2. Learning Objectives
• Define and explain OM
• Explain the role of OM in business
• Describe the differences between service and
manufacturing operations
• Describe the decisions that operations managers make
• Identify major historical developments in OM
• Identify current trends in OM
• Describe the flow of information between OM and other
business functions
3. What is Operations Management?
• Management of that part of organization that deals with
production of goods and services
• Operation management is the management of systems or
processes that create goods and / or provide services
• The business function responsible for planning,
coordinating, and controlling the resources needed to
produce products and services for a company
• The design and operation of production system
4. The basic functions of business
organizations
Three basic functional areas of business organization
Finance : securing financial resources at favourable prices,
allocating them throughout the organization, budgeting,
analysing investment proposals, providing funds for
operations
Operations :
Marketing :
Business
Organization
Finance Operations Marketing
Primary / Line functions
6. Operations as a transformation process
Inputs
Land
Labour
Capital
Information
Transformati
on /
conversion
process
Outputs
Goods
Services
Control
Feedback
Feedback
Feedback
Value added
Value added : the difference between the cost of input and the value of
output
Greater value added greater is the effectiveness of operation
for non profit org : value of the output / value to the society
For profit org : prices that customers are willing to pay
7. OM’s Transformation Role
• To add value
• Increase product value at each stage
• Value added is the net increase between output product value and
input material value
• Provide an efficient transformation
• Efficiency – means performing activities well for least possible cost
• Factors that affect the design and management of operation
system
• Degree of involvement of the customer in the process : challenging
• Degree to which technology is used : impact on productivity, cost, flexibility,
quality and customer satisfaction
8. Examples of inputs, transformation and
output
Inputs Transformation Output
Land
Human :
physical
intellectual
Capital
Raw materials :
Energy
Water
Metals
wood
Equipment :
Machines
Computers
Trucks
Tools
Facilities :
Hospitals
Factories
retail stores
Processes :
Cutting
Drilling
Transporting
Teaching
Mixing
Packaging
Houses, automobiles, clothing
computers, machines, text
books - High goods percentage
Health care, entertainment, car
repair, delivery, banking - High
service percentage
10. How they differ
• Degree of customer contact
• Uniformity of input
• Labour content of job
• Uniformity of output
• Measurement of productivity
• Quality assurance
• Amount of inventory
• Evaluation of work
• Wages
• Ability to patent
11. How they are similar
• 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
13. Scope of Operations Management
• Planning
• Capacity, utilization
• Location
• Choosing products or services
• Make or buy
• Layout
• Projects
• Scheduling
• Market share
• Plan for risk reduction, plan B?
• Forecasting
Controlling
– Inventory
– Quality
– Costs
Organization
– Degree of standardization
– Subcontracting
– Process selection
Staffing
– Hiring/lay off
– Use of overtime
– Incentive plans
In a nutshell, the challenge is
“Matching the Supply with Demand”
14. Example : Service organization
Airline company
Forecasting : seat demand, growth in air travel etc.
Capacity planning : how many planes, in which route
Scheduling : of planes, pilots and flight attendant, ground
crew etc.
Managing inventories : foods, in-flight magazines etc.
Assuring quality : safety, check-in efficiency
Motivating and training employee
15. Types of operations
• Goods producing……….farming, mining, manufacturing,
power generating
• Transportation…..mail service, warehousing, trucking
• Exchange………..retailing, wholesaling,
• Entertainment…….films, radio, plays, concerts
• Communication…..newspapers, telephone, the Internet
16. System design
• Decision related system capacity
• Geographical location of the facilities
• Arrangement of the departments
• Placing the equipment in the physical structure
• Product and service planning
• Acquisition of equipment
Strategic decisions
17. System operation
• Management of personnel
• Inventory planning and control
• Scheduling
• Project management
• Quality assurance
Tactical and operational decisions
18. Functions of an operations manager
Guide the system by decision making
Design Operation
• System capacity
• Geographic location of facilities
• Arrangement of departments &
placement of equipment within
physical structure
• Product and service planning
• Acquisition of equipment
• Management of personnel
• Inventory planning and control
• Scheduling
• Project management
• Quality assurance
Strategic decisions Operational decisions
19. Other functions of an operations manager
• Purchasing
• Procurement of materials, equipment
• Works in close connection with operation to decide about how
much and when to purchase
• Evaluate vendors for quality, reliability, service, price, ability to
adjust to changing customer demand
• Distribution
• Shipping of goods to warehouse, retail outlets or final customers
• Maintenance
• Upkeep and repair of the equipment, building, heating and air
conditioning etc.
21. OM decision making
• What : what resources will be needed?
• When : when all the resources will be needed? Work
schedule? When materials to be ordered? When
corrective action to be taken?
• Where : where will the work be done?
• How : how will be the product / service designed?
• Who : who will do the work?
22. OM decision making
Decision area Basic issues
Forecasting What will be the demand ?
Design
Product and service
design
What do the customers want? How can products and services
be improved?
Capacity How much capacity will be needed? How can the organization
best meet the capacity requirement?
Process selection layout What process should the organization use?
Layout What is the best arrangement for departments, equipment,
work flow and storage in terms of cost and productivity?
Design of the work
system
What is the best way to motivate the employees? How can
productivity be improved? How to measure work? How to
measure work methods?
Location What is satisfactory location for factory, store etc.
23. OM decision making
Operation
Quality How is quality defined for products and services?
Quality control Are the processes performing adequately?
Supply chain
management
How to achieve effective flow of information and goods
throughout the chain?
Inventory management How much to order? When to reorder? Which items should get
more attention?
Aggregate planning How much capacity will be needed for the intermediate range?
How can the capacity needs be best met?
Materials requirement
planning
What materials, parts and subassemblies will be needed and
when?
Just in time and lean
systems
How to maintain a smooth balanced flow of work with fewer
resources
Scheduling How can jobs and resources be best scheduled?
Project management Which activities are the most critical for the success of the
project?
24. Importance of using models in decision
making
• Easy to use and less expensive
• Increase understanding of the problem
• Enable managers to analyze “what if?”
• Consistent tool for evaluation and provides standardized
formats
But
• Models undermine the importance of qualitative information
• Highly sophisticated – to be used by trained professional
• Does not guarantee good decision
• Models may be incorrectly applied or results may be
misinterpreted
• Use of model does not guarantee good decision
25. Types of Models
• Physical models (prototypes)
• Schematic models (Graphs, charts, pictures)
• Mathematical models, by application area
• Statistical models
• Linear regression
• Linear programming
• Queuing techniques
• Inventory models
• EOQ model
• Project management models
• Networks
26. History of operations management
• Craft production
• Adam Smith’s wealth of nations (1776) : division of labour
• Work broken down into small steps
• More specialized each step, repetitive task leading to less time
• Interchangeable parts by Eli Whitney (1790)
• Customized one at a time production to volume production of standardized
parts
Non existence of management theory and practice
• Early 1900s : Scientific management - Fredrick W. Taylor showed the
scientific way of performing each job based on observation,
measurement, analysis and improvement of work methods and
economic incentives. Maximizing output
• Idea of scientific management extended by Henry Ford- applied
scientific management in production of Model T in 1913 which
reduced the time required to assemble a car from 728 hours to 1.5
hours
• Model T started producing in high volume / en mass : mass
production
• https://www.youtube.com/watch?v=S4KrIMZpwCY
27. History of operations management
• Next fifty years American producers reaped the benefit of
mass production
• 1930 : worker motivation, as well as technical aspect of
work improved productivity
• Hertzberg, Maslow motivation theories
Till 1960 USA was the major source of managerial and
technical expertise
1970, 1980 USA manufacturing superiority was threatened by
lower cost and higher quality from foreign manufacturers, led
by Japan
28. History of operations management
• They delegated the function of manufacturing to technical
specialists who ignored the changes in consumer
environment and strategic importance of operations
• Decisions were made on short term financial goal rather
long term strategic goal
• Japanese used the concept of Lean production
• Flexibility rather than efficiency
• Quality rather than quantity
• https://www.youtube.com/watch?v=TiuaFwzJ4FU
• https://www.youtube.com/watch?v=P-bDlYWuptM
29. Strategy formulation
• Primary task
• What do the firms do?
• Competitive arena
• Should not be defined too narrowly
• Expressed in firm’s mission statement
• Assessing core competency
• What firm does better than others : distinctive competence
• E.g, Exceptional service, higher quality, faster delivery, lower cost
• Provides sustainable competitive advantage
• Competency can’t be a product
• It’s the process
• E.g, ability to transform technology rapidly into new products and
processes
30. Strategy formulation
• Order qualifiers / order winners
• Order qualifiers are the characteristics of the product of service that qualify to
be purchased
• Order winner is the characteristic of a product that wins orders in the
marketplace – the final factor in purchasing decision
Order qualifier and order winner can evolve over the years
Today high quality, as a standard of automotive industry has become
an order qualifier, innovative design wins the orders
Firm should strive to be an order qualifier and improve on order winner
• Positioning of the firm : choosing one or two important things and
doing extremely well
• Defines how it will compete in the market
• What unique value it will deliver
• Strength and weakness of the organization, need of the marketplace and
position of the competitors
31. Strategic decisions in operation
• Product /service
• Make to order : according to customer specifications e.g custom
built homes
• Make to stock : according to forecasted demand e.g, books, ready
to wear apparels
• Assemble to order : produced in standard module to which options
are added; minimizing inventory of standard components; improved
delivery time of finished product
32. Strategic decisions in operation
• Process
• Project : one at a time production e.g., aircraft production
• Batch production :
• many different jobs at a time, in groups or batches
• Products are made to customer order
• Volume low for each category
• Demand fluctuates
E.g, education, furniture making, bakeries etc.
• Mass production :
• High volume
• Standard products
E.g, automobiles, televisions
• Continuous production
• High volume commodity products that are very standardized
• Highly automated system
• Operation continues 24 hours a day
34. Strategic decisions in operation
• Capacity & facilities
• Product lead time
• Customer responsiveness
• Competitiveness
• When, how much and what form to alter capacity is important
decision
• Facilities : if the goods are to be sold in foreign countries then –
licensing policy, joint ventures, partnerships are to be decided
• Human resources
• Skill level
• Training requirement
• Selection criteria
• Performance evaluation
• Compensation, incentives
35. Strategic decisions in operation
• Quality
• What is the target level of quality?
• How will it be measured?
• What types of training?
37. Ways to ensure competitiveness
How effectively an organization meets the wants and
needs of the customers relative to others that offers
similar goods or service.
Organization compete through marketing and operations
ways to achieve competitiveness
Marketing ways :
• Identifying customer needs and wants
• Pricing
• Advertising and promotion
38. Ways to ensure competitiveness
Operation ways :
• Product and service design : should reflect joint efforts of
many areas of the firm to achieve a match between
financial resources, operations capabilities, supply chain
capabilities, consumer wants
• Cost : of an organization’s output. Productivity is an
important determinant of cost
• Location : in terms of cost and convenience for customers
– location near input reduces input cost, location near
market ensures lower transportation cost, convenient
location relates to the location of the retail store
• Quality : materials, workmanship, design and service
39. Ways to ensure competitiveness
• Quick response : quickly bring new or improved products /
quickly deliver existing product to a customer after they
are ordered
• Flexibility : the ability to respond to changes : alteration in
the design features or in volume of production
• Inventory management
• Supply chain management : coordinating internal and
external operations effectively
• Service : customer perceive these as value added – e.g.,
delivery, warranty work, technical support; service quality
• Competent managers and workers
40. Competitive priorities
Competing on
• Cost
• Pursue the elimination of waste
• Stabilizing the production process, tightening productivity
standards, investing in automation
• Companies that compete on cost realize low cost cannot be
sustained as competitive advantage
• A long term productivity portfolio is required
• Quality
• Opportunity to please the customer
• Flexibility
• Ability to produce a high variety of products, introduce new
products redesign the existing ones to met customer needs
41. Competitive priorities
Speed
• Fast moves of the organization
• Fast adaptation and
• Tight linkage
• Decision making is pushed down the organization
• Levels of management are collapsed
• Work is performed in cross functional teams
• Close contact is maintained with suppliers and the customers
• Performance matrix reflect : time, speed and rate
• E.g, Intel doubling the capacity of computer chips every 18 months
42. Reasons for failing
• Emphasis on short term financial gain
• Less research and development
• Failing to take advantage of the strength and
opportunities
• Neglecting operational strategies
• Too much emphasis on product and service design not on
process design.
43. Productivity
• Indicator of how competitive a organization is
• Can be computed for single operation, department,
organization
Productivity=
Output
input
Productivity growth =
Current productivity – previous productivity
previous productivity
x 100
44. Productivity
• Partial measure : single input
• Multi factor measure : more than one input
• Total measure : all inputs
output
labour
output
capital
output
Labour+capital
output
energy
output
All inputs
45. Example 1
It is time for the annual performance review of Go-Com’s account executives. Account values and
hours spent each week acquiring and servicing accounts are shown below. Each agent works
approximately 45 weeks out of the year, but the time spent on accounts each week differs
considerably. How would you rate the performance of each individual? Which agent is most
productive? Which agents show the most potential?
Agents Albert Bates Cressey Duong
New
accounts
$100,000 $40,000 $80,000 $200,000
Existing
accounts
$40,000 $40,000 $150,000 $100,000
Labor
hours
40 20 60 80
46. Example 2
Omar Industries maintains production facilities in several locations around the globe. Average monthly
cost data and output levels are as follows.
a. Calculate the labor productivity of each facility.
b. Calculate the multifactor productivity of each facility.
c. If Omar needed to close one of the plants, which one would you choose?
47. Example 3
Posey Ceramics makes ceramic vases for a chain of department stores. The output and cost figures
over the past four weeks are shown here. Labor costs $10 an hour, and materials are $4 a pound.
Calculate the (a) labor productivity (in hrs), (b) material productivity (in lbs), and (c) multifactor
productivity for each week. Comment on the results.
