Operations Management Introduction

Module 1
Content
• Introduction
• Goods Vs Service
• Scope of Operations Management
• The Evolution of Operations Management
• Productivity and Competitiveness
• Operations Management Decision Area
 What is Operations Management
Operations management - The management of systems or processes that create
goods and/or provide services. It is a process of planning, organizing, and supervising
the operations of the business for better productivity. Operation management aims at
reducing the cost to business by avoiding any wastage of resources.

Operations and supply chains are intrinsically linked.

Supply chain - A sequence of organizations, their facilities, functions, and activities—

that are involved in producing and delivering a product or service
 What is Operations Management
While the operations function is responsible for producing products and/or delivering
services, it needs the support and input from other areas of the organization. Business
organizations have three basic functional areas, finance, marketing, and operations.
 What is Operations Management
Finance is responsible for securing financial resources at favorable prices and allocating
those resources throughout the organization, as well as budgeting, analyzing
investment proposals, and providing funds for operations.

Marketing is responsible for assessing consumer wants and needs and selling and
promoting the organization’s goods or services.

Operations is responsible for producing the goods or providing the services offered by
the organization. To put this into perspective, if a business organization were a car,
operations would be its engine. And just as the engine is the core of what a car does, in
a business organization, operations is the core of what the organization does.
 Goods Vs Services
Goods are physical items that include raw materials, parts, subassemblies such as
motherboards that go into computers, and final products such as cell phones and
automobiles.

Services are activities that provide some combination of time, location, form, or
psychological value.

Although goods and services often go hand in hand, there are some very basic
differences between the two, differences that impact the management of the goods
portion versus management of the service portion. There are also many similarities
between the two.
 Goods Vs Services
Output - Production of goods results in a tangible output, such as an automobile, a
refrigerator—anything that we can see or touch. Delivery of service, on the other hand,
generally implies an act -A physician’s examination etc.

Degree of customer contact - Many services involve a high degree of customer

contact, although services such as Internet providers, utilities, and mail service do not.
When there is a high degree of contact, the interaction between server and customer
becomes a “moment of truth”.

Labor content of jobs - Services often have a higher degree of labor content than
manufacturing jobs do, although automated services are an exception.
 Goods Vs Services
Uniformity of inputs - Service operations are often subject to a higher degree of
variability of inputs.. Conversely, manufacturing operations often have a greater ability
to control the variability of inputs, which leads to more-uniform job requirements

Measurement of productivity - Measurement of productivity can be more difficult for

service jobs due to the high variations of inputs.

Quality assurance - Quality assurance is usually more challenging for services due to
the higher variation in input, and because delivery and consumption occur at the same
time. Unlike manufacturing, which typically occurs away from the customer and allows
mistakes that are identified to be corrected.
 Goods Vs Services
Inventory - Many services tend to involve less use of inventory than manufacturing
operations, so the costs of having inventory on hand are lower than they are for
manufacturing. However, unlike manufactured goods, services cannot be stored.
Instead, they must be provided “on demand.”

Ability to patent - Product designs are often easier to patent than service designs, and
some services cannot be patented, making them easier for competitors to copy.
 Goods Vs Service
Characteristics Goods Services
Output Tangible Intangible
Customer Contact Low High
Labor Content Low High
Uniformity of input High Low
Measurement of Productivity Easy Difficult
Inventory High Low
Patentable Usually Not usually
 Product Service Continuum
Product and Service are not totally two discrete categories rather a continuum with
pure service at one endpoint and pure commodity goods at the other endpoint.
Most products fall between these two extremes.
A product's position on the continuum enables marketers to spot opportunities
At the pure goods end of the continuum, goods that have no related services are
positioned.
At the pure services end are services that are not associated with physical products.
Products that are a combination of goods and services fall between the two ends.
Goods Service Continuum
 Product Service Continuum
Goods such as furnaces, which require accompanying services such as delivery and
installation, are situated toward the pure goods end.

Products that involve the sale of both goods and services, such as auto repair, are
near the center.

And products that are primarily services but rely on physical equipment, such as
taxis, are located toward the pure services end.

Salt Auto Repair Teaching

Pure Product Pure Service
Furnace Taxi Service
 Scope of Operations Management
The scope of operations management ranges across the organization. Operations
management people are involved in

• product and service design,

• process selection, selection and management of technology,

• design of work systems,

• location and facilities planning, and

• quality improvement of the organization’s products or services.

 Scope of Operations Management
The operations function includes many interrelated activities, such as forecasting,
capacity planning, scheduling, managing inventories, assuring quality, motivating
employees, deciding where to locate facilities, and more. For example, in an Airlines
company the activities include

Forecasting such things as weather and landing conditions, seat demand for flights, and
the growth in air travel.

Capacity planning, essential for the airline to maintain cash flow and make a reasonable
profit. (Too few or too many planes, or even the right number of planes but in the wrong
places, will hurt profits.)
 Scope of Operations Management
Locating facilities according to managers’ decisions on which cities to provide service
for, where to locate maintenance facilities, and where to locate major and minor hubs.

Facilities and layout, important in achieving effective use of workers and equipment.
Scheduling of planes for flights and for routine maintenance.

Scheduling of pilots and flight attendants; and scheduling of ground crews, counter staff,
and baggage handlers.

Managing inventories of such items as foods and beverages, first-aid equipment, inflight
magazines, pillows and blankets, and life preservers.
 Scope of Operations Management
Assuring quality, essential in flying and maintenance operations, where the emphasis is
on safety, and important in dealing with customers at ticket counters, check-in,
telephone and electronic reservations, and curb service, where the emphasis is on
efficiency and courtesy.

Motivating and training employees in all phases of operations.

The Evolution of Operations Management
Evolution of Operations Management

The Industrial Revolution

Scientific Management

The Human Relations Movement

Decision Models and Management Sciences

The Influence of Japanese Manufacturers

 The Industrial Revolution
 The Industrial Revolution began in Great Britain in
1770 and then spread to the rest of Europe and
US.
 Machine power replaced Human Power. E.g.
Steam Engine
 Rate of production increased many fold and cost
of production reduced. Economies of Scale
achieved
 Number of factories grew and that Provided jobs
to countless people
Scientific Management
 Brought widespread change in the management of factories.
 Movement was spearheaded by F. W. Taylor, known as the father of
scientific management

F. W. Taylor
 Taylor believed that Management should be responsible for planning,
carefully selecting and training the workers to do a particular job in the best
possible way
Scientific Management
Other contributors of this movement were
Frank Gilbreth
Known as the father of motion study
Frank Gilbreth
Developed the principles of motion economy

Henry Gantt
Recognized the value of nonmonetary rewards

Developed the widely used scheduling tool called

Gantt Chart Henry Gantt
 Scientific Management
Harrington Emerson
 Applied Taylor’s idea to organization structure

 Encouraged the use of experts to increase organizational

efficiency
Harrington Emerson
Henry Ford
 Applied Taylor’s principles of Scientific Management in Ford’s
Motor

 Introduced the concept of Mass Production and applied the

principle of Interchangeable Parts which was based on
Standardization of Parts

 Also introduced the concept of Division of Labour Henry Ford

 The Human Relations Movement
Emphasized the importance of the human elements of Job Design

Lillian Gilbreth
 Focused on the human factors of work
Elton Mayo
 Showed that workers’ motivation is important for
Lillian Gilbreth
improving productivity
Abraham Maslow
 Developed Motivational theories
Elton Mayo

Other contributors, worth mention are

Frederick Hertzberg, Douglas McGregor and William
Ouchi. Abraham Maslow
 Decision Model and Management Science
Factory movement was accompanied by the development of several
quantitative techniques

F. W. Harris
Developed first model for Inventory Order Size

F. W. Harris
H.F. Dodge, H. G. Romig and W. Schewart (from Bell Labs)
Developed statistical process of sampling and quality control

During World War II immense demand in manufacturing of military

equipment resulted in the development of scientific management tools and
techniques
 Decision Model and Management Science
After the war effort continued and many mathematical techniques for
forecasting, inventory management were developed

During 1980s these schentific techniques lost their importance.

Again, with development in computer technology there is a resurgence

in their popularity.
 The Influence of Japanese Manufacturers
Japanese manufacturing practices made their operations highly
productive, cost effective and made their product very competitive in
the world market.

Companies outside Japan were interested in their approaches.

The influence of Japanese manufacturing practices has been enormous

and promises to continue in the foreseeable future.
 OM Decision Area
The chief role of an operations manager is that of planner and decision maker. Most
decisions involve many possible alternatives that can have quite different impacts on
costs or profits. Consequently, it is important to make informed decisions.
Operations management professionals make a number of key decisions that affect the
entire organization. These include the following:
What: What resources will be needed, and in what amounts?
When: When will each resource be needed? When should the work be scheduled?
When should materials and other supplies be ordered? When is corrective action
needed?
 OM Decision Area
Where: Where will the work be done?

How: How will the product or service be designed? How will the work be done

(organization, methods, equipment)? How will resources be allocated?

Who: Who will do the work?

 OM Decision Area
The general approaches to decision making, including the use of models, quantitative
methods, analysis of trade-offs, establishing priorities, ethics, and the systems approach.

Model – It is an abstraction of reality; a simplified representation of something. Models

are sometimes classified as physical, schematic, or mathematical.

System - A system can be defined as a set of interrelated parts that must work together.
In a business organization, the organization can be thought of as a system composed of
subsystems (e.g., marketing subsystem, operations subsystem, finance subsystem).
Productivity and Competitiveness
 Competitiveness
How effectively an organization meets the wants and needs of customers relative to
others that offer similar goods and services.

Competitiveness is an important factor in determining whether a company

prospers, barely gets by or fails.

Business organizations compete through some combination of price, delivery time

and product and service differentiation.
 Competitiveness
Operations can influence competitiveness through the following factors
1) Product and Service Design - Some features of a product or service can be a
key factor in consumer buying decision
2) Cost – Operation efficiency brings down the cost which intern affects the price
which is an important factor in customers’ buying decision
3) Location – Location nearer to the source and market brings down the cost
4) Quality – Customers are generally willing to pay a higher price which they perceive
to be of higher quality than those of competitors.
5) Response Time – Quick response is a competitive advantage. Response time can
be the time to bring a new product or service to market or the delivery time of a
product or service.
 Competitiveness
6) Flexibility – Flexibility refers to the ability to respond to changes which may be
in terms of changes in design or in volume demanded.
7) Inventory Management – Effective management of inventory provides
efficient match of supply to demand leading to cost advantage.
8) Supply Chain Management – SCM helps in coordinating internal and
external operations (buyers and suppliers) to achieve timely and cost-effective
delivery of goods throughout the system.
9) Service – Service might relate to after sales activities like warranty, technical
support which customers perceive as value addition and many a times is a key
determinant in their buying decision.
10) Managers and Workers – Competent and motivated workers provide a
competitive edge by their skill and the ideas they create.
 Productivity
Productivity is a measure of the effective use of resources, usually
expressed as a ratio of output (goods & services) to input (labor, material,
energy & other resources).

For an organization higher productivity provides cost advantage with

respect to competitors.

Productivity =

Productivity growth = x 100 %

 Computing Productivity
Partial Productivity – Based on a single input
Multifactor Productivity – Based on more than one input
Total Productivity – Based on all inputs

Output Output Output Output

Partial Productivity Labor Input Machine Input Capital Input Energy Input

Output Output
Multifactor Productivity ( Labor + Machine ) Input ( Labor +Capital + Energy ) Input

Output
Total Productivity All Input
 Computing Productivity - Examples
For the following 2 cases calculate Labor Productivity and Machine
Productivity respectively
a) Four workers completed 720 square meters of carpeting in eight hours.
b) A machine produced 70 pieces of garments in two hours out of which two are
defective.

Labor Productivity = = 22.5 sq. yards/labor hr

Machine Productivity = = 34 pieces/machine hr

 Computing Productivity - Examples
Determine multifactor productivity combining given three input factors
Output: 7040 units
Input: Labor: 20 workers for 5 hours Materials: 40 Kg Overhead: $2000
Labor cost = $10/Worker/hour
Material Cost = $13/Kg

Labor Cost = $(10x20x5) = $1000

Material Cost = $(13x40) = $520

Multifactor Productivity
= = 2 units/dollar input
 Productivity in the Service Sector
Output of a service sector is intangible. Hence measuring Productivity is
difficult
Productivity or Process Yield for a service sector depends on the type of
service provided and the key success factors
Some examples for productivity or Process Yield for service Sector can be
• For a Hospital it can be the ration of number of patients successfully treated and sent
home
• For an Education system a possible measure can be the number of students graduated
in a particular year to the number of students admitted in that year or the number of
students getting job offer through campus recruitment to the number of students who
applied for campus placement.
• For Subscription service the yield can be the ration of new subscription to the number
of calls made or emails sent seeking the subscription.
 Factors that affect Productivity
 Standardization of Process and Product – Quality improvement and
reduction in cycle time

 Use of Technology and Innovation – Use of computer and automation

reduces cost and time

 Satisfied and motivated employees – Reduces employee turn over and

increases individual output of workers

 Workplace design – Reduces fatigue and motivates worker leading to

improved performance

 Quality Management – Reduces defect, rework and scrap.

 Improving Productivity
 Develop Productivity Measures. We cam manage only what we can measure

 Look for overall system productivity and remove any bottle necks

 Develop methods for improving productivity – Innovate, Ideate and

Benchmark

 Establish reasonable goals for improvement

 Get Management’s buy-in

 Measure improvement and publicize them

 Class Work
Problem 1

Compute the multifactor productivity measure for an eight-hour day in which

the usable output was 300 units, produced by three workers who used 600
pounds of materials. Workers have an hourly wage of $20 and the material
cost is $1 per pound. Overhead is 1.5 times labor cost.
 Class Work
Problem 2

A catering company prepared and served 300 meals at an anniversary

celebration last week using eight workers. Six out of them prepared and
served 240 meals at a wedding reception the previous week.

a) For which event the labor productivity was higher? Explain.

b) What are some possible reasons for productivity difference?

 Class Work
Problem 3
A company that makes shopping carts for supermarkets and other stores recently purchased some new
equipment that reduces the labor content of the jobs needed to produce the shopping carts. Prior to
buying the new equipment, the company used five workers, who produced an average of 80 carts per
hour. Workers receive $10 per hour, and machine cost was $40 per hour. With the new equipment, it
was possible to transfer one of the workers to another department, and equipment cost increased by
$10 per hour while output increased by four carts per hour.
• a. Compute labor productivity before and after buying the new equipment. Use carts per worker
per hour as the measure of labor productivity.
• b. Compute the multifactor productivity before and after buying the new equipment. Use carts per
dollar cost (labor plus equipment) as the measure.