Operation Management

CHAPTER ONE
NATURE OF OPERATIONS MANAGEMENT
Introduction
Production is the creation of goods and services. The field of production management in the
past focused almost exclusively on manufacturing management, with a heavy emphasis on the
methods and techniques used in operating a factory. In recent years, the scope of production
management has broadened considerably. Production concepts and techniques are applied to a
wide range of activities and situations outside manufacturing; that is, in services such as health
care, food service, recreation, banking, hotel management, retail sales, education,
transportation, and government. This broadened scope has given the field the name
production/operations management, or more simply, operations management, a term that more
closely reflects the diverse nature of activities to which its concepts and techniques are applied.
We can use an airline company to illustrate a production/operations system. The system consists
of the airplanes, airport facilities, and maintenance facilities, sometimes spread out over a wide
territory. Most of the activities performed by management and employees fall into the realm of
operations management: 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 the 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.) 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. Location of 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. At first glance, it may appear that service
operations don’t have much in common with manufacturing operations. However, a unifying
feature of these operations is that both can be viewed as transformation processes. In
manufacturing, inputs of raw materials, energy, labor, and capital are transformed into finished
goods. In service operations, these same types of inputs are transformed into service outputs.
Managing the transformation process in an efficient and effective manner is the task of the
operations manager in any type of organization.

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OBJECTIVES

After studying this chapter, you should be able to:

 define the term production/operations management;
 describe the operations function and the nature of the operations manager’s job;
 describe the four major decision areas in operations; and
 Know the new operations themes; and
 Explain why we have to study operations management;
1.2. 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.
In organizations that do not create physical products, the production function may be less
obvious. An example is the transformation that takes place at a bank, hospital, airline, or
college. Regardless of whether the end product is good or service the production activities that
go on in the organization are often referred to as operations or operations management.
Operations are responsible for supplying the product or service of the organization. Operations
managers make decisions regarding the operations function and its connection with other
functions.
Operations management is the study of decision-making in the operations function.
Three points in this definition deserve emphasis:
1. Decisions- Decision-making is an important element of operations management.
There are four major decision responsibilities in operations management.
 Process
 Quality
 Capacity
 Inventory
2. Function- Operations is a major function in any organization, along with marketing
and finance.
- The operations function is responsible for supplying or producing products and
services for the business.

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- In a manufacturing company, the operations function is typically called the

manufacturing or production department.
- In service organizations, the operations function is called the operations
department.
- In general, the term “operations” refers to the function that produces goods or
services.
3. System- The transformation systems produce goods and services. Using the
systems view, we consider operations managers as managers of the conversion
process in the firm.
1.3. Operations Decisions
Operations have responsibility for four major decision areas: process, quality, capacity and
inventory.
1. Process- Decisions in this category determine the physical process or facility used
to produce the product or service. The decisions include the type of equipment and
technology, process flows, layout of the facility and all other aspects of the physical
plant or service facility. Many of these process decisions are long range in nature
and cannot be easily reversed, particularly when heavy capital investment is needed.
2. Quality- The operations function is responsible for the quality of goods and services
produced. Quality decisions must insure that quality is designed and built into the
product in all stages of operations: standards must be set, people trained, and the
product or service inspected for quality to result. Operations has a particular
responsibility for producing products and services that meet the defined
specifications and standards.
3. Capacity- Capacity decisions are aimed at providing the right amount of capacity
at the right place at the right time. Long-range capacity is determined by the size of
the physical facilities built by the firm and its suppliers. In the short run, capacity
can sometimes be augment by subcontracting, extra shifts, or rental of space.
Capacity planning, however, determines not only the size of facilities but also the
proper number of people in operations. The available capacity must be allocated to
specific tasks and jobs in operations by scheduling people, equipment, and facilities.
4. Inventory- Inventory management decisions in operations decisions determine
what to order, how much to order, and when to order. Inventory control systems are
used to manage materials from purchasing through raw materials, work in process,

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and finished goods inventories. Inventory managers manage the flow of materials
within the firm and within the supply chain.
Careful attention to the four decision areas is the key to management of successful
operations. If each of the four decisions areas is functioning properly and well integrated
with the other areas and functions of the firm, the operations function can be considered
well managed.
Activity 1

Answer the following questions before continuing to the next section.

1. Define operations/production management.
_____________________________________________________________________
_____________________________________________________________________
2. Outline the major decision responsibilities in operations management.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
3. Explain how the operations function produces quality goods and services.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
1.4 Historical Development of OM
Operations management will now be now set within its rich historical context. Operations
systems have always been in existence, although in different configurations to what one might
expect to find today.

 Industrial revolution Late 1700s

 Scientific management Early 1900s
 Human relations movement 1930s-60s
 Management science 1940s-60s
 Computer age 1960s
 Environmental Issues 1970s
 JIT & TQM* 1980s

*JIT= Just in Time, TQM= Total Quality Management

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 Reengineering 1990s
 Global competition 1980s
 Flexibility 1990s
 Time-Based Competition 1990s
 Supply chain Management 1990s
 Electronic Commerce 2000s
 Outsourcing & flattening of world 2000s

For long-run success, companies must place much importance on their operations

1.5. Operations as a Productive System

Operations have been defined as transformation system that converts inputs into outputs. Inputs
to the system include energy, materials, labor, capital and information as shown below. Process
technology is then used to convert inputs into outputs. The process technology is the methods,
procedures, and equipment used to transform materials or inputs into products or services.

Environment
Operations Management

Inputs Outputs
Energy
Materials Goods or Services
Labour Transformation
Capital
(conversion)
Information
process

Feedback information for

control of process inputs
and process technology
Figure 1.1 An operation as a productive system

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 The types of inputs used will vary from one industry to another e.g., operation in
automobile manufacturing will differ from service industry.
 Feedback information is used to control the process technology or inputs.
 Operations managers use feedback information to continually adjust the mix of inputs
and technology needed to achieve desired outputs.

The operations system is in constant interaction with its environment; internal and external
environment.
 The internal environment may change policies, resource forecasts or goals.
 The external environment may change in terms of legal, political, social, economic, or
technical condition thereby causing a corresponding change in the operations inputs,
outputs, or transformation system. For example, a change in economic conditions may
cause operations managers to revise their demand forecast and as a result hire more
people and expand capacity.
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.
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.
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 out puts for customers and clients. Transformation process includes

• Change in physical characteristics of materials

• Change in location of materials, information, and customers
Example Airline service, information exchange and etc.

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Example (Transformation System)

Food
processor Inputs Processing Output
 Raw vegetables  Cleaning  Canned vegetables
 Metal sheets  Making cans
 Water  Cutting
 Energy  Cooking
 Labor  Packing
 Building  Labeling
 Equipment

Hospital Inputs Processing Output

 Doctors, nurses  Examination  Healthy patients
 Hospital  Surgery
 Medical supplies  Monitoring
 Equipment  Medication
 Laboratories  Therapy

Distinction between Manufacturers and Service Organizations

Manufacturers: Services:
 Tangible product •Intangible product
 Product is inventoried •Product cannot be inventoried
 Low customer contact •High customer contact
 Longer response time •Short response time

 Capital intensive •labor intensive

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1.6 New Operations Themes

1. Services and Manufacturing

 Services and manufacturing are highly interrelated in today’s economy. Services
such as banking, insurance consulting, telecommunications, and transportation
are critical for support of manufacturing, and likewise, manufactured products
support all service industries.
 The need to treat both manufacturing and service is a critical theme in
operations, because of the pervasive and intertwined nature of both
manufacturing and service.

2. Customer Directed Operations

Every operation should be externally directed to meet customer requirements. This
notion is consistent with the marketing concept taught in marketing courses and is
now being integrated into operations courses as well.
 A key concept is that efficiency need not be sacrificed in the pursuit of meeting
customer needs. Rather, the customer can be a powerful driver for reducing
waste and improving efficiency of all processes.

3. Continuous Improvement
Continuous improvement is the key to remaining competitive in today’s business
world.
 Operations can no longer be designed to meet fixed standards without emphasis
on future improvements as customer needs change and better ideas are
developed.
 In some cases, process reengineering ―the radical redesign of processes― is
needed when continuous incremental improvement is not sufficient. Even then,
continuous improvement will be needed after processes are reengineered.

4. Integration of Operations with other Functions

 Teaching of business functions has been too isolated in the past.
 The best operations are now seeking increased integration through use of cross-
functional teams, information systems, management coordination, rotation of
employees, and other methods of integration across functions.
 Integration is critical as a way of getting everyone pulling in the same direction.
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5. Environmental Concerns
Everyone in society must help protect the environment including those in
operations. Operations have come a long way in reducing pollution of the
environment, but there is still a long way to go.

6. Globalization of Operations
 Strategies for operations should be formulated with global effects in mind and
not only consider narrow national interests.
 Facility location should be considered in view of its global implications.
1.6. Why Study Operations Management (OM)
1. Operations management (OM) is one of the three major functions of any organization,
and it is integrally related to all the other business functions. All organizations market
(sell), finance (account), and produce (operate), and it is important to know how the
operations management segment functions. Therefore, we study how people organize
themselves for productive enterprise.
2. We study operations management 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.
3. We study operations management to understand what operations managers do. By
understanding what these managers do, you can develop the skills necessary to become
such a manager.
4. We study operations management because it is such a costly part of an organization. A
large percentage of the revenue of most firms is spent in the operations management
function. Indeed, operations management provides a major opportunity for an
organization to improve its profitability and enhance its service to society. The
following example considers how a firm might increase its profitability via the
production function.
1.6.1 The role of OM

The business function that plan, organizes, coordinates and controls the resource needed to
produce a company’s goods and service. OM involves managing people, equipment,
technology, information and many other resources. To transform a company’s input into output
(finished products) In general, OM is responsible for orchestrating all the resource needed to
produce the final product and service. This includes

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 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
1.7. The Productivity Challenge
 The creation of goods and service requires changing resources into goods and services.
The more efficiently we make this change the more productive we are.
 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.

1.7.1 Productivity Measurement

Productivity can be measured at firm level, at industry level, at national level and at
international level. 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 = Units Produced
Input used

For example, if units produced =1000 and labor hours used is 250, then:

Productivity = Units produced = 1000 = 4 units per labor hour

Labor-hours used 250

 The use of just one resource input to measure productivity as shown above, is known as
single factor productivity.

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 However, a broader view of productivity is multifactor productivity, which includes all

inputs (e.g., labor, material, energy, capital).
 Multifactor productivity is also known as total factor productivity. Multifactor
productivity is calculated by combining the input units, as shown below:

Output
Productivity= Labor + Material + Energy + Capital + Miscellaneous

Example

Collins Title Company has a staff of 4 each working 8 hours per day (for a payroll cost of $640
/day) and overhead expenses of $400 per day. Collins processes and closes on 8 titles each day.
The company recently purchased a computerized title-search system that will allow the
processing of 14 titles per day. Although the staff, their work hours, and pay will be the same,
the overhead expenses are now $800 per day.

- Labor productivity with the old system = 8 titles per day = 0.25 titles per labor hour
32 labor-hours

- Labor productivity with the new system = 14 titles per day = 0.4375 titles
32 labor-hours per labor-hour

- Multifactor productivity with the old system = 8 titles per day = 0.0077 titles
640+400 per dollar

- Multifactor productivity with the new system= 14 titles per day = 0.0097 titles
640+800 per dollar

 Labor productivity has increased from 0.25 to 0.4375. The change is 0.43750.25=1.75
or a 75% increase in labor productivity.
 Multifactor productivity has increased from 0.0077 to 0.0097. This change is
0.00970.0077=1.259, or a 25.9% increase in multifactor productivity.

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