MODULE 2

LEARNING OUTCOMES

Having completed this module you will be able to:

 Define operations management

 Discuss the relationship between operations, productivity and
competitiveness
 Identify the characteristics of an operations manager
 List the nine key strategy areas
 Explain the role of quality management in operations
 Explain inventory management techniques

INTRODUCTION

Markets demands Competitive Strategies

Every organisation attempts to be successful in the market place by

obtaining an acceptable market share through competitive strategies. In
order to obtain and then to hold a competitive edge or advantage over
competitors, organisations must produce goods or services that are
competitive in their respective markets.

Role of Operations Management

Operations management (OM) involves all the activities required to

transform a product idea into a finished product. Due to the complexity of
organising all the activities in an organisation, it is crucial for operations
management to ensure due diligence in structuring operations. Due diligence
includes the necessary actions taken by directors or managers to mitigate
potential risks and [Link] managers are also responsible for
planning and controlling the systems that produce goods and services. In
essence, they manage the process that converts inputs into outputs.

Operations Management: A Core Activity

The competitive advantage adopted by the management of an organisation
will be determined by the organisation's overall strategic plan and by its
strategic objectives. First, the marketing and sales department must draw up
their specific strategies, then the operations management strategy can be
drawn up to support both the organisation's overall strategic direction and
that of the marketing/sales [Link] success of an organisation is
dependent then on the organisation adopting efficient and effective
operations with respect to the manufacturing of their products or the
provision of their services. The planning and control of the operations
management function of organisations is, therefore, crucial to the success of
any organisation. Operations Management is seen, in fact, as one of the core
activities of any organisation.

UNDERSTAND OPERATIONS MANAGEMENT

What does operations management Involve?

Operations Management (OM) involves the designing, planning, organising,

leading and controlling functions involved in the production of a good or the
provision of a [Link], OM concerns itself with the processes
involved in converting and transforming inputs (material resources, human
resources, capital resources, and information resources together with
entrepreneurial resources) into outputs in the form of goods or services that
add value to the [Link], OM involves the development and
implementation of an effective operating system. The development and
implementation of this effective operating system is applicable to each and
every part of the organisation.

Inputs, Transformation Processes, Output

Such an operating system consists of three basic components:‣ Inputs or

resources (natural or material resources, human resources, technological
resources and entrepreneurial resources) which are purchased by the
organisation‣ Processes which involve the conversion or transformation of
these resources into products or services (e.g. using project, batch or
continuous processes)‣ Output and then feedback to the organisation from
its customers

The Critical Decision

Such a conversion or transforming process involves managers in making

many critical decisions. These decisions concern the initial design of the
product or service, the equipment and assets required for the production
process, the skills needed by employees during the transformation process,
employee remuneration details, the location of organisational operations,
organisational capacity, and internal facility layout. All of these decisions
must be made to support the strategic direction of the organisation.

Distinction Between Manufacturing and Service Organisations

Operations Management is a crucial function of both manufacturing and

service organisations. Therefore, one must understand the difference
between the two to comprehend the role of operations.

Manufacturing organisations produce tangible physical products or goods.

Service Organisations produce a non physical output and involves the

customer in the production process.

A manufacturing organisation is defined as one that produces an easily

identifiable, tangible physical product or good. Whereas, a service
organisation is one which provides or produces a non-physical output that
can not be kept as inventory and involves the customer in the actual
production process.

Operational Essentials: Manufacturing and Services

Essential operational differences

A manufacturing organisation is defined as one that produces an easily
identifiable, tangible physical product or good. Whereas, a service
organisation is one which provides or produces a non-physical output that
can not be kept as inventory and involves the customer in the actual
production process. The essential differences between manufacturing and
service organisations (which must be considered by management when
designing their operations management system) include the facts that:‣ The
customer of a service organisation is directly involved in the production
process of the service being purchased‣ The end products of a
manufacturing organisation may be stored or held as inventory

Similar Operational Issues

However, both types of organisations face similar operational problems:

 Both must obtain suitable and sufficient materials to be used in the

production process
 Both must determine suitable scheduling tasks
 Both should be concerned with both the quality of their end products
and with their productivity levels

Role of an Operations Manager

The role of the operations manager involves, amongst other roles, decision-
making with long, mid and short-term consequences. These decisions will
concern the following:

 The initial design of the product or service

 The equipment and assets required for the production process
 The skills needed by employees during the transformation process
 Employee remuneration details
 The location of organisational operations, organisational capacity, and
internal facility layout

All of these decisions must be made to support the strategic direction of the
organisation and will not be made in isolation to the decisions made by other
senior managers.
Understand the Role of an Operations Manager

In order to understand the role of Operations Managers you might like to

obtain a number of advertisements for the position of Operations Manager in
large-scale organisations. What do these advertisements say about the job
specification and job description of the Operations Managers?

RELATIONSHIP BETWEEN OPERATIONS, PRODUCTIVITY, AND

COMPETITIVENESS

Every organisation attempts to improve its productivity i.e. its rate of

production output per unit of input in a given time period. Increasing
productivity produces a more competitive cost structure for the organisation
and enables the organisation to offer more competitive prices to its
customers.

There are three types of productivity - technological productivity, employee

productivity and managerial productivity.

Technological productivity

Increased technological productivity refers to the use of more efficient

equipment, robots, computers and other technologies to increase output.
Organisations in their attempt to achieve and then maintain competitive
edge must remain at the forefront of technological advances.

These advances include employing flexible manufacturing systems -

manufacturing systems that use computers to control machines and the
production process automatically so that different types of parts or product
configurations can be handled on the same production line. With a flexible
manufacturing system, a single line can be readily readapted to small
batches of different products based on computer instructions.

Examples of technologies
Examples of other technological advancements that organisations can adopt
to enhance their competitiveness include:

‣ CIM - Computer-integrated manufacturing is the computerised integration

of all major functions associated with the production of a product. CAD/CAM
forms the basis of CIM systems i.e. Computer-aided design (CAD) and
Computer-aided manufacturing (CAM).

‣ CAD enables engineers to develop new product designs in about half the
time required using traditional methods. Engineers can use the CAD system
to design the pattern layouts and then determine the manufacturing changes
needed to produce new sizes and styles, expected labour standards and bills
of materials.

‣ CAM is where the computer is harnessed to help guide and control the
manufacturing process.

Employee productivity

Increased employee productivity means having employees produce more

output in the same time period. This may be achieved by better training of
employees. Improved training could involve cross and multi-skilling, the re-
engineering of work practices, the introduction of participative management
styles, or the altering of remuneration levels or types.

Managerial productivity

Increased managerial productivity simply means that managers do a better

job of running the business. Management productivity improves when
managers emphasise quality over quantity, break down communication
barriers and empower employees using a participative decision-making
management style. Managers must learn to use reward systems, to use
management by objectives, to increase employee involvement, to better
utilise teamwork and to adopt other management techniques in order to
increase productivity.

Increases in productivity are, therefore, dependent upon both people and

operations variables and are a significant contributor to improved business
competitiveness.
OPERATIONS MANAGEMENT STRATEGIES

The operations management strategy adopted by an organisation must be

one that supports the successful implementation of the organisation's overall
strategic plan. This topic looks at how operations management strategies are
implemented to achieve both organisational efficiency and effectiveness.

Introduction

The development of efficient and effective operating systems for any

organisation are based on management drawing up suitable solutions for
following decisions

Strategic planning decisions

‣ Organisational capacity (How many products can be produced?)

‣ Location (Where are the products to be produced?)

‣ Process (Which production methods should be used?)

Tactical planning decisions

‣ Aggregate planning (What is the annual production plan for all products or
services to be produced?)

‣ Master scheduling (How many of each product will be produced in a

specific time period eg. monthly?)

‣ Materials requirement planning (What resources are needed to meet the

master schedule?)

The operations management strategies outlined in this topic list specific tools
organisations use to reach their set objectives. Let's begin with capacity
planning.
Capacity planning

Capacity planning is concerned with determining the level of human and

other resources that will be necessary to meet the production targets of the
organisation. (Capacity planning is contingent upon the organisation having
forecast the future demand for the goods or services produced by that
organisation.)

It is concerned with establishing the maximum output capability of an

organisation in a given time period. There are several ways that
organisations can increase capacity. These include:

▪ Creating additional shifts and hiring more employees, or outsourcing to

contractors▪ Getting current staff to work overtime▪ Outsourcing to other
organisations▪ Increasing plant and machinery▪ Building up inventory and
taking back orders from customers

Facilities location planning

Facilities encompass the land, buildings, plant and equipment, and other
major physical inputs that substantially determine productive capacity and
involve significant capital investment. Facilities issues confronting managers
focus mainly on expansion and contraction decisions, facilities location
(single facility, multiple factories and warehouses, competitive retail outlets
or emergency services) and facilities layout.

The preferred location of the facility will be determined by the availability of:

▪ Employees with specific skills▪ Government zoning regulations▪ Employee

costs▪ Environmental regulations▪ Utility costs and proximity to suppliers
and markets
Process planning

Processs planning is determined by the nature of the service to be provided

and the available space.

Once a product or service has been designed, the organisation must plan for
its actual production.

This involves assessing the production methods currently available (e.g.

project, batch or continuous) and determining which of these is appropriate
for the organisation.

▪ This decision will be based on the nature and number of goods or services
to be produced, the space available and the activities that need to be carried
out by employees in the actual production process.▪ This will also involve
determining the layout of the organisation's facilities and how they will be
used in the production process.

Facilities layout plannin

Facilities layout may be based on a process, product, cellular or fixed position

production process.

Process layout

A process layout is one in which all of the equipment that performs a similar
process, function or task is grouped together. The advantage of the process
layout is that it has the potential for economies of scale and reduced costs.
The drawback to the process layout is that the actual path or track that a
product or service takes may become too long and complicated. A product
may need different processes performed on it and thus must travel through
many different areas before production is complete.

↑ In a process layout equipment for specific tasks is grouped together

Product layout

A product layout is one in which equipment and tasks are arranged according
to the progressive steps involved in producing a single product. Many fast
food restaurants use the product layout with activities associated with
producing the goods arranged in sequence. The product layout is regarded
as efficient when the organisation produces large volumes of identical items.
This duplication of functions can be economical only if the volume of
products produced is high enough to keep each area working on the
specialised products.

← In a product layout tasks are arranged in progressive steps

Cell unit layout

This is layout is based on group-technology principles in which equipment

dedicated to sequences of operations is grouped into small unit areas. These
units provide efficiencies in material and equipment handling and in
inventory management. One advantage of the cell-unit layout is that the
employees work in units that facilitate teamwork and joint problem solving.
Staff flexibility is enhanced because one employee can operate all
equipment in the unit and travelling time between equipment is kept to a
minimum.

↑ Cell unit layouts facilitate teamwork and joint problem solving

Fixed position layout

The fixed-position layout is one in which the product remains in one location
and tasks and equipment are brought to it. It is used to produce a product or
service that is either very large or one of a kind. The product cannot be
moved from function to function or from process to process along an
assembly line. This layout is not good for high volume but is necessary for
large, bulky items and custom orders.
↑ In a fixed position layout the product remains in one location and tasks and
equipment are brought to it.

Aggregate Planning and Scheduling

Aggregate planning involves the overall planning of production activities and

the resources required for the production process for a specific time period
e.g. a year.

The plan will set out total stock levels, production targets and employee
requirements for that time period.

Master production schedule

The aggregate plan leads to the establishing of a master production schedule

(MPS).

This schedule establishes a production plan concerned with producing

specific products to meet the needs of customers and takes into account the
specific capacity requirements of the organisation over a designated time
period.

What does scheduling do?

It is concerned with establishing and implementing appropriate lead times

required to obtain the necessary materials and human resources to be used
in the production process and with delivery times to customers.

It is concerned with specifying both the type and quantity of each item that
needs to be produced in a given time frame; the production specifications to
be implemented to produce these products; and the employee and inventory
requirements for this level of production
Materials requirement planning

Materials requirement planning is involved in obtaining the required

resources to meet the master production schedule for each specific product
to be produced. A computerised system may be used to identify these
specific requirements.

▪ Material requirements planning (MRP) aims to optimise production planning

for finished goods. ▪ It accomplishes this by determining inventory
requirements for component parts and raw materials.▪ MRP ensures the
timely availability of materials and components, which minimises inventory
levels, reduces customer lead times, and enhances customer satisfaction. ▪
However, it requires accurate data, can be costly to implement, and
necessitates adherence to a strict production schedule.

Maintenance control

Maintenance control refers to the strategy of minimising the breakdown of

equipment so that minimal disruption to the production process occurs. This
maintenance may be proactive, reactive or random.

▪ A maintenance system can be conceptualised as a straightforward input-

output process. ▪ The inputs encompass manpower, broken machinery,
materials and replacement parts, tools, data, policies and processes, and
spare components. ▪ The output is operational, dependable, and
appropriately configured equipment that fulfils the plant's planned
operations. ▪ A set of activities, including planning, scheduling, execution,
and control, make the system functional. The maintenance system's
objectives guide the regulation. ▪ Availability of equipment, expenditures,
and quality are common goals that align with the organisation's objectives. ▪
Feedback and control are crucial components of this system, which can be
used to enhance system performance.

Evaluation of performance
Management must determine the KPI's (Key performance indicators) that will
be used to assess the performance of the operations management system
implemented by the organisation. These will include:

Operational costs

 An effective operations management system will not only involve

planning the operations but also controlling the costs associated with
these operations.
 These costs may be classified as either direct or indirect costs.
 Direct costs are those costs directly related to output and in direct
proportion to that output level e.g. supplies and employee costs.
 Indirect costs are those costs that are incurred irrespective of output
levels e.g. rent and other related occupancy costs.
 Management of organisations must pay particular attention to the
costs associated with the availability, purchase price and quality of its
resources.

Inventory management

A large portion of the operations manager's job thus consists of inventory

management. Inventory is defined as the goods that an organisation keeps
on hand for use in the production process - finished goods prior to delivery,
work in progress and raw materials.

These forms of inventory may be defined as follows:

Finished goods inventory

Finished goods inventory includes items that have passed through the entire
production process but have not yet been sold. This form of inventory is
expensive because the organisation has invested labour costs and other
related costs to make the finished product but as yet it has not been sold.

Work in progress inventory

Work-in-progress inventory includes the materials moving through the stages
of the production process that are not yet completed products.

Raw material inventory

Raw materials inventory includes the basic inputs to the organisation's

production process.

This form of inventory is the cheapest because the organisation has not yet
invested labour in its conversion or transformation.

Inventory management is vitally important to organisations because

inventory sitting idly on the factory floor or in the warehouse is, in fact,
costing the organisation money in terms of insurance, deterioraEconomic
ion, space, stocktaking costs, handling costs and tied-up capital. Current
inventory management information systems allow for close inventory control
but with the capacity to meet customer needs on demand. No excess
inventory is needed by an organisation if an efficient control system is
adopted.

Inventory management techniques

There are four important techniques of inventory management. These are:

▪ Economic order quantity (EOC)▪ Materials requirement planning(MRP)▪

Manufacturing planning and control (MPC) ▪ Just-in-time inventory planning
(JIT)

Economic Order Quantity

▪ Two basic decisions that can help minimise inventory are how much raw
material to order and when to order it from suppliers.▪ The economic order
quantity, is designed to minimise the sum of both ordering costs and of
holding costs.▪ Ordering costs are the costs associated with actually placing
the order such as administrative paperwork, delivery, receiving, and
inspection.▪ Holding costs are those costs associated with keeping the items
on hand such as storage, finance charges, and materials handling costs.

What does Economic order quantity indicate

The EOQ calculation indicates the order quantity size that will minimise
holding and ordering costs based on the organisation's use of inventory. The
EOQ formula includes ordering costs, holding costs and annual demand.

EOQ Formula

Where,

D = Annual demand for the product;

C = ordering costs per unit;

H = holding costs per unit as expressed by purchase price of the item times
the carrying costs of maintaining the inventory

The reorder point

The re-order point(ROP) for the EOQ is calculated as follows: ROP = D/Time

A few extra items of inventory called safety stock are used to ensure that the
organisation does not run short of stock. The EOQ formula works well when
inventory items are not dependent on one another and when demand and
lead-time are constant.

Materials required Planning

A more complicated inventory problems occurs with dependant demand
inventory

▪ The most common inventory control system used for handling dependent
inventory is materials requirement planning (MRP).▪ MRP is dependent
demand inventory planning and involves the implementation of a control
system that schedules the exact amount of all materials required to support
the desired end product. ▪ MRP is computer based and requires sophisticated
calculations to coordinate information on inventory location, bills of materials
(a listing of all components including partially assembled pieces and basic
parts that make up an end product), purchasing, production planning,
invoicing, and order entry specified in the master schedule.

Inventory levels are based on past consumption and are aimed at reducing
inventory costs and keeping the production line supplied with the materials
necessary to keep it running smoothly.

Manufacturing, planning and control

Manufacturing planning and control (MPC) systems enable the firm to move
materials through the operation and schedule so that the company satisfies
customer needs at a minimal cost e.g. MRP II and JIT.

MRP II - a technique for managing inventory; it is a computer-based

information system that integrates the production planning and control
activities of basic MRP systems with related financial, accounting, personnel,
engineering and marketing information.

▪ Material requirements planning (MRP) is a software tool utilised in

operations management to calculate the quantity of each component part
required for production based on sales forecasts and ordering lead times for
materials. ▪ The detailed sales forecast is transformed into a master
production schedule (MPS), which MRP subsequently expands into a
predicted demand for the necessary parts, informed by the bill of materials
for each item in the forecast. ▪ Essentially, a bill of materials enumerates the
various parts that constitute the final product. ▪ The primary function of MRP
is to determine the anticipated need for each part, based on the sales
forecast, and to place orders strategically so that every component arrives
precisely in time for production.

Just in time

Just in time printing of textbooks

Zero inventory system

Just-in-time (JIT) inventory planning is a system designed to reduce the level

of an organisation's inventory to zero. Sometimes these systems are referred
to as stockless systems or zero inventory systems.

Demand pull system

JIT is called a demand-pull system because each workstation produces its

product only when the next workstation says it is ready to receive more
input.

This is in contrast to the traditional batch-push system, in which parts are

made in large, supposedly efficient batches and pushed to the next
operation on a fixed schedule, where they sit until used.

Quality Management

Operations Managers are concerned with the quality of the output of their
operations system. This quality may be associated with the reliability of the
product or service, the conformity to regulations, the level of waste, the level
of after sales service provided, the design of the product, and the
consistency of delivery of the product or service.

Total quality management (TQM), also known as quality assurance,

encompasses all the measures a company takes to deliver products or
services that meet customers' expectations. TQM involves focusing on three
core principles:

▪ Customer Satisfaction: Ensuring that the customer is delighted with the

quality of the product or service.▪ Employee Involvement: Engaging
employees in the quality improvement process and empowering them to
make decisions.▪ Continuous Improvement: Striving for constant
enhancement of processes, products, and services.

Quality Benchmarking

Quality benchmarks may be achieved by using one or more of the following

strategies:

▪ Quality control (where the quality is monitored during the production or the
service provision process)▪ Quality assurance (where the organisation
achieves certification that is dependent upon them achieving specified levels
of quality in the actual production of the good or service)▪ Total quality
management (where the organisation applies both quality control and quality
assurance to their production or provision processes)

Statistical Process Control

What is STC?

One operations management technique for improving quality and

productivity is statistical process control (SPC).

SPC is the application of statistical techniques to control work processes in

order to detect production of defective items.

Steps in STC

The steps involved in SPC include:

‣ Define the characteristics of a high quality output

‣ Break down the various work activities into individual activities required to
produce a high quality output

‣ Have a standard for each work activity

‣ Discuss specific performance expectations for each task with employees

‣ Make check sheets and collect data for each task activity

‣ Evaluate employee progress against standards at frequent intervals

Plan-Do-Check-Act

This process relies upon the 'PLAN-DO-CHECK-ACT' approach to production. It

involves planning to achieve set standards of performance and identifying
areas to be improved, implementing these strategies, measuring
performance and carrying out corrective action.

The key points that were covered in this module are:

▪ Operations Management (OM) involves the designing, planning, organising,

leading and controlling functions involved in the production of a good or the
provision of a service.▪ The differences between manufacturing and service
organisations include the facts that a the customer of a service organisation
is directly involved in the production process of the service being purchased
whereas the end products of a manufacturing organisation may be stored or
held as inventory.▪ Increases in productivity are dependent upon both people
and operations variables and are a significant contributor to improved
business competitiveness.▪ The development of efficient and effective
operating systems organisations use both Strategic Planning Decisions and
Tactical Planning Decisions.▪ Capacity planning is concerned with
determining the level of human and other resources that will be necessary to
meet the production targets of the organisation.▪ Facilities location planning:
Facilities encompass the land, buildings, plant and equipment, and other
major physical inputs that substantially determine productive capacity and
involve significant capital investment.▪ Process planning: assessing the
production methods currently available (e.g. project, batch or continuous)
and determining which of these is appropriate for the organisation.▪ Facilities
layout planning is based on finding a physical layout or arrangement that will
enable efficiency of production and be accepted by employees of the
organisation.
▪ These forms of inventory may be defined as follows: (i) Finished goods
inventory includes items that have passed through the entire production
process but have not yet been sold. (ii) Work-in-progress inventory includes
the materials moving through the stages of the production process that are
not yet completed products. (iii) Raw materials inventory includes the basic
inputs to the organisation's production process.▪ There are four important
techniques of inventory management. These techniques include economic
order quantity, materials requirement planning, manufacturing resource
planning, and just-in-time inventory planning.▪ Operations managers are
concerned with the quality of the output of their operations system. This
quality may be associated with the reliability of the product or service, the
conformity to regulations, the level of waste, the level of after sales service
provided, the design of the product, and the consistency of delivery of the
product or service.▪ Quality control is where the quality is monitored during
the production or the service provision process.▪ Quality assurance is where
the organisation achieves certification that is dependent upon them
achieving specified levels of quality in the actual production of the good or
service.▪ Total Quality Management (TQM) is where the organisation applies
both quality control and quality assurance to their production or provision
processes.▪ Statistical process control (SPC) is the application of statistical
techniques to control work processes in order to detect production of
defective items. This process relies upon the 'PLAN-DO-ACT-CHECK' approach
to production.

LEARNING OUTCOMES

Having completed this course you will be able to

▪ Identify the factors that influence the workforce▪ Describe the role of a
human resource manager▪ Discuss the eight stages of the employment life
cycle▪ Explain the key motivational theories▪ List the forms that conflict may
take in the workplace▪ Suggest ways in which a HR manager can help
alleviate conflict▪ Describe how changes in society, technology and
legislation may impact employees▪ Discuss KPI's and methods of recognition
and reward