Operations Management

MBA II Sem

UNIT: I
Dr. A. Subrahmanyam

GITAM Institute of Management

GITAM Deemed to be University
 UNIT: I

Topics:
Introduction to Operations Management- Scope, Need, Input-
Process-Output Model, Nature of Operations, Goods Vs.
Services, Four Vs, Five Performance Objectives, Operations
Strategy and its Formulation.
 Introduction
• Operations Management (OM) involves managing the various
activities, processes, and procedures related to the conversion of
numerous inputs into outputs.
• It is crucial for manufacturing as well as services organizations to
implement OM practices effectively.
• This subject is assuming greater importance with globalization, and
with corporations expanding their operations worldwide.
• The Indian economy has experienced enormous development in OM
practices since liberalization.
• Liberalization has brought with it a lot of foreign MNCs into the
country as well as world-class OM practices to be implemented by
the domestic companies.
Historical Development of Operations Management
• Adam Smith is the first person who introduced Production Management
in 1776.
– Emphasized the division of labour and This effected in turn for
improving the quality & quantity of goods.
• Charles Babbage in 1883 introduced the principle of limiting skills as a
basis for pay fixation.
• Also agreeing on Adam Smith’s theory.
• Frederick W. Taylor (early 1900s) - Scientific laws govern how much a
worker can produce and Importance of specialization & expertise to carry
different operations.
• In 1914 Henry L. Gantt Activity Scheduling - Precursor to CPM/PERT
Project Management – GANTT Charts
• In 1914 F W Harris introduced the economic lot size method to control the
inventory of an Enterprise.
Historical Development of Operations Management
Cont..
• In 1931 Walter Schewart introduced statistical quality control. Applied in
second World War.
• Elton Mayo (Western Electric, 1927-1933) Hawthorne Studies - Human
Relations School
• –In 1934 L H C Tippet developed ‘Sampling Theory’. Applied in Production
Analysis in 1950.
• In 1947 George Dantzig, US, Simplex Method of Linear Programming
• 1950s-1960s Proliferation of Operations Research
• 1970s Computer OR Applications
• 1980s JIT, CAD/CAM, TQC, Robots, etc.
• 1990s Customer Satisfaction, Business Process Reengineering
Historical Development of Operations Management
Cont..

Where Do We Stand Today?

• Advent of computer introduced the field of Automation.
• Efficient use of Labour, Material & Equipment Economies in
Production.
• Continuous improvement in design & layout.
• Sophisticated production control techniques to produce goods
& service at desired time & minimal cost.
 Production Management
• Production involves Step by step conversion of one form
of material to other through chemical or mechanical process.
• Creating goods and services

• Production Management
– Planning, organizing, directing and controlling the activities of
the production function.
– The set of interrelated management activities which are
involved in manufacturing certain products is called as
production management.
 Production Management
▪ Operations Management is:
The management of systems or processes that create goods and/or
provide services

Goods: Physical items produced by business organizations

Services: Activities that provide some combination of time, location,
form and psychological value.

Operations Management affects:

▪ Companies’ ability to compete
▪ Nation’s ability to compete internationally
 OM interaction with other functional areas of
management
• All the mangers are involved in planning, organizing and controlling.
Operations managers have the direct responsibility of “getting the job
done”.
• Operations managers must provide the leadership that is needed to
produce the product or service demanded by the customer.
Operations are everywhere
• The best way to start understanding the nature of “Operations” is to look
around you
• Everything you can see around you (except the flesh and blood) has been
produced by an operation
• Every service you consumed today (radio station, bus service, lecture, etc.)
has also been produced by an operation
• Operations Managers create everything you buy, sit on, wear, eat, throw at
people, and throw away
Interfunctional relationships between operations and
other functions

Engineering/ Product/service
technical Understanding of
the capabilities and development
function constraints of the function
operations process
Analysis of new
technology options Understanding of
process technology
needs New product and
Accounting service ideas
and finance Provision Understanding of the
of relevant capabilities and
function data
Operations constraints of the
Financial analysis function operations process
for performance
and decisions Market
requirements Marketing
Understanding of function
human resource needs Understanding Provision of systems for
of infrastructural design, planning and
Recruitment and system control, and improvement
development needs
and training
Human Information
resources technology
function (IT) function
 Why Should Study OM?
– OM is one of three major functions of any organization, and it is
integrally related to all the other business functions
– We want to know how goods and services are produced
– Offers a major opportunity for an organization to improve its
productivity and profitability
– We study OM to understand what operations managers do. By
understanding, we can develop the skills necessary to become
such a OM Expert
– The OM function is responsible for a major portion of the assets
of most organizations
– OM is such a costly part of an organization
– Nearly half of the employed people over the world have jobs in
operations

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 Production vs. Operations Management:
• production management was formerly considered as
manufacturing management only, now after inclusion of
services into its scope, is broadly known as operations
management.
• Production implies products i.e. manufacturing.
• Operations also apply to services.
• Therefore, Operations have replaced the term production.
• "Good" = economic unit that is produced. It is tangible.
• "Service" = economic activity that is performed. It is
intangible.

• Operations Management (OM):

– the set of activities that creates value in the form of goods
and services by transforming inputs into outputs
 Examples
❖ Some examples of Productions are:
a) Manufacturing custom-made products like, boilers with a
specific capacity, constructing flats, some structural fabrication
works for selected customers, etc.,
b) Manufacturing standardized products like car, bus, motor cycle,
radio, television etc.,

❖ Some examples of Services are:

a) Custom made services like, medical facilities and clinical tests,
arranging food for parties, travel booking services etc., and
b) Standardized services like, developing standard computer
softwares, providing standard insurance policies etc.
Benefits Derived From Efficient Operations Management
• Consumer benefits from improved industrial Productivity, increased
use value in the product. Products are available to him at right
place, at right price, at right time, in desired quantity and of desired
quality.

• Investors: They get increased security for their investments,

adequate market returns, and creditability and good image in the
society.

• Employee gets adequate Wages, Job security, improved working

conditions and increased Personal and Job satisfaction.

• Suppliers: Will get confidence in management and their bills can be

realized with out any delay.

• The Nation will achieve prospects and security because of

increased Productivity and healthy industrial atmosphere.
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Scope of Production and Operation Management
• The scope of production and operations management is indeed vast.
• Commencing with the selection of location production management
covers such activities as
• Acquisition of land,
• constructing building ,
• Procuring and installing machinery ,
• Purchasing and storing raw material and
• Converting them into saleable products.

• Product Selection Design

• Process Selection and Planning
• Facilities Location
• Facilities Layout and Materials Handling
• Capacity Planning
Scope of Production and Operation Management
Cont..
Added to the above are other related topics Operational decisions
such as
• Quality management ,
• Maintenance management,
• Production planning and control (PPC)
• Inventory Control,
• Method Study,
• work simplification,
• Maintenance & Replacement,
• Cost Reduction And Control and other related areas.
ROLE OF THE PRODUCTION AND OPERATIONS
MANAGER
The Operations Function consists of all activities directly
related to producing goods or providing services.

A primary function of the operations manager is to

guide the system by decision making.

1. System Design Decisions

2. System Operation Decisions

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 ROLE OF THE OPERATIONS MANAGER
1. System Design Decisions
– Capacity
– Facility location
– Facility layout
– Product and service planning
– Process planning
– Technology planning
– Acquisition and placement of
equipment
These are typically strategic
decisions that require
• long-term commitment of
resources
• Determine parameters of
system operation
Cont..
2. System Operation Decisions
– Management of personnel
– Inventory management and
control
– Scheduling
– Project management
– Quality assurance
Operations managers spend more
time on system operation decision
than any other decision area but
they still have a vital stake in
system design
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 Careers in OM
Opportunities
• Plant manager
• Operations analyst
• Quality manager
• Supply chain manager and planner
• Process improvement consultants

Entry-Level Jobs in OM
• Purchasing planner/buyer
• Production (or operations) supervisor
• Production (or operations) scheduler/controller
• Production (or operations) analyst
• Inventory analyst
• Quality specialist
• others
 ETHICAL ISSUES IN OPERATIONS

➢Ethical issues arise in many ➢Financial statements

aspects of operations ➢Worker safety
management:
➢Product safety
➢Quality
➢The environment
➢The community
➢Hiring and firing workers
➢Closing facilities
➢Workers rights

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 OPERATIONS SYSTEM
• Operations are activities through which people carry out
transformations (input-Process- output) in an organization.
• Virtually in all organizations, the operations function usually
involves the larger share of organizational resources.
• This does not mean, however, that operations is more
important than other functions, like marketing, human
resources management, finance, etc.
• On the contrary, operations are best viewed as one of the essential
functions of any organization and well integrated into other
functions of an organization.
 Operations System
Operations: Value-added Process,
Transformation Process
The operations function involves
the conversion of inputs into outputs
 Characteristics of Operations Systems
• Production is an organized activity, so every production system has
an objective.

• The system transforms the various inputs to useful outputs.

• The transformation process is performed efficiently and the output

is of greater value than the sum of the inputs.

• It does not operate in isolation from the other organization system

• There exists a feedback about the activities, which is essential to

control and improve system performance.

• Any activities that do not add value are superfluous and should be
eliminated.
 Operations management at..... IKEA
Design a store layout
Design elegant which gives smooth Ensure that the jobs
products which can and effective flow of all staff encourage
be flat-packed their contribution to
efficiently business success

Site stores of an Continually

appropriate size examine and
in the most improve operations
effective locations practice

Maintain
cleanliness and Monitor and
safety of storage Arrange for fast enhance quality of
area replenishment of service to customers
products
 Examples of Operations Systems
Operations management in all types of organization
System Inputs Conversion Output
(desired)
Hospital Patients Health Care Healthy
MDs, Nurses Individuals
Medical Supplies
Equipment
Restaurant Hungry Customers Prepare Food Satisfied
Food, Chef Serve Food Customers
Servers
Atmosphere
Automobile Sheet Steel Fabrication High Quality
Plant Engine Parts and Assembly Automobiles
Tools, Equipment of Cars
Workers
University High School Grads Transferring Educated
Teachers, Books of Knowledge Individuals
Classroom and Skills 6
 Operations management is changing
The business environment is changing,
for example……
❑ Increased cost-based competition
❑ Higher quality expectations
❑ Demands for better service
❑ More choice and variety
❑ Rapidly developing technologies
❑ Frequent new product/service
introduction
❑ Increased ethical sensitivity
❑ Environmental impacts are more
transparent
❑ More legal regulation
❑ Greater security awareness
Prompting operations responses, for
example…….
❑Globalization of operations networking
❑Information-based technologies
❑Internet-based integration of operations
activities
❑Supply chain management
❑Customer relationship management
❑Flexible working patterns
❑Mass customization
❑Fast time-to-market methods
❑Lean process design
❑Environmentally sensitive design
❑Supplier ‘partnership’ and development
❑Failure analysis
❑Business recovery planning
Solutions
• Introduction of six sigma: a process for reducing cost, improving quality,
and increasing customer satisfaction
• Introduction of Agility: the ability of organization to respond quickly to
demands or opportunities.
• Introduction of Lean system: System that uses minimal amount of
resources to produce a high volume of high quality goods with some
variety.
 Goods vs Service
Characteristic Goods Service
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Output Tangible Intangible
Measurement of productivity Easy Difficult
Opportunity to correct problems High Low
Inventory Much Little
Evaluation Easier Difficult
Patentable Usually Not usual
 Goods-service Continuum

Steel production Home remodeling Auto Repair Maid Service Teaching

Automobile fabrication Retail sales Appliance repair Manual car wash Lawn mowing

High percentage goods Low percentage goods

Low percentage service High percentage
service
Responsibilities of Operations Management

Planning Organizing
– Capacity – Degree of centralization
– Location – Process selection
– Products & services
– Make or buy
– Layout Staffing
– Projects – Hiring/laying off
– Scheduling – Use of Overtime

Controlling/Improving Directing
– Inventory – Incentive plans
– Quality – Issuance of work orders
– Costs – Job assignments
– Productivity
Key Decisions of Operations Managers

• What
What resources/what amounts

• When
Needed/scheduled/ordered

• Where
Work to be done

• How
Designed

• Who
To do the work
 The Five Performance objectives for operations
• The quality objective • The flexibility objective
✓ Quality reduces costs • Product/service flexibility
✓ Quality increases • Mix flexibility
dependability
• Volume flexibility
• Delivery flexibility
• The speed objective
✓ Flexibility speeds up response
✓ Speed reduces inventories
✓ Flexibility saves time
✓ Speed reduces risks
✓ Flexibility maintains dependability
• The dependability objective
• The cost objective
✓ Dependability saves time
✓ Dependability saves money.
✓ Dependability gives stability
The 5Ps to achieve Performance objectives for operations
1. Product: 2. Plant:
A product must have: • The plant accounts for major investment
✓ Performance • The plant is concerned with:
✓ Quality and reliability (1) Design and layout of buildings, (2) Reliability and
✓ Aesthetics and ergonomics maintenance of equipment, (3) safety of operations
✓ Quantity and selling price • Plant layout must allow smooth movement of men and
✓ Delivery schedule material.
• Type of layout dependent on production type, volume
of demand
3. Programme: 4. Process:
Programme indicates timetable of Selection of process depends on following factors:
production ✓ Available capacity
Programme prepares schedule for: ✓ Manpower skill available
➢Purchasing ✓ Type of production
➢Transforming ✓ Layout of plant
➢Maintenance ✓ Safety
➢Cash ✓ Maintenance required
➢Storage and transport ✓ Manufacturing cost
5. People:
People are part of organization. Success of organization depends on attitude and skills of working
people. Job satisfaction depends on good matching between people and jobs.
It is possible by:
✓ Motivation, Training of employees, Condition of work and Proper wages
A general model of Operations Management
Operation’s
strategic
Objectives

Operation's
Input competitive
transformed role & Position
Operation
resources Strategy

Materials
Information
Customers Design
Improvem Customers
ent
Output
Input
products and
Resources
services

Planning
Facilities and Control
Staff

Input
transforming
resources
 Operations Strategy

Strategic
reconciliation

Operations Operations Market

Strategy
Requirement
Resources
 Operations Strategy
Introduction
• No organization can tell exactly what will happen in the future.
• But all organizations need strategic direction and can benefit from
some idea of where they are heading and how they could get
there.
• Once the operations function has understood its role in the
business, it needs to formulate a set of general principles which
will guide its decision making. This is the operations strategy of the
company.

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Low-cost Airlines That We Have In The Country
 Differences??
• How the low-cost airlines are different from a full fare airlines
such as Indian airlines???

• Which of the two airlines is better- low-cost airline or full fare

airline??

• ANSWER IS…

• Both are good in their own way provided they design the service
with a strategy (or an objective) and deliver it flawlessly to the
chosen customer segment.

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 What is strategy?

✓ Setting broad objectives that direct an enterprise towards its overall

goal

✓ Planning the path (in general rather than specific terms) that will
achieve these goals

✓ Stressing long-term rather than short-term objectives

✓ Dealing with the total picture rather than stressing individual activities

✓ Being detached from, and above, the confusion and distractions of

day-to-day activities.
 Strategic decisions

Strategic decisions are those decisions which: are widespread in their

effect on the organization to which the strategy refers, define the
position of the organization relative to its environment, and move the
organization closer to its long-term goals.
‘Operations’ is not the same as ‘operational’

‘Operations’ are the resources that create products and

services.

‘Operational’ is the opposite of strategic, meaning day-to-

day and detailed.

So, one can examine both the operational and the

strategic aspects of operations.
 Operations Strategy
Relevance & Context
• Strategic planning exercise
Enables an organization to respond to the market needs in the most
effective manner by :
– By aligning various resources and activities in the organization
– To deliver products & services that are likely to succeed in the market

• Operations Strategy
– Is a process by which key operations decisions are made that are
consistent with the overall strategic objectives of a firm
– Decisions in the operations function are made on the basis of the inputs
from the overall corporate strategy

Corporate strategy is hierarchically the highest strategic plan of the organization,

which defines the corporate goals and ways of their achieving within
strategic management. A vision and mission are parts of the strategy. When
developing the strategy, numerous analytical techniques are used (PESTLE, SWOT,
VRIO)
 Need for Operations Strategy
• Competitive dynamics & expectations of customers change with
time
• Due to the changes in market place, competitive priorities for an
organization is likely to change

– While it was customary for people to book for a passenger car and wait for a
few months to get delivery of the car, today a manufacturer of passenger cars
cannot afford to make customers wait that long
– Triveni Engineering, a manufacturer of Turbines faced a 40% reduction in the
price of turbines in the less than 3.5 million watts category over the last six
years

• Need a mechanism to systematically respond to these changes in

the most effective way
• Need to tune their operations to match with the competitive
priorities
 Strategy Formulation Process Steps

• Step 1: Understanding the Competitive Dynamics at the Marketplace

• Step 2: Identifying Order-Qualifying & Order-Winning Attributes
• Step 3: Deciding on Strategic Options for Sustaining Competitive
Advantage
• Step 4: Matching the strategic options with resources, constraints,
values & objectives to arrive at the overall Corporate Strategy
• Step 5: Developing an Operations Strategy on the basis of the
corporate strategy
• Step 6: Selecting appropriate options for configuring an Operations
systems & establishing relevant measures for operational excellence
 Strategy formulation process

Competitive
Order winners
Dynamics at
Order Qualifiers
the marketplace

Strategic options for Generic Competitive Priorities

Sustaining Quality, Cost,
competitive advantage Delivery, Flexibility

Firm level
Strengths & Corporate Strategy
Weaknesses

Strategic decisions for Measures for

Operations Strategy
Operations System Operational Excellence
 Order Qualifiers & Order Winners

• Order qualifying attributes are the set of attributes that customers

expect in the product or service they consider for buying
• Order winning attributes are other attributes that have the
potential to sufficiently motivate the customer to buy the product
or service
• What constitutes order winning and order qualifying might
change from time to time
– During the early 1980’s providing superior quality products was
an order winning attribute. However, in the 1990’s quality
became an order qualifying attribute as customers began to
expect high levels of quality.
– Order winning attributes include efficient consumer response,
speed, variety and convenience
 Operational Excellence
Performance Measures
• Provide critical linkage between order winning and order qualifying
attributes and choices made in operations
• Help organisations evaluate how well the operations system is
responding to the requirements at the marketplace
• Serve a useful purpose in comparing performances amongst
competitors and for benchmarking
• Four generic options are useful for developing measures for
operational excellence; this includes
• Quality,
• Cost,
• Delivery and
• Flexibility
 Operational Excellence
Performance Measures
Quality
First Pass Yield
Quality Costs
Defects per Million Opportunities
Number of suggestions per employee
Process Capability Indices
Delivery
Lead time for order fulfillment
Procurement and Manufacturing Lead time
On time delivery for supplies
Schedule adherence
Indirect Measures
Indirect-labour to Direct-labour ratio
Ratio of Lead time to work content
Process rate to sales rate ratio
Average training time per employee
Cost
Average days of inventory (No. of inventory
turns)
Manufacturing cost as percent of sales
Procurement costs, total cost of ownership
Value of import substitution, cost reduction
Target cost reduction efforts
Flexibility
Number of models introduced
New product development time
Breadth and depth of the product and
service offerings
Process flexibility
Number of suggestions per employee
Non-value added content in processes
No. of certified deliveries
Delivery quote for customized products and
services
Strategic Decisions in Operations
Options

Product
Portfolio

Supply Chain Process

Strategic
Options for
Operations

Technology Capacity
 Operations Strategy Options:
Product Portfolio
Product portfolio pertains to decisions on
what products the organization wants to produce
the number of variations in each product line
the extent of customization offered to customers

Product portfolio as a strategic option

Wide product portfolio: Overall strategic objective is to provide highly
differentiated set of products and services to the customer
Narrow product portfolio: Overall strategic objective is one of cost
leadership

Examples in Services & Manufacturing

✓ Air travel from Bangalore to Delhi: Indigo and Jet Airways differ vastly in
terms of the service offered
✓ Computer manufacturers, Dell and Lenova: Overall strategic objective of
Dell appears to be one of providing highly differentiated products,
Lenova appears to emphasize on robust and reliable computing power
 Operations Strategy Options:
Process Choices
Three types of flow happen on account of process choices:
✓ Continuous streamlined flow
✓ Intermittent or batch flow
✓ Jumbled flow
Choice of process will be consistent with product portfolio decisions
✓ A manufacturer emphasizing on production volumes, fewer varieties
and less cost will make process choices pertaining to continuous
streamlined flow (Hero Honda)
✓ An organization wishing to satisfy an objective of providing wide
range of products to the customers will adopt batch/intermittent
flow type
✓ the need to provide a very large variety and practically a production
volume of one or few will adopt jumbled flow (BHEL)
 Operations Strategy Options:
Supply Chain issues
Supply chain refers to the network of entities supplying components and
raw material to an organization as well as those distributing the finished
goods of an organization to the customers through alternative channels
Designing an appropriate supply chain calls for a better understanding of the
product profile for which the supply chain is configured
Two types of supply chains can be configured:
Efficient supply chain: objective is cost optimization and better
utilization of resources employed in supply chain operations; typically
used in the case of functional products (machine tools, engineered
equipments)
Responsive supply chain: the key objective is to develop a capability to
respond fast to the market requirements; typically used in the case of
innovative products (iPhone, Fancy Garments, trendy Electronics
Goods)
 Operations Strategy Options:
Technology Choices
Technological advancements in recent years have given new opportunities
for creating competitive advantage for firms
Case of Asian Paints utilizing technological advancements for mixing of
basic pigments to distribute paints in large varieties of colours and in
large assortment of sizes
Using new technology options for manufacturing processes, organizations
can
react faster to customer needs
manage a wide portfolio of product offerings and
yet maintain high levels of productivity
Organizations making a strategic choice to operate in the manufacture of
mid-volume, mid-variety products could utilize new technology
 Operations Strategy Options:
Strategic Advantages
✓ Increased machine utilisation
✓ Scheduling flexibility: Permits an organisation to have flexibility in
scheduling thereby enabling the organisation to react to changes
fast
✓ Ease of engineering challenges: Changes in engineering design and
process plans can be easily accommodated by use of technology
based manufacturing and process design.
✓ Ease of expansion: Provides volume flexibility to the organisation,
making it much easier to expand in response to a growing market
✓ Reduced manufacturing lead time
✓ Lower in-process inventory: Several of the above benefits directly
translate to lower work in process inventory and reduced cost of
manufacturing
 Operations Strategy Options:
Capacity
Capacity is defined as:
maximum number of units of goods that can be produced per unit time
in the case of manufacturing system
the maximum number of service offerings that can be made per unit
time in the case of a service system

Capacity decision influences the cost of goods & services offered in three
ways:
Accrued cost advantage due to economies of scale
Ability to spread fixed costs over a larger capacity
additional cost advantages in procuring other factors of production
 World Class Manufacturing (WCM)
Core building blocks
WCM firms perform very well in all the four parameters of Quality, Cost,
Delivery and Flexibility at the same time using better operations
management practices
The new operations management tools that form the core building blocks of
WCM are:
Just in Time (JIT)
Total Quality Management (TQM)
Total Productive Maintenance (TPM)
Employee Involvement (EI)
Simplicity
 World Class Manufacturing (WCM)
Changing Competitive Priorities for WCM

Weak companies are plagued by Trade-off obstacles

WCMs have gained an upper hand over the trade-off obstacles
 The strategy challenge

• Difficulties in formulating operations strategy

• Highly complex, effective use of most of an organization’s
resources
• Operations managers may be geographically dispersed
• Operations managers operate in “real times” & day to day
detailed running of the operations.
• Difficult to accept innovative and imaginative changes
Judging the effectiveness of operations strategy
• An effective operations strategy should clarify the lines between
overall competitive strategy and the development of the
organization’s operations resources.
• The operations strategy should be:
✓ Appropriate
✓ Comprehensive
✓ Coherent
✓ Consistent over time
✓ Credible (feasible and realistic)

• At a broad level, operations strategies must also be

✓ Ethical
✓ International
✓ Creative and
✓ Implemented
Success factors that effect implementation of an
operations strategy
• Top management support
• Business driven
• Strategy drives technology
• Change strategies are integrated
• Invest in people as well as technology
• Manage technology as well as people
• Everybody in board
• Clear explicit objectives
• Time framed project management
End of Unit 1

All the best