OPERATIONS MANAGEMENT

• By: Chala Dechassa (PhD)

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 CHAPTER-ONE

INTRODUCTION

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 Learning Objectives

The Objectives of this Course is to:

Define Operations Management (OM)
Explain the role of OM in business
Describe the differences between service and
manufacturing operations
Identify major historical developments in OM
Describe the flow of information between OM and
other business functions
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 Introduction to Operations
Management

Operation is the part of an organization which is

concerned with the transformation of a range of
inputs into the required output (services) having the
requisite quality level.
Operations management is the process, which
combines and transforms various resources used in
the operations subsystem of the organization into
value added services in a controlled manner as per
the policies of the organization.
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 Cont’d

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.
OM is a business function responsible for planning,
coordinating, and controlling the resources needed to produce
a company’s products and services.
OM is the activity of managing the resources which are devoted
to the production and delivery of products and services.

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 Cont’d

OM is one of the core functions of any organization

(service or manufacturing; for profit or not for profit).
Operations management is concerned with managing
processes. And all processes have internal customers
and suppliers. All management functions also have
processes.
Therefore, operations management has relevance for
all managers.

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 Cont’d

Operations management designs, operates, and

improves productive systems for getting work
done.
Operations is more than planning and
controlling; it is doing.
Whether it is superior quality, speed-to-market,
customization, or low cost, excellence in
operations is critical to a firm’s success.
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 Why study OM?

four reasons:
 OM is one of the three major functions of any organisations, and it is integrally
related to all the other business functions.
All organisations market (sell), finance (account), and produce (operate), and it is important
to know how the OM segment functions. Therefore, we study how people organise
themselves for productive enterprise.
 We study OM because we want to know how goods and services are
produced. The production function is the segment of our society that creates the
products we use.
 We study OM to understand what operations managers do. By understanding
what these managers do, you can develop the skills necessary to become such a
manager. This will help you explore the numerous and lucrative career
opportunities in POM.
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 Cont’d

We study OM because it is such a costly

part of an organisation.
(A large percentage of the revenue of
most firms is spent in the OM function.
Indeed, OM provides a major opportunity for
an organisation to improve its profitability
and enhance its service to society.
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 Evolution of OM

Operations Management evolved from

factory oriented terms like "manufacturing
management", production management" and
"production operations",
But, its present meaning has been
broadened to embrace service industries
and non-profit activities as well.
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Industrial revolution Late 1700s
Scientific management Early 1900s
Human relations movement 1930s to 1960s
Management science Mid-1900s
Computer age 1970s
Environmental Issues 1970s
Just-in-Time Systems (JIT) 1980s
Total quality management (TQM) 1980s
Reengineering 1990s
Global competition 1980s
Flexibility 1990s
Time-Based Competition 1990s
Supply chain Management 1990s
Electronic Commerce 2000s
Outsourcing 2000s

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 OM’s System

Operations is often defined as a transformation

process.
In operation function; inputs (such as material, machines, labor,
management, and capital) are transformed into outputs (goods
and services).
Requirements and feedback from customers are used to adjust
factors in the transformation process, which may in turn alter inputs.
In operations management, we try to ensure that the transformation
process is performed efficiently and that the output is of greater
value than the sum of the inputs.

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 Cont’d

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 Cont’d

Operations management is principally concerned with the use

of resources; which are categorized as follows:
Materials: That is the physical items consumed or converted by
the system, e.g. raw materials, fuel, indirect materials.
Capital: That is the physical items equipment and facilities, used
by the system, e.g. plant, tools, vehicles, buildings.
Human Resources: That is the people, workers and managers,
who provide or contribute to the operation of the system, without
which neither machine nor materials are effectively used.
These resources are inputs to the operation system.
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 Cont’d

The transformation process, as part of an OM system, can

be:
Physical, as in manufacturing operations;
Locational, as in transportation or warehouse operations;
Exchange, as in retail operations;
Physiological, as in health care;
Psychological, as in entertainment; or
Informational, as in communication.
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 Cont’d

The essence of the operations function is

to add value and increase efficiency
during the transformation process.
Value-added is the term used to describe the difference
between the costs of inputs and the value or price of
outputs.
Efficiency on the other hand refers to producing at the
lowest cost possible.

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 Cont’d

Information feedback can come from external

sources, such as reports on economy, a call from
a vendor on past-due shipments, or new
customer orders.
It can also come from internal sources such as
reports on cost variances, customer service or
inventory levels.
Information from both sources is needed to manage the
production and operations system.
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 Cont’d

Outputs from manufacturing operations are goods

produced for consumers or for industrial firms.
Goods are tangible physical products/outputs. We can see, feel and
inspect them.

Outputs from service operations are usually

intangible and perishable.
They are often ideas, concepts or information or an act.
Detailed comparison of these outputs is presented in the following
table.
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 Table: The Continuum Of Characteristics Of Goods And Services Producers

Goods Services
Physical products Intangible, perishable products

Product can be resold Reselling a service is unusual

Output can be inventoried Many Outputs cannot be inventoried

Low customer contact High customer contact

Long response time to demand Short response time to demand

Regional, national or international markets Local Markets

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Large facilities with economies of scale Small facilities (often difficult to automate)
 Cont’d
Goods Services

Capital intensive Labor intensive

Site of the facility is important for cost Site of the facility is important for
customer contact

Selling is distinct from production Selling is often a part of the service

Production precedes consumption Production and consumption are

simultaneous

Product is transportable
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not product,
20 is
transportable
 Cont’d

This distinction gets cloudy, when we try to

classify an organization as either a goods
producer or a service producer
In reality, almost all services are a mixture of a service and a
tangible product; similarly, the sale of most goods includes or
requires a service.

For instance, many products have the service

components of financing and transportation (e.g.
automobile sales).
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 The activities of OM

Operations managers have some responsibility for all

the activities in the organization which contribute to
the effective production of products and services.
And while the exact nature of the operations function’s
responsibilities will, to some extent, depend on the
way the organization has chosen to define the
boundaries of the function, there are some general
classes of activities that apply to all types of operation.

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 Cont’d

1. Developing an operations strategy for the organization.

Operations management involves hundreds of minute-by-
minute decisions, so it is vital that there is a set of general
principles which can guide decision-making towards the
organization's long term goals-this is an operations
strategy.
2. Designing the operation’s products, services and processes.
Design is the activity of determining the physical form,
shape and composition of products, services and processes.
It is a crucial part of operations managers’ activities.
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 Cont’d

3. Planning and controlling the operation.

Planning and control is the activity of deciding
what the operations resources should be doing,
then making sure that they really are doing it.
4. Improving the performance of the operation.
The continuing responsibility of all operations
managers is to improve the performance of their
operation.
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 OM as Function and activity

we must distinguish between two meanings

of ‘operations’:
Operations as a function: it is the part of the
organization which produces the products and services
for the organization’s external customers;( core to firms)
Hence it produce core product that is reason for
existence
Operations as an activity: it is the management of the
processes within any of the organization’s functions.
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 Operations in the Organization

The operations function is central to the

organization because it produces the goods and
services which are its reason for existing, but it
is not the only function.
It is, however, one of the three core functions of
any organization. These are:
1. The marketing (including sales) function: Which is responsible
for communicating the organization’s products and services to its
markets in order to generate customer requests for service;
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 Cont’d

2. The operations function: Which is responsible for

fulfilling customer requests for service through the
production and delivery of products and services.
3. Finance function: Searching and utilizing
financial resources.
NB: Almost all organizations have the three core functions:
have a fundamental need to sell their services,
satisfy their customers and
create the means to satisfy customers in the future.
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 Operations in the organization

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 Cont’d

support functions that enable the core functions to

operate effectively.
These include, for example:
a. The accounting:
provides the information to help economic decision-making and manages
the financial resources of the organization;

b. The human resources function:

recruits and develops the organization’s staff as well as looking after their
welfare.
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 Today’s OM Environment

Customers demand better quality, greater speed,

and lower costs
Companies implementing lean systems concepts a
total systems approach to efficient operations
Recognized need to better manage information
using Electronic reporting process (ERP) and CRM
systems
Increased cross-functional decision making
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OM Interface: Business Information Flow between OM and other
functions of an organization

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 Cont’d

The functional areas must interact to achieve the organization goals.

Marketing is not fully capable of meeting 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 standards.

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 OM and Productivity

Productivity is a measure of how efficiently inputs

are converted to outputs
Productivity = Output/Input
Improving productivity is one of the concerns of OM

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 Cont’d

For example, let us 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 $8600.
The company’s total weekly productivity would be computed as follows:

Total Productivity = = = 1.186.

Often it is much more useful to measure the productivity of one
input variable at a time in order to identify how efficiently each is
being used.
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 Factors affecting productivity

There are variety of reasons for changes in productivity.

However some of the principal factors influencing
productivity rate are:
1. Scarcity of some resources: Resources such as energy,
water and number of metals will create productivity problems.
2. Work-force changes: Change in work-force effect
productivity to a larger extent, because of the labor turnover.
3. Innovations and technology: This is the major cause of
increasing productivity.
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 Cont’d

4. Capital/labor ratio: It is a measure of whether enough

investment is being made in plant, machinery, and tools to
make effective use of labor hours.
5. Regulatory effects: These impose substantial constraints on
some firms, which lead to change in productivity.
6. Bargaining power: Bargaining power of organized labor to
command wage increases excess of output increases has had a
detrimental effect on productivity.
7

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 Cont’d

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.

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 Measuring Productivity

Total Productivity Measure

Total Productivity = Sales/Inputs $

Partial Productivity Measure

Partial Productivity = Cars/Employee

Multifactor Productivity Measure

Multi-factor Productivity = Sales/Total costs
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 Cont’d

Productivity Example: An automobile manufacturer has

presented the following data for the past three years in its
annual report.

As a potential investor, you are interested in calculating

yearly productivity and year to year productivity gains
as one of several factors in your investment analysis.

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 Cont’d
2003 2002 2001

Unit car sales 2,700,000 2,400,000 2,100,000

Employees 112,000 113,000 115,000

$ Sales (billions$) $49,000 $41,000 $38,000

Cost of Sales (billions) $39,000 $33,000 $32,000

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 Cont’d

2003 2002 2001

Partial Prod. Measure
Unit Car Sales/Employee 24.1 21.2 18.3
Year-to-year Improvement 13.7% 15.85%
Multifactor Prod. Measures
Total Cost Productivity 1.26 1.24 1.19
Year-to-year Improvement 1.6% 4.2%
Which is the best measurement?
Founded by:

(21.2 – 18.3)/18.3 * 100 = 15.85%

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 -

• End of chapter one

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