Production/Operations Management

PREFACE

An organization, which may either be a manufacturing or service organization, is made up

of a number of functional areas which interact or interface with each other. Some of these functional
areas are finance, marketing, personnel, and operations. These different functions, which are either
primary functions or supporting ones, work hand in hand to achieve the goals of the
organization.
The focus of this study guide is the operations function which is considered as one of the
primary functions in most business organizations. The operations function, which consists of all
activities directly related to producing goods or providing services, exists not only in manufacturing
organizations which are goods-oriented but also in service organizations which are service-oriented.
In the past, emphasis of production management was on methods and techniques that were
directly related to operating a factory. However, this has changed considerably in recent years.
Production management has broadened its scope and, therefore, its concepts and theories are
now also being applied to activities outside of manufacturing. For example, in our day-to-day
activities as private individuals, we may, in one way or another, be engaged in activities
which belong to the operations function. Because of this broadened scope of production
management, the term operations management came into being.
The operations management plays a significant role in an organization since his ultimate
responsibility is to create goods or services. Although he is more concerned with day-to-day
operating decisions, he may be able to provide top management with information which may
have an impact or bearing on design decisions.
This study guide, therefore, contains topics such as forecasting, location planning, product
design, quality management, process selection, and inventory control. The concepts or
theories which are discussed in this study guide should provide the student or user of
this study guide sufficient knowledge in operations management.

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 OVERVIEW

The operations function which is considered as one of the primary functions in

most business organizations consists of all activities directly related to producing goods
or providing services. An organization, therefore, which produces goods or provides
services is engaged in an operations activity.
This study guide aims to provide the student with ample knowledge of operations management.
It contains topics such as forecasting, location planning, product design, process selection,
quality control, and inventory management. Since some of these topics involve quantitative
analysis, sample problems are provided by the writer to give a student a better
understanding of these concepts and theories. This study guide also contains review
problems and review questions to enable the student to evaluate what he has learned
from each chapter. The student, therefore, is expected to master the important concepts and
theories in operations management and apply them to appropriate situations.

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 Table of Contents

PART I INTRODUCTION

1 Production/Operations Management

Learning Objectives
Introduction
Functional Areas Within Business Organizations
The Operations Management Function
Manufacturing Versus Service Operations
Summary
Review Questions

2 Decision-Making

Learning Objectives
Introduction
The Decision-Making Process
Decision Theory
Different Environments In Which Decisions Are Made
Summary
Solved Problems
Review Questions
Review Problems

PART II PRODUCT DESIGN AND QUALITY MANAGEMENT

3 Location Planning

Learning Objectives
Introduction
The Nature of Location Decisions
The Importance of Location Decisions
Location Options Available To A Decision Maker

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 Making Location Decisions
Factors Affecting Location Decisions
Evaluating Location Alternatives
Summary
Solved Problems
Review Questions
Review Problems

4 Product and Service Design

Learning Objectives
Introduction
The Need For Product And Service Design
Product Life Cycle
Research and Development
Standardization
Reliability
Measuring Reliability
Improving Reliability
Summary
Solved Problems
Review Questions
Review Problems

5 Process Selection and Capacity Planning

Learning Objectives
Introduction
Process Selection
Automation
Capacity Planning
Summary
Solved Problems
Review Questions
Review Exercises/Problems

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 6 Quality Control

Learning Objectives
Introduction
Quality Defined
The Importance of Quality
How Quality Affects An Organization
The Determinants of Quality
Pioneering Leaders of the Quality Movement
Improving Quality
Summary
Review Questions

PART III FORECASTING

7 Forecasting

Learning Objectives
Introduction
Steps in Forecasting
Elements of A Good Forecast
Approaches to Forecasting
Summary
Solved Problems
Review Questions
Review Problems

PART IV MATERIALS MANAGEMENT

8 Inventory Management

Learning Objectives
Introduction
Requirements For Effective Inventory Management
Economic Order Quantity Models
Quantity Discounts

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 When to Reorder
Safety Stock
Summary
Solved Problems
Review Questions
Review Problems

9 Materials Requirement Planning

Learning Objectives
Introduction
Materials Requirement Planning: Inputs, Processing, and Outputs
Materials Requirement Planning II
Summary
Review Questions

10 Just-In-Time Systems (JIT)

Learning Objectives
Introduction
Key Elements of JIT Systems
Kanban System
Kanban Versus MRP II
Benefits of JIT Systems
Summary
Review Questions

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PART I INTRODUCTION
Module 1
Production/Operations Management

Learning Objectives:
After studying Chapter 1 on production/operations management, you shall be able to:
1. History of Production/Operation Management
2. define the term production/operations management;
3. identify the three major functional areas in an organization and how they interrelate or
interact with each other;
4. show how the transformation process works - from raw material to finished product;
5. differentiate manufacturing operations from service operations.

INTRODUCTION

When one hears of the term production, he readily associates it with raw materials, finished
products, machinery and equipment, factories, etc. In the past, the focus of the field of production
management was the manufacturing system. However, recently the field of production management
has broadened its scope, and thus, it does not only focus itself on the different manufacturing
activities but also on activities outside of manufacturing such as health, banking, education, etc.
Because of this, the term operations management came into existence.
Operations management is responsible for the management of productive systems. These
productive systems either create tangible goods or provide services or even both. For example, a
hospital delivers health care to the general public. For it to be able to provide such, the
hospital‟s management must see to it that there is proper scheduling of the duty hours
of its doctors, nurses, and other medical staff. Not only this, other activities have to be
undertaken to ensure satisfactory delivery of health care such as the preparation of meals
for patients, cleaning of hospital premises, and maintaining an inventory of medicines and
other medical supplies. Although these are not the only activities to be undertaken for the
proper delivery of health care, this will give you an idea of the scope of operations
management.

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 Now, consider operations management in another setting - a factory. A factory manufactures
tangible goods such as bags, furniture, washers, bolts, and others. Activities such as
forecasting, quality control, procurement, and inventory control have to be undertaken to ensure
delivery of the finished product.
Although, the activities involved in the delivery of health care and in the manufacture
of a tangible good may be different in one way or another, still they have elements which
are common to both of them such as procurement, quality control, inventory control, etc.

HISTORY OF PRODUCTION/OPERATION MANAGEMENT

Date Contribution Contributor

1776 Specialization of labour in manufacturing Adam Smith
1799 Interchangeable parts, cost accounting Eli Whitney and others
1832 Division of labour by skill; assignment of jobs by skill; basics of time study Charles Babbage
1900 Scientific management time study and work study developed; dividing Frederick W. Taylor
planning and doing of work
1900 Motion of study of jobs Frank B. Gilbreth
1901 Scheduling techniques for employees, machines jobs in manufacturing F.W. Harris
Henry L. Gantt 1915 Economic lot sizes for inventory control
1927 Human relations; the Hawthorne studies Elton Mayo
1931 Statistical inference applied to product quality: quality control charts W.A. Shewart
1935 Statistical sampling applied to quality control: inspection sampling plans H.F. Dodge & H.G. Roming
1940 Operations research applications in World War II P.M. Blacker and others
1946 Digital computer John Mauchlly and J.P. Eckert
1947 Linear programming G.B. Dantzig, Williams & others
1950 Mathematical programming, on-linear and stochastic A. Charnes, W.W. Cooper
processes & others
1951 Commercial digital computer: large-scale computations available. Sperry Univac
1960 Organizational behaviour: continued study of people at work L. Cummings, L. Porter
1970 Integrating operations into overall strategy and policy, and Computer W. Skinner J. Orlicky ,G. Wright
applications to manufacturing, Scheduling and control, Material
requirement planning (MRP)
1980 Quality and productivity applications from Japan: W.E. Deming and robotics,
CAD-CAM J. Juran.
TABLE 1.1 Historical summary of operations management (Production and Operation Managements 2 nd Edition by
S. Anil Kumar)

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 Production management becomes the acceptable term from 1930s to 1950s. As F.W. Taylor‟s
works become more widely known, managers developed techniques that focused on economic efficiency
in manufacturing. Workers were studied in great detail to eliminate wasteful efforts and achieve greater
efficiency. At the same time, psychologists, socialists and other social scientists began to study people and
human behavior in the working environment. In addition, economists, mathematicians, and computer
socialists contributed newer, more sophisticated analytical approaches.
With the 1970s emerges two distinct changes in our views. The most obvious of these, reflected in
the new name operations management was a shift in the service and manufacturing sectors of the economy.
As service sector became more prominent, the change from „production‟ to „operations‟ emphasized the
broadening of our field to service organizations. The second, more suitable change was the beginning of an
emphasis on synthesis, rather than just analysis, in management practices.

CONCEPT OF PRODUCTION

Production function is that part of an organization, which is concerned with the transformation of a range
of inputs into the required outputs (products) having the requisite quality level. Production is defined as
“the step-by-step conversion of one form of material into another form through chemical or mechanical
process to create or enhance the utility of the product to the user.” Thus production is a value addition
process. At each stage of processing, there will be value addition. Edwood Buffa defines production as „a
process by which goods and services are created‟. Some examples of production are: manufacturing
custom-made products like, boilers with a specific capacity, constructing flats, some structural fabrication
works for selected customers, etc., and manufacturing standardized products like, car, bus, motor cycle,
radio, television, etc.

Inputs: Transformation during

 Men (Workers) Process:
 Materials (raw Materials) Outputs:
 Design of Product
 Machines (heavy equipment)  Products
 Process Planning
  Services
Information  Control of Production
 Capital 
 Maintenance


Continuous:
 Checking of
Inventory
 Quality Assurance
Feedback Information
Environment  Costing


Fig. 1.1 Schematic production system

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FUNCTIONS WITHIN BUSINESS ORGANIZATIONS

Most business organizations have three major functional areas and these are finance, marketing, and
operations. These three functional areas are interrelated as shown in Figure 1-1.

Finance

Marketing Operations

Figure 1-1. The Three Functional Areas of Business Organizations

As shown in Figure 1-1, the three circles representing the three functional areas are
overlapping. This means that these functions are interrelated and that they are dependent
on each other. For example, it is very important that marketing works with the manufacturing
function since the marketing department may attempt to promote a product which the operations
function cannot produce or manufacture, and production may in turn produce or manufacture
goods for which there is no market demand. As for the finance function, the finance department
must see to it that there are substantial financial resources for the purchase of machines,
equipment, raw materials, etc. These machinery, equipment, and raw materials are in turn
used to come up with the finished product which is within the realm of the operations
function.

Although finance, operations, and marketing are the major functional areas in a business
organization, there are other supporting functional areas which interrelate or interface with the three
functional areas and some of these supporting functional areas are the personnel, maintenance, and
purchasing department.

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THE TRANSFORMATION PROCESS

For a raw material to become a finished product, it must go through a transformation process as
illustrated below.

The raw materials pass through one or more manufacturing processes. These manufacturing
processes may include cutting, dyeing, sewing, etc. These manufacturing processes transform the
raw material into a finished product. However, as the raw material goes through the
transformation process, measurements have to be taken and then compared with previously
established standards to determine if corrective actions or measures are necessary.

THE OPERATIONS MANAGEMENT FUNCTION

The operations manager is a key element in the organization since he is responsible for
the creation of goods and services. This involves the acquisition of resources and the
conversion of inputs into outputs through one or more transformation processes. Such an
enormous task requires planning, coordinating, and controlling the different elements that
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make up the entire process. These elements include the human resources or the workers of
an organization, equipment, machinery, allocation of resources, and work methods. Not only these, it
also includes product and service design wherein the operations manager can work with
the marketing people who can also be a source of ideas with regard to the coming up
of new products or services as well as improving existing products or services.
People in the operations department can also be a source of ideas for improving
production processes such as assembly, fabrication, finishing, handling, storage procedures,
and so on. The main function, therefore, of the operations manager is to guide the system
through decision making especially in the utilization of resources.

MANUFACTURING VERSUS SERVICE OPERATIONS

Manufacturing operations differ from service operations in a number of ways. Some of

these differences that can be cited are as follows.

a. There is more variability in terms of inputs for service operations than manufacturing
operations since the kind of services rendered by an organization may depend on
customer specifications.
b. There is a higher degree of customer contact when it comes to service operations
than with manufacturing operations since services may have to be rendered at the
point of consumption. Unlike manufacturing operations where the manufacture or
production of a product takes place in a factory.
c. Service operations are more or less labor intensive while manufacturing operations can
be capital-intensive although there are certain exceptions.

SUMMARY

The operations function is one of the major functional areas in an organization. It is primarily
concerned with producing goods or providing services. It is interrelated with the other two major
functional areas which are finance and marketing.
For a raw material to become a finished product, it must go through one or more
transformation processes such as cutting, dyeing, etc. To ensure that the desired outputs are obtained,
measurements are taken at various points in the transformation process and then compared to
standards previously established.
There are a number of differences between manufacturing and service operations. Some of
these differences involve (a) nature of input; (b) labor content; and (c) degree of customer contact.

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 Chapter 1. Production/Operations Management

Review Questions (5points each)

A. Identification

1. List down three (3) of the differences between a manufacturing operation and a service
operation?
2. What are the three major functions in a business organization?
3. When was operations research applications in World War II applied?
4. It is the key element in the organization since he is responsible for the creation of goods and
services.
5. What are the inputs in production?
6. What are the output in production?
7. Why does the workers were studied in great detail in production?
8. It is a material that pass through lot of process to become a product?
9. What are the functions of operation manager?
10. They attempt to promote a product which the operations function cannot produce or manufacture,
and production may in turn produce or manufacture goods for which there is no market demand.

a. Modified True or False

Write “TRUE” is the statement is correct and if the statement is FALSE write the correct word
corresponding to the underlined word on the given space.

______ 1. A factory manufacture intangible goods such as bags, furniture, bolts, etc.
______ [Link] management is responsible for the management function system.
______ 3. Business organization has 3 major functional areas and these are finance, market, and
management.
______ 4. The operation manager is a key element in the organization.
______ 5. The overlapping of 3 functional areas it means that they are related.
______ 6 . Specialization of labour in manufacturing contributed by Sam Smith.
______ 7. Division of labour by skill; assignment of jobs by skill; basics of time study in 1932.
______ 8. & _______ 9. F.W. Harris motioned of study of jobs in 1900.
_______ 10. Production management becomes the acceptable term from 1935s to 1950s.
_______ _11. Edmond Buffalo defines production as „a process by which goods and services are created‟.
_______ 12. The raw materials pass through only one manufacturing processes.
_______ 13 & _______ 14. It is interrelated with the other two major functional areas which
are support and commercial.
_______ 15. Scheduling techniques for employees, machines jobs in manufacturing Henry L. Gantt 1915
Economic lot sizes for inventory control by F.W. Harris.
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 b. Multiple Choice
Choose the correct answer and write the letter on the given space.

______ [Link] does hospital deliver to us?

a. Drugs b. health care c. doctors d. none
2 & 3. Forecasting, quality control, ___2____, and inventory control have to be undertaken to
ensure delivery of the finished ___3___.
______ 2. a. control b. procurement c. delivery d. none
______ 3. a. output b. process c. product d. production

______ 4. What kind of material needed to have finished the product?

a. Money b. raw material c. people d. All of the above
______ 5. What process happen in raw material?
a. Manufacturing process b. transformation process c. cooking process d. none
_______ 6. Integrating operations into overall strategy and policy, and Computer applications to manufacturing,
Scheduling and control, Material requirement planning (MRP)
a. 1970 b. 1917 c.1980 d.1890
________7. Quality and productivity applications from Japan:
a. 1970 b. 1980 c. 1951 d. 1931
________8. Specialization of labour in manufacturing occurred in ________.
a. 1951 b. 1776 c. 1832 d. 1931
________9. Statistical sampling applied to quality control: inspection sampling plans
a. 1776 b. 1931 c. 1901 d. 1947
________10. The change from „____________‟ to „operations‟ emphasized the broadening of our field to
service organizations.
a. Product b. Concept c. Management d. Production

D. Problem Solving and Analysis

1. Two former surfers invented a material for surfboards that‟s lighter and stronger than
anything manufacturers now use. They have received funding to set up a production
facility, and they want you to help them select a location. In addition to your
recommendation, identify the factors that you considered in reaching your decision.

2. Compare and contrast three common types of production processes: make-to-order,

make-to-stock, and mass customization. What are the advantages and disadvantages of
each? Why are more companies devoting at least a portion of their operations to mass

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 customization? Identify three goods that could probably be adapted to mass
customization and three that probably couldn‟t.

E. Case Study

Marina
Marina had worked for the same TimeTin 500 Company for most 14 years. Although the
company had gone through some tough times, things were starting to turn around. Customer orders
were up, and quality and productivity had improved dramatically from what they had been only a
few years earlier due company wide quality improvement program. So, it comes as a real shock to
Marina and about 400 of her co-workers when they were suddenly terminated following the new
CEO‟s decision to downsize the company. After recovering from the initial shock, Sheena tried to
find employment elsewhere. Despite her efforts, after eight months of searching she was no closer
to finding a job than the day she started. Her funds were being depleted and she was getting more
discouraged. There was one bright spot, though: She was able to bring in a little money by mowing
lawns for her neighbors. She got involved quite by chance when she heard one neighbor remark
that now that his children were on their own, nobody was around to cut the grass. Almost jokingly,
Marina asked him how much he‟d be willing to pay. Soon Marina was mowing the lawns of five
neighbors. Other neighbors wanted her to work on their lawns, but she didn‟t feel that she could
spare any more time from her job search. However, as the rejection letters began to pile up, Marina
knew she had to make an important decision in her life. On a rainy Tuesday morning, she decided
to go into business for herself taking care of neighborhood lawns. She was relieved to give up the
stress of job hunting, and she was excited about the prospects of being her own boss. But she was
also fearful of being completely on her own. Nevertheless, Marina was determined to make a go of
it.

At first, business was a little slow, but once people realized Marina was available, many
asked her to take care of their lawns. Some people were simply glad to turn - the work over to her;
others switched from professional lawn care services. By the end of her first year in business,
Marina knew she could earn a living this way. She also performed other services such as fertilizing
lawns, weeding gardens, and trimming shrubbery. Business became so good that Marina hired two
part-time workers to assist her and, even then, she believed she could expand further if she wanted
to.

Questions

1. In what ways are Marina‟s customers most likely to judge the quality of her lawn care services?
2. Marina is the operations manager of her business. Among her responsibilities are forecasting, inventory
management, scheduling, quality assurance, and maintenance.

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