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INTRODUCTION TO
OPERATIONS MANAGEMENT
Dr. Navneet Bhatt
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What are Operations?
The aspects of business organization that is
responsible for producing goods and services
A function or system that
transforms inputs into outputs of
greater value
OPERATIONS MANAGEMENT
DEALS WITH:
The design and management of:
Products
Processes
Services
Supply Chains
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What Is Operations
Management?
Production is the creation of goods and
services
Operations management (OM) is the set of activities
that create value in the form of goods and services by
transforming inputs into outputs
The business function responsible for planning,
coordinating and controlling resources needed to
produce products and services for a company.
THE TRANSFORMATION PROCESS
Inputs Value-Added Outputs
Land, People, Transformation/Conversion Goods
Labor, Process and
capital, services
management,
Material
Measurement Measurement
and Feedback and Feedback
Control
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Why Study OM?
1. OM is an integrative body of knowledge, whose skills
are needed in industries as diverse as health care,
education, telecommunication, hospitality, food,
service, banking, consulting and manufacturing.
2. OM is one of three major functions of any organization,
and its integrally related to all other business functions
3. To know how goods and services are produced
4. To understand what operations managers do
ORGANIZING TO PRODUCE GOODS AND
SERVICES
Essential functions:
1. Marketing – generates demand
2. Production/operations – creates the product
3. Finance/accounting – tracks how well the organization is
doing, pays bills, collects the money
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ORGANIZATIONAL CHARTS
Figure 1.1
ORGANIZATIONAL CHARTS
Figure 1.1
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ORGANIZATIONAL CHARTS
Figure 1.1
QUESTION
Figure 1.1 outlines the operations, finance/accounting, and marketing functions of
three organizations. Prepare a chart similar to Figure 1.1 outlining the same
function (for operations) for one of the following:
a newspaper
a drugstore
a retail store
a college library
a college event
a summer camp
a small costume-jewelry factory
any other
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EXAMPLE
Newspaper
Operations Finance Marketing
• Editorial department • Accounting department • Advertising department
• IT department
• Printing department
• Store department
CASE: WHY OM YIELDS THE GREATEST
IMPROVEMENT IN CONTRIBUTION
Fisher Technologies is a small firm that must double its dollar
contribution to fixed cost and profit in order to be profitable enough to
purchase the next generation of production equipment. Management
has determined that if the firm fails to increase contribution, its bank will
not make the loan and the equipment cannot be purchased. If the firm
cannot purchase the equipment, the limitations of the old equipment
will force Fisher to go out of business and, in doing so, put its employees
out of work and discontinue producing goods and services for its
customers.
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CASE (CONT.)
Table 1.1 shows a simple profit-and-loss statement
CURRENT Three strategic options (marketing, finance/accounting, and
Sales $100,000 operations) are available for the firm.
• The first option is a marketing option , where excellent marketing
Cost of goods –80,000 management may increase sales by 50%.
• The second option is a finance/accounting option , where finance
Gross margin 20,000
costs are cut in half through good financial management.
Finance costs –6,000 • The third option is an OM option , where management reduces
production costs by 20%
Subtotal 14,000
Taxes at 25% –3,500
Which option yields the greatest improvement in contribution?
Contribution $ 10,500
OPTIONS FOR INCREASING CONTRIBUTION
TABLE 1.1
FINANCE
MARKETING /ACCOUNTING
OPTION OPTION OM OPTION
REDUCE REDUCE
INCREASE SALES FINANCE COSTS PRODUCTION
CURRENT REVENUE 50% 50% COSTS 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of goods –80,000 –120,000 –80,000 –64,000
Gross margin 20,000 30,000 20,000 36,000
Finance costs –6,000 –6,000 –3,000 –6,000
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% –3,500 –6,000 –4,200 –7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500
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OBJECTIVES OF OPERATIONS MANAGEMENT
Minimising Achieving Increasing
Improving
Operating Optimal Capacity Customer
Quality
Expenses Utilisation Satisfaction
Reducing waste Efficient planning Conducting quality Providing excellent
Improving process and scheduling of audit customer service
efficiency production Implementing Offering a good product
Negotiating better Effective inventory quality control or service
prices with management procedures Keeping promises
suppliers Use of technology Training employees Resolving problems
quickly
HERITAGE OF OPERATIONS MANAGEMENT
1800 Eli Whitney Interchangeable Parts/ Standardized
Parts
Scientific Management
1881 Frederick W.
Taylor
1913 Henry Ford Assembly line
Charles Sorensen
1924 Walter Shewhart Statistical Quality Control (SQC)
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SIGNIFICANT EVENTS IN OM
SCOPE OF OPERATIONS MANAGEMENT
Design of goods and services
Managing quality
Process strategy
Location strategy
Layout strategy
Supply-chain management
Inventory management
Production planning & control
Maintenance
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4 M'S OF OPERATIONS
The 4 M’s of Operations Managements:
Manpower
Manpower talks about human labor force involved in the manufacture of
products. It is measured. as the most serious and main factor of production.
Machine
The basic tools to produce goods or to generate services. Selection of an
appropriate machine not only enhance efficiency but also saves time &
increase revenue
Method
A set of procedure and instructions. Plans, Policies, Procedures, and Data
Material
It is a basic ingredient in management be it a service a product industry.
Most of the industries locate them self nearby to the availability of material.
PRODUCTIVITY CHALLENGE
Productivity is the ratio of outputs (goods and
services) divided by the inputs (resources
such as labor and capital)
The objective is to improve productivity!
Important Note!
Production is a measure of output only
and not a measure of efficiency
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PRODUCTIVITY
Units produced
Productivity =
Input used
▶ Measure of process improvement
▶ Represents output relative to input
▶ Only through productivity increases
can our standard of living improve
IMPROVING PRODUCTIVITY AT STARBUCKS
A team of 10 analysts
continually look for ways
to save time. Some
improvements:
Stop requiring signatures Saved 8 seconds
on credit card purchases per transaction
under $25
Change the size of the ice Saved 14 seconds
scoop per drink
New espresso machines Saved 12 seconds
per shot
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IMPROVING PRODUCTIVITY AT STARBUCKS
A team of 10 analysts
continually look for ways
to save time. Some
improvements:
Operations improvements have
helped StarbucksSaved
Stop requiring signatures increase yearly
8 seconds
revenue per outlet
on credit card purchases bytransaction
per $250,000 to
under $25 $1,000,000 in six years.
Change the size Productivity
of the ice has improved
Saved 14by 27%, or
seconds
scoop about 4.5% per year.
per drink
New espresso machines Saved 12 seconds
per shot
PRODUCTIVITY CALCULATIONS
Labor Productivity
Units produced
Productivity =
Labor-hours used
1,000
= = 4 units/labor-hour
250
One resource input single-factor productivity
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MULTI-FACTOR PRODUCTIVITY
Output
Productivity =
Labor + Material + Energy +
Capital + Miscellaneous
► Also known as total factor productivity
► Inputs are often expressed in dollars
Multiple resource inputs multi-factor productivity
EXAMPLE
COLLINS TITLE INSURANCE LTD.
Collins Title Insurance Ltd. wants to evaluate its labor and multifactor
productivity with a new computerized title-search system.
The company has a staff of four, 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 new computerized title-search system will allow the processing of 14
titles per day.
Although the staff, their work hours, and pay are the same, the overhead
expenses are now $800 per day.
Compute single & multifactor productivity and the increase.
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COLLINS TITLE PRODUCTIVITY
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old labor 8 titles/day
productivity =
32 labor-hrs
COLLINS TITLE PRODUCTIVITY
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old labor 8 titles/day
productivity = = .25 titles/labor-hr
32 labor-hrs
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COLLINS TITLE PRODUCTIVITY
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
Old labor 8 titles/day
productivity = = .25 titles/labor-hr
32 labor-hrs
New labor 14 titles/day
productivity =
32 labor-hrs
COLLINS TITLE PRODUCTIVITY
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
Old labor 8 titles/day
productivity = = .25 titles/labor-hr
32 labor-hrs
New labor 14 titles/day
productivity = = .4375 titles/labor-hr
32 labor-hrs
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COLLINS TITLE PRODUCTIVITY
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
Old multifactor 8 titles/day
productivity =
$640 + 400
COLLINS TITLE PRODUCTIVITY
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
Old multifactor 8 titles/day
productivity = = .0077 titles/dollar
$640 + 400
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COLLINS TITLE PRODUCTIVITY
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
Old multifactor 8 titles/day
productivity = = .0077 titles/dollar
$640 + 400
New multifactor 14 titles/day
=
productivity $640 + 800
COLLINS TITLE PRODUCTIVITY
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
Old multifactor 8 titles/day
productivity = = .0077 titles/dollar
$640 + 400
New multifactor 14 titles/day
productivity = = .0097 titles/dollar
$640 + 800
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PRODUCTIVITY GROWTH RATE IS:
The productivity growth rate is:
𝑃 −𝑃
𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒 =
𝑃
𝑃 is the productivity at a given time
𝑃 is the productivity of an earlier period
Collins Title Productivity:
Labor productivity has increased from .25 to .4375.
. .
The change is = 0.75, or a 75% increase in labor productivity.
.
Multifactor productivity has increased from .0077 to .0097.
(. .
This change is = 0.26, or a 26% increase in multifactor productivity.
.
QUESTION
Productivity can be measured in a variety of ways, such as by labor, capital,
energy, material usage, and so on. At Modern Lumber, Inc., Art Binley, president
and producer of apple crates sold to growers, has been able, with his current
equipment, to produce 240 crates per 100 logs.
He currently purchases100 logs per day, and each log requires 3 labor-hours to
process.
He believes that he can hire a professional buyer who can buy a better-quality log
at the same cost.
If this is the case, he can increase his production to 260 crates per 100 logs. His
labor-hours will increase by 8 hours per day.
What will be the impact on productivity (measured in crates per labor-hour) if the
buyer is hired?
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QUESTION
Art Binley has decided to look at his productivity from a multifactor (total factor
productivity) perspective. To do so, he has determined his labor, capital, energy,
and material usage and decided to use dollars as the common denominator.
His total labor-hours are now 300 per day and will increase to 308 per day.
His capital and energy costs will remain constant at $350 and $150 per day,
respectively.
Material costs for the 100 logs per day are $1,000 and will remain the same.
Because he pays an average of $10 per hour (with fringes), determines the
productivity and it’s increase.
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