Chapter One

NATURE OF OPERATION MA
NAGEMEN T
 NATURE OF OPERATION MANAGEMENT

Business organizations; regardless of their nature, typically

have three basic functional areas; finance, marketing, and
operations.

Figure 1.1 The three basic functions of business organizations

 Cont’d
 Finance is responsible for securing 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 are responsible for producing the goods or providing the

services offered by the organization.

 Other business functions such as purchasing, human resources, and

engineering support these three major functions.
 What is Operations Management?

Operations management is the set of activities that

creates goods and services through the transformation of inputs
into outputs.

Activities creating goods and services take place in all

organizations (firms), the production activities that create goods
are usually quite obvious.

In them, we can see the creation of a tangible product such as

cement or cloth.
 Transformation Process
 Operation is often defined as a transformation process of
inputs into outputs (goods and services).

 Various inputs such as material, machines, labor, management,

and information are used to create goods or services using one
or more transformation processes (e.g., storing, transporting,
and cutting).
Transformation Process
 Components of transformation model
1. Inputs
 Some inputs are used up in the process of creation of goods
and services, while others play a part in the creation
process but are not used up. To distinguish between these
inputs resources, usually classified as:

 Transformed resources for example material,

information

 Transforming resource example staffs, land, building,

machines, and equipment's
2. Out puts
 Output is goods and services resulting from the
transformation process.
 In these OM is responsible for minimizing wastes, protecting
the health and safety of the employees and ethical behavior
in relation to social impact of transformation process.
 Components of transformation model

3. Transformation process
 Is any activity or group of activities that takes one or more
inputs and transform and add values to them and provides
Outputs for customers and clients.
 Transformation process includes Change in physical
characteristics of materials, Change in location of
materials, information, and Customers.
4. Feed back
 Information used to control the operation process by
adjusting the inputs and transformation process that are
used to achieve desired out comes.
 It can come from both internal and external sources
 The Role of Operations Management
 The business function that plan, organizes, coordinates and
controls the resource needed to produce a company’s goods and
service.
 In general, OM is responsible for orchestrating all the resources
needed to produce the final product and service. This include
 Designing the product or service
 Deciding what resources are needed
 Arranging schedules, equipment, and other facilities
 Managing inventory
 Controlling quality
 Designing jobs to make sub products
 Designing work methods
 Manufacturing Operations and Service Operations

 Operations in an organization can be categorized into

manufacturing operations and service operations.

 Manufacturing operations: converts inputs like materials,

labor & capital into some tangible outputs.

 The objective of each process is to change the shape or

physical characteristics of the raw-materials or inputs.

 Service operations: Non-manufacturing/service operations

are also transform a set of inputs into a set of outputs, but the
outputs are intangible.
 Differences between manufacturing and service
operations

 Following characteristics can be considered for distinguishing

manufacturing operations with service operations:

Characteristic Manufacturing Service

The nature of Output Tangible Intangible

Degree of Consumer contact Low High

Nature of work Capital intensive Labor intensive

Uniformity of output High Low
Difficulty of quality assurance Low High

Measurement of performance Easy Difficult

 Operations Decision Making

 Operations managers are not gamblers but, they are decision

makers.

 To achieve the goals of their organizations, operations

managers must understand how decisions are made and know
which decision-making tools to use.

 Knowing how these tools are used in the decision-making

process is an important and necessary part of the study of
operations management.
 Operation Decision Making Approaches

 Decision Making without probabilities:

 Decision making approaches:

1. Maximax (Optimist)
 The maximax looks at the best that could happen under each
action and then chooses the action with the largest value.
Maximize the maximum payoffs (best of best)
Alternatives States of nature / Outcomes Best
Growing Stable Declining
A 5,000 6,000 500 6,000
B 8,000 3,500 -1,500 8,000
C 7,500 5,000 -1000 7,500
Decision: invest in Project “B”
 Operation Decision Making Approaches
2. Maximin (Conservative/Pessimist approach)
The maximin person looks at the worst that could happen under
each action and then choose the action with the largest payoff.
Maximize the minimum payoffs (Best of Worst)
Alternatives States of nature / Outcomes Worst
Growing Stable Declining
A 5,000 6,000 500 500
B 8,000 3,500 -1,500 -1,500
C 6,000 5,000 -1,000 -1,000

Decision: invest in Project “A”

 Operation Decision Making Approaches

3. Minimax (Opportunist)
 Minimax decision making is based on opportunistic loss. They
are the kind that look back after the state of nature has
occurred.

Minimize the Maximum Regret

Alternatives States of nature / Outcomes
Growing Stable Declining
A 8,000-5,000 6,000-6,000 500-500
B 8,000-8,000 6,000-3,500 500-(-1,500)
C 8,000-6,000 6,000-5,000 500-(-1,000)
Operation Decision Making Approaches

Minimax Regret Table

Alternatives States of nature / Outcomes Maximum
Stable Declining
A 3,000 0 0 3,000
B 0 2,500 2,000 2,500
C 2,000 1,000 1,500 2,000

Decision: invest in Project “C”

 Productivity Measurement
 Productivity is the ratio of outputs (goods and services) divided by the
inputs (resources, such as labor and capital).
 The operations manager’s job is to enhance (improve) this ratio of
outputs to inputs.
 Improving productivity means improving efficiency.
 This improvement can be achieved in two ways:
 A reduction in inputs while output remains constant, or
 An increase in output while inputs remain constant.
 Productivity can be improved by:
(a) Controlling inputs,
(b) Improving process so that the same input yields higher output, &
(c) By improvement of technology.
 Productivity can be measured at firm level, at industry level, at national
level and at international level.
Productivity Measurement
Productivity Measurement
 END OF THE
FIRST CHAPTER!!