Operations

Management

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 Learning objectives

After completing this unit, you will be able to:

Define Operations management

Discuss history of operations management
Discuss manufacturing and service operations
Scope of operations management
Explain operations decision making
Productivity measurement

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 Key terms

Operations Managerial functions

Management Operations manager
Goods Operations management
Services
Quality
Productivity
System
 Definition

◦ Operations management (OM) is the set of activities that

creates value in the form of goods and services by
transforming inputs into outputs.
◦ OM is management of processes or systems that create goods
and/or provide services.
◦ Comprises
Forecasting, capacity planning, scheduling, managing inventories,
assuring quality, motivating employees, location selection…

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 OM …

 Operations management is the business function that plans, organizes,

coordinates and controls the resources needed to produce a company’s

goods and services (Reid & Sanders, 2013).

 A group of interrelated activities, which are involved in the production of

certain goods and services, is called operations management.

 Operations management is a management function that involves the

management of people, equipment, technology, information and many

other resources used for the operations.

 Why study Operations management?

 Core of business (inevitable), it plays as exactly similar as an

engine plays in a car

 Covers 50% of the business process

 The rest 50% business functions are interrelated to OM

 Operations manager controls the processes by which value is

added from conversion of inputs to outputs

 Manage inputs materials, inventory, services, land and energy,

human and capital resources
 Functions within business organizations
Operations Management

Organizations are formed to pursue goals are achieved more

efficiently by the concerted efforts of a group of people.
Organization

Finance Operations Marketing

Figure 1.1: three major functions

 The main objective of operations/production management is the

production of goods and services of right quality and quantity at the
right time and right manufacturing cost (Kumar & Suresh, 2009)
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Functional areas …

 Operations  Marketing
 Finance
management
 Consists of all activities  Comprises activities  Focuses on selling
directly related to related to securing or promoting goods
producing goods or resources at favorable and services
providing service prices and allocating those
 Assess customers
 Core of most business resources
organizations  Common activities:
wants …
 Responsible for creating  budgeting,
values in the form of goods  economic analysis of
investment proposals  Other functional
or services
, areas?
 The essence of this
 provision of funds
function is to add value.
 Scope of OM

 Mainly, OM is responsible for the creation of goods and services

 This encompasses acquisition of resources and the conversion of

those inputs into outputs.

 These involves
◦ Planning, coordinating, and controlling the elements that make
up the process, including workers, equipment, facilities,
allocation of resources, and work methods.

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 The scope of operations management
 Though the scope of OM varies from company to company, for
most of the companies it is nearly the same. See the following
figure Location of
facilities Plant layout and
material handling
Materials
management
Operations
Product design
Management
Maintenance
management
Production
planning
and control
Quality control
Process design
Operations manager
 Operations managers
Primary functions of operations manager to guide the system by decision
making.

The decision may affect both design of the system and the operation of the
system
◦ System design – involves decisions related to system capacity, location,
layout, product planning, acquisition of equipment
◦ System operation – involves management of personnel, inventory
planning and control, scheduling, project management, quality
assurance.
◦ In most cases, the operations manager is more involved in operating
decision than decision relating to system design.
 Types of operations

 Manufacturing
 is the transformation of raw materials into finished goods
for sale, or intermediate processes involving the production
or finishing of semi-manufactures.
 Service/s
 are deeds, processes, and performance or
 is a time-perishable, intangible, experience performed
for a customer acting in the role of a co-producer
 Typical Characteristics of Services and Goods Producers

Primarily Goods
Primarily Service Continuum of
Producers
Producers Characteristics
Mixed
Intangible, nondurable Tangible, durable

Output can’t be inventoried Output can be inventoried

High customer contact Low customer contact

Short response time Long response time

Labor intensive Capital intensive

Low uniformity of output High uniformity of output

Not usually patentable Usually patentable

Difficult productivity measurement Easy productivity measurement

Less opportunity to correct problems better opportunity to correct problems

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 Similarities

•Both use technology

•Both have quality, productivity, & response issues

•Both must forecast demand

•Both will have capacity, layout, and location issues

•Both have customers, suppliers, scheduling and staffing issues

•Manufacturing often provides services

•Services often provides tangible goods

The Operations manager and the management process

The operations manager is the key

figure in the system: he or she has
the ultimate responsibility for the
creation of goods or provision of
services.
 Responsibilities
Responsibilities of of operations
Operations manager
Management

Planning Organizing
– Capacity – Degree of centralization
– Location – Process selection
– Products & services Staffing
– Make or buy – Hiring/laying off
– Layout – Use of Overtime
– Projects Directing
– Scheduling – Incentive plans
Controlling/Improving – Issuance of work orders
– Inventory – Job assignments
– Quality
– Costs
– Productivity
Operations managers and Decision making

 Managers uses various approaches to make decisions:

◦ Models - An abstraction of reality; a simplified
representation of something.
◦ Physical, schematic, mathematical models
◦ Quantitative methods – applying scientific models
◦ Analysis of trade-offs – pros and cons
◦ The system approach - system A set of interrelated parts
that must work together
 Ten Critical Decisions

Design of goods and services

What good or service should we offer?

How should we design these products and

services?

Managing quality
How do we define quality?

Who is responsible for quality?

 The Critical Decisions

 Process and capacity design

 What process and what capacity will these products require?
 What equipment and technology is necessary for these
processes?
 Location strategy
 Where should we put the facility?
 On what criteria should we base the location decision?
 The Critical Decisions

 Layout strategy
 How should we arrange the facility?

 How large must the facility be to meet our plan?

 Human resources and job design

 How do we provide a reasonable work environment?

 How much can we expect our employees to produce?

 The Critical Decisions

 Supply chain management

 Should we make or buy this component?

 Who are our suppliers and who can integrate into our e-
commerce program?

 Inventory, material requirements planning, and JIT

 How much inventory of each item should we have?

 When do we re-order?
 The Critical Decisions
 Intermediate and short–term scheduling
 Are we better off keeping people on the payroll
during slowdowns?
 Which jobs do we perform next?

 Maintenance
 Who is responsible for maintenance?
 When do we do maintenance?
Historical Evolution of operations
management

• Production/operations systems have

existed since the existence of human
beings. However,
• The modern production system had
their roots in the Industrial revolution.

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 Historical Evolution of operations
management

Industrial revolution 1770s

Brought in innovations that changed production

by using machine power instead of human
power. Examples
• Steam Engine – James Watt
• Division of labour – Adams Smith 1990s
Scientific management
• Interchangeable parts – Eli Whitney

Brought the concepts of analysis and

Human relations measurement of the technical aspects of
work design and development of moving
movement 1930s
assembly lines and mass production. Eg
• Friedrich Taylor –
• The Glibreths
Focused on understanding human elements of • Henry L. Gantt – Gantt Chart
job design, such as worker motivation and job • Henry Ford – Assembly line
satisfaction.
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 Historical Evolution ….
Management
1940s
science
Focused on the development of
quantitative techniques to solve
The influence of operations problems.
Japanese manufacturers
TQM
Kaizen
Theory Y

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Current trends in operations management

•E-business - Use of the Internet to transact business

•Supply chain management - A sequence of activities and organizations involved in
producing and delivering a good or service.
• Manages the following three things
• Money
• Material
• Information
•Globalization
•Environmental issues
•Sustainability
•Lean production
 Marketing IS Finance

Customer dd Current operating Capital investment

capabilities Information planned
Customer needs
Inventory level Financial
feedback
measures
Output rates Capital
Need for new Budgets
Technological requirement
products
capabilities Stockholders
requirements
Operations management

Billing info Operations Product specs

capabilities Labor skills
Process Current
improvement performance Technological
measure trade-offs Labor costs
Design
Labour
require
requirements
ments

Accounting Engineering HR

Information flow between operations and other business functions

 Options for Increasing Contribution
Finance/
Marketing Accounting OM
Option Option Option

Increase Reduce Reduce

Sales Finance Production
Current Revenue 50% Costs 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 15% – 2,100 – 3,600 – 2,550 – 4,500
Contribution $ 11,900 $ 20,400 $ 14,450 $ 25,500
Productivity
The use of productivity as a measure of competitiveness is effective because it
allows companies to

◦ compare their performance against their competitors, and

◦ Identify areas where they can improve efficiency and effectiveness.

◦ It enables companies to track progress over time and identify trends in

performance.
Productivity…
To improve productivity, companies need to focus on

◦ maximum utilization of their resources,

◦ reducing waste, and

◦ improving the quality of their products or services.

The use of technology can also significantly improve productivity by automating

processes and reducing the need for manual labor.

Effective workforce planning, training, and development can improve employee

performance and productivity
 Productivity

Productivity

◦ A measure of the effective use of resources, usually expressed

as the Outputs
Productivity =
Inputs
Productivity ratio measures

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 Example 1

Three employees work for five days (8 working hours a day) to produce 800
units, calculate the labor hour productivity

Given
Labour hr. productivity = 800units
3 employees x 40 hrs./employees = 120 hrs
6.67 units/hr.
 Example 2

Determine the MFP for the combined input of labor and material time
using the following data:

A team of workers make 500 units of a product having cost of ETB. 10

each. Actual cost is ETB.400 for labor and ETB. 2000 for material &
ETB. 500 for overheads, calculate the productivity
Solution
 Example 3

What is the multifactor productivity “MFP”? if 7500

Units Produced and Sold for ETB10/unit with Cost of
labor - ETB10,000, Cost of materials- ETB5,000 and Cost of
overhead- ETB20,000.
 Class work

Bluewood Furniture produces average 35 chairs/day. Labor

costs average ETB480, material costs are typically ETB200,
and overhead cost is ETB250. Bluewood sells the chairs to a
retailer for ETB70/unit. Find multifactor productivity.

(70/chair x 35 chairs)/(480+200+250)
= (2450)/(930) or
2.63
End of Chapter one