of decisions

Operations decision range from simple

judgments to complex analyses.
The appropriateness of a given type of analysis
depends on:
• The significant or long lasting decisions:
• The degree of complexity of the decision:
• The time availability and the cost of analysis:
11/8/21 27
 Operations management decisions are made all along this continuum.

11/8/21 28
 An analytical and scientific framework for
decision implies the following systematic steps

1. Defining the problem.

2. Establish the decision criteria.
3. Generating alternatives.
4. Evaluation of the alternatives.
5. Implementation and monitoring.
11/8/21 29
 1.4.2 DECISION METHODOLOGY

(All information) (Some information) (No information)

Algebra: Statistical analysis: Game theory
Break-even 􀁺 Objective and subjective probabilities Flip coin
Benefit/cost 􀁺 Estimation and tests of hypothesis
Calculus 􀁺 Bayesian statistics

11/8/21 30
 1.4.2.1 Complete Certainty Methods

Under complete certainty conditions, all relevant

information about the decision variables and
outcomes is known or assumed to be known.
Algebra: This basic mathematical logic is very
useful for both certainty and uncertainty analysis.
Calculus: The branch of mathematics provides a
useful tool for determining optimal value
Mathematical programming:

11/8/21 31
 2.4.2.2 Risk and Uncertainty Methods

Following are some of the useful approaches:

 Statistical analysis:
 Queuing theory:
 Simulation: Simulation duplicates the essence of
an activity.
 Network analysis techniques: Network
approaches include decision trees, CPM and
PERT methods.
 Heuristic methods: Heuristic methods involve
set of rules, which facilitate solutions of
scheduling,
11/8/21 Tessema T 32
 2.4.2.3 Extreme Uncertainty Methods

Following are some of strategies to solve this:

Game theory
Coin flip
2.4.2.4 Decision-Making under Uncertainty
Four possible decision criteria are:
 Maximin,
 Maximax,
 Laplace:Determine the average pay-off for each
alternative, and choose the alternative with the best
average.
 and Minimax regret.
11/8/21 33
 Productivity, competitiveness and strategy

A. Productivity
• Productivity is an index that measure output (goods and services)
relative to the input used to produce them.
• It is a measure of the effective use of resources, usually expressed as
the ratio of output to input

Productivity =output
input

11/8/21 34
 • The choice of productivity measure depends primarily on the

purpose of the measurement.

• If the purpose is to track improvements in labor productivity then

labor becomes the obvious input measure.

Number of machine installed

Labor hours

• It can be described as the number of machines installed per labor

11/8/21 35
 Productivity measures

There are three types of productivity

measurement
Output Ouput Output
a. Partial Measures ; ;
Single Input Labor Capital
Output Ouput Output
b. Multifactor Measures ; ;
Multiple Inputs Labor+ Machine Labor+ Capital + Energy

Goods or services produced

c. Total Measure
All inputs used to produce them

11/8/21 36
 Examples of Partial Productivity Measures

Labor Units of output per labor hour

Units of output per shift
Productivity

Machine Units of output per machine hour

Productivity
Capital Units of output per dollar input
Dollar value of output per dollar input
Productivity

11/8/21 37
 Productivity measures

• Productivity Index = Value of output

Cost of Inputs
•  For example, suppose the value of services generated by
a group of computers operations in a day is $2000 and
their total operational costs are $1,200.
• The ratio of value produced to costs incurred is
$2,000/$1,200, or 1.67.
11/8/21 38
 Example . Determine the multifactor productivity for a
combined input of labor and machine time using the following
data
- Total out put 16000 units

- Inputs
- Labor – 65 hours
- Machine – 15 hours
Multi factor productivity = total output
Labor + material
Multi factor productivity = 16000 units = 200 units per hour
65 hrs + 15hrs

11/8/21 39
7040 Units Produced

Sold for $1.10/unit

Cost of labor of $1,000 What is the

multifactor
Cost of materials: $520 productivity?

Cost of overhead: $2000 Ans. 2.20

11/8/21 40
 MFP = Output
Labor + Materials + Overhead

MFP = (7040 units)*($1.10)

$1000 + $520 + $2000

MFP = 2.20

11/8/21 41
 Factors Affecting Productivity
• Some of the principal factors influencing productivity are:
Capital/Labor ratio: is a measure of whether enough investment is being made

in plant, machinery, and tools to make effective use of labor hours.

Scarcity of some resources, such as energy, water and a number of metals, etc.

Innovation and technology

Safety

Shortage of IT workers

Layoffs/dismissals

Labor turnover

Incentive plans that reward productivity

11/8/21 42
 Improving Productivity
A company or a department can take a number of key steps toward improving
productivity:

1. Develop productivity measures:- measurement is the first step in managing

and controlling an operation.

2. Determine critical (bottleneck) operations:- look at the system as a whole in

deciding which operations are the most critical & it is over all productivity
that is important.

3. Develop methods for achieving productivity improvements: such as

soliciting ideas from workers ( organizing teams of workers, engineers and
mangers studying how other firms have increased productivity, and
reexamining the way work is done

11/8/21 43
4th . Establish reasonable goals

5th . make it clear that management supports/encourage productivity improvement.

6th. Measure and publicize improvements
Current Period Productivity – Previous Period Productivity
Productivity Growth = Previous Period Productivity

Don’t confuse productivity with efficiency:

 Efficiency is narrower concept that pertains to getting the most out of a given set
of resources

 Productivity is a broader concept that pertains to effective use of over all

resources

11/8/21 44
11/8/21 Tessema T 45
 Competitiveness

• Companies must be competitive to sell their goods

and services in the market place
• Organizations compete through some combination of
their marketing and operations functions
• What do customers want?
• How can these customer needs best be satisfied?

11/8/21 46
 Ways of competing with rivals

 Identifying consumer  Quality

wants and needs  Quick response
 Pricing  Flexibility
 Advertising and  Inventory management
promotion  Supply chain
 Product and service management
design  Service
 Cost

11/8/21
 Location 47
 Why Some Organizations Fail?

• Too much emphasis on short-term financial performance

• Failing to take advantage of strengths and opportunities

• Failing to recognize competitive threats

• Neglecting operations strategy
• Neglecting investments in capital and human resources

• Failing to establish good internal communications

• Failing to consider customer wants and needs

11/8/21 48
 Strategy

• Strategies

–Plans for achieving organizational goals

• Mission

– The reason for existence for an organization

• Mission Statement

– A clear statement of purpose that serves as a guide for strategy and

decision making

– Answers the question “What business are we in?”

11/8/21
49
  Example. As a service company, our mission is to: Satisfy our

customers’ immediate needs and wants by providing them with a

wide variety of goods and services at multiple locations.

 Example 2. The mission of Adama soap factory is to provide

society with superior products and services - innovations and

solutions that improve the quality of life and satisfy customer

needs - to provide employees with meaningful work and

advancement opportunities and investors with a superior rate of

return

11/8/21 50
 • Goals
– Provide detail and scope of mission

• Tactics
– The methods and actions taken to accomplish strategies

– They are more specific in nature than strategies and they provide
guidance and direction for carrying out actual operations, which need
the most specific and detailed plans and decision making in an
organization.

– “How to” part of process

– Operations as the actual doing part of the process.

11/8/21 51
 which comes first?

Mission Strategy Tactics

How does mission, strategies and tactics relate to

decision making and distinctive competencies?

11/8/21 52
 Planning and Decision Making

Mission

Goals

Organizational Strategies

Functional Goals

Finance Marketing Operations

Strategies Strategies Strategies

Tactics Tactics Tactics

Operating Operating Operating

procedures procedures procedures
11/8/21 53
 Operations Strategy
• Operations strategy – The approach, consistent with
organization strategy, that is used to guide the operations
function.

11/8/21 54
 Strategy Formulation

• Effective strategy formulation requires taking into account:

– Core competencies

– Environmental scanning

• SWOT

• Successful strategy formulation also requires taking into account:

– Order qualifiers

– Order winners

11/8/21 55
 Distinctive/core competencies
 Core competencies is the special attributes that give an
organization a competitive edge.
 Differentiation
 Cost: Make the Product or Deliver the Service Cheap
 Quality: Make a Great Product or Deliver a Great Service
 Delivery Speed: Make the Product or Deliver the Service
Quickly
 Delivery Reliability: Deliver It When Promised
 Coping with Changes in Demand: Change Its Volume
 Flexibility and New Product Introduction Speed: Change It
11/8/21 56
 Strategy Process
57

Environmental Company
Analysis Mission

Corporate SWOT
Strategy Analysis

FunctionalArea
Functional Area
Strategies

Marketing Operations Finance

Strategy Strategy Strategy

Tessema T 11/8/21
 SWOT Analysis to Strategy Formulation
58

Mission

Internal External
Sstrengths Oopportunities
Strategy

Internal External
Wweaknesses Tthreats
Competitive
Advantage

11/8/21
 Operations Strategy
59
Strategy Process Exampl
e
Customer Needs More Product

Corporate Increase Org.

Strategy Size

Operations Increase Production

Strategy Capacity

Decisions on Processes
Build New
and Infrastructure
Factory
11/8/21
• Order qualifiers

– Characteristics that customers perceive as minimum

standards of acceptability to be considered as a
potential purchase
• Order winners
– Characteristics of an organization’s goods or services
that cause it to be perceived as better than the
competition.
11/8/21 60
 New Strategy
• Traditional strategies of business organizations have
tended to emphasize cost minimization or product
differentiation.
• While not abandoning those strategies, many
organizations are adopting new strategies that are based
on time/quality.

11/8/21 61
 Quality based Strategy
• Focus on satisfying the customer by integrating
quality in to all phases of the organization.
• This includes not only the final product or service that
is provided to the customer but also the related
process such as design, production and service after
sale

11/8/21 62
 Time based Strategy
• Focus on reducing the time required to accomplish various
activities in process. Example. -
– develop new product or services and market them,
– respond to a change in customer demand, or
– deliver a product or perform a service.
– Processing time
• The rationale is that by reducing time,
– costs are generally less,
– productivity is higher,
– product innovation appear on the market sooner, and
– customer service improved.

11/8/21 63
 Key Decisions of Operations Managers

• What
What resources/what amounts
• When
Needed/scheduled/ordered
• Where
Work to be done
• How
Designed
• Who
To do the work
11/8/21 64
 OM The Critical Decisions

 Quality Management
 Who is responsible for quality?
 How do we define quality?
 Goods and Services Design
 What product or service should we offer?
 How should we design these products and services?

11/8/21 65
  Process and Capacity Design
 What processes will these products require and in what order?
 What equipment and technology is necessary for these
processes?
 Location
 Where should we put the facility
 On what criteria should we base this location decision?
 Layout Design
 How should we arrange the facility?
 How large a facility is required?
 Human Resources and Job Design
 How do we provide a reasonable work environment?
 How much can we expect our employees to produce?

11/8/21 66
 Supply Chain Management and JIT “Just-in-time” Inventory,
Material Requirements Planning
 Should we make or buy this item?
 Who are our good suppliers and how many should we have?
 How much inventory of each item should we have?
When do we re-order?

 Immediate, Short Term, and Project Scheduling
 Is subcontracting production a good idea?
 Are we better off keeping people on the payroll during
slowdowns?
 Maintenance
 Who is responsible for maintenance?

11/8/21 Tessema T 67