2. Operations Management
Why Study Operations Management?
Historical Development of OM
Differences between Manufacturing and Service
Organizations
Operations Decision Making
Productivity Measurement
OBJECTIVES
3. 1.1. What is operation Management?
Operations management (OM) is
The business function that plans, organizes,
coordinates, and controls the resources needed to
produce a company’s goods and services.
Operations management is a management function.
• It involves managing people, equipment, technology,
information, and many other resources to produce goods
and services.
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Operations management is
It is the set of activities that creates goods and
services through the transformation of inputs into
outputs.
A series of activities along a value chain extending
from supplier to customer.
Activities that do not add value are superfluous and
should be eliminated
6. Value-Added Process
The operations function involves the conversion of
inputs into outputs
Inputs
Land
Labor
Capital
Transformation/
Conversion
process
Outputs
Goods
Services
Control
Feedback
Feedback
Feedback
Value added
1-6
7. Food Processor
Inputs Processing Outputs
Raw Vegetables Cleaning Canned
vegetables
Metal Sheets Making cans
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment
1-7
8. Hospital Process
Inputs Processing Outputs
Doctors, nurses Examination Healthy
patients
Hospital Surgery
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy
1-8
9. CONT....
Operations management is
– Defined as the design, operation, and improvement of the
production system that creates the firm’s primary products
(goods and/or services).
– Concerned with the management of the entire
production/delivery system that produces a goods and
delivery a product.
– it is the management of systems or processes
that create goods and/or provide services
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The Production System
Environment
Customers . Competitors .Suppliers
Government regulations . Technology . Economy
Inputs
Capital
Materials
Equipment
Facilities
Suppliers
Labor
Knowledge
Time
Transformation
System
Alteration
Transportation
Storage
Inspection
Outputs
Goods
Services
Action
Data Action
Data Data
Monitoring &
Control
11. Operation mgmt of a Typical Original Equipment Manufacturer
Source: Operations & Supply Management by Richard B. Chase, Ravi Shankar, F. Robert Jacobs, and
Nicholas J. Aquilano; Tata McGraw-Hill 2010 (12th Edition)
12. cont....
Operations management is the central core function of
every company.
Every company has an operations management
function.
Without operations, there would be no goods or
services to sell.
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13. Operations
Finance/Accounting
Human Resources
Marketing
Suppliers
Production and
Inventory data
Capital budgeting requests
Capacity expansion and
Technology plans
Budgets
Cost analysis
Capital investments
Stockholder
requirements
Orders for materials
Production and delivery
Schedules Quality
Requirements Design/
Performance specs
Material availability
Quality data
Delivery schedules
Designs
Product/Service
Availability
Lead-time estimates
Status of order
Delivery schedules
Sales forecasts
Customer orders
Customer feedback
Promotions
Personnel needs
Skill sets
Performance evaluations
Job design/work
measurement
Hiring/firing
Training
Legal requirements
Union contract negotiations
Operations as the Technical Core
Source: Operations Management by Roberta S. Russell & Bernard W. Taylor; Pearson Education, 4th Edition
14. 1.2. Why Study Operations
Management?
Business Education
Systematic Approach
to Org. Processes
Career Opportunities
Cross-Functional
Applications
Operations
Management
15. 1.3. Historical Development of Operations
Management
Late 1970s
Early 1980s
Mid 1980s
Early 1990s
Mid 1990s
Late 1990s
Early 2000s
Mid 2010s
Manufacturing strategy developed
Just-in-time (JIT) production
pioneered by the Japanese
Service quality and productivity
Total quality management
(TQM) and Quality
certification programs
Business process
reengineering (BPR)
Electronic commerce
Business analytics
Service science
Supply chain
management (SCM)
Six-sigma quality
16. 1.4. Manufacturing versus Service organization
Every organization can be broadly classified in to two broad
categories.
1. Manufacturing Organization
It produce physical, tangible goods that can be stored in
inventory before they are needed.
customers have no direct contact with the operation. Customer
contact is made through distributors and retailers.
2. Service Organization
It produce intangible products that cannot be produced ahead of
time.
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18. Manufacturing vs Service
Characteristic Manufacturing Service
Output
Customer contact
Uniformity of input
Labor content
Uniformity of output
Measurement of productivity
Opportunity to correct
Tangible
Low
High
Low
High
Easy
High
Intangible
High
Low
High
Low
Difficult
Low
quality problems
High
19. 1.5. Operation Mgmt Decision Making
• The major areas in which operations managers
make decisions are:
1.Strategic decision
Long-term decisions that set the direction for the entire
organization are called strategic decisions.
-Product and service plan
-Competitive priorities (TQM, statistical process, Location,
capacity and layout decision ).
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20. Cont...
2. Operating Decision
–deals with operating the factory the system once it is
in place.
It includes forecasting, materials management,
inventory management, aggregate planning,
scheduling.
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22. Productivity
Productivity is a measure of how well resources are
used
• Productivity =
Productivity is a relative measure
– Must be compared to something else to be meaningful
• Operations can be compared to each other
• Firms can be compared to other firms
• Partial productivity measures compare output to a
single input
• Multifactor productivity measures compare output to
a group of inputs
• Total productivity measures compare output to all
inputs
25. Example 2.
Collins Title Company has a staff of 4 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 company recently purchased a computerized title-search
system that will allow the processing of 14 titles per day.
Although the staff, their work hours, and pay will be the same, the
overhead expenses are now $800 per day.
- Labor productivity with the old system = 8 titles per day = 0.25 titles per
32 labor-hours labor hour
- Labor productivity with the new system = 14 titles per day = 0.4375 titles
32 labor-hours per labor-hour
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26. Cont…
Multifactor productivity with the old system = 8 titles per day = 0.0077 titles
640+400
per dollar
Multifactor productivity with the new system= 14 titles per day = 0.0097 titles
640+800 per dollar
• Labor productivity has increased from 0.25 to 0.4375. The change
is 0.43750.25=1.75 or a 75% increase in labor productivity.
• Multifactor productivity has increased from 0.0077 to 0.0097.
This change is 0.00970.0077=1.259, or a 25.9% increase in
multifactor productivity.
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27. Example 3
• You have just determined that your service employees have
used a total of 2400 hours of labor this week to process 560
insurance forms. Last week the same crew used only 2000
hours of labor to process 480 forms.
• Which productivity measure should be used?
• Answer: Could be classified as a Total Measure or Partial
Measure.
• Is productivity increasing or decreasing?
• Answer: Last week’s productivity = 480/2000 = 0.24, and
this week’s productivity is = 560/2400 = 0.23. So,
productivity is decreasing slightly.
28. Ex.
Osborne Industries is compiling the monthly productivity report for its
Board of Directors. From the following data, calculate (a) labor
productivity, (b) machine productivity, and (c) the multifactor
productivity of dollars spent on labor, machine, materials, and
energy.
The average labor rate is $15 an hour, and the average machine
usage rate is $10 an hour.
Units produced 100,000
Labor hours 10,000
Machine hours 5,000
Cost of materials $35,000
Cost of energy $15,000
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