Operations Management

An Overview of Operations Management

(OM)
Operations is a business function concerned with the creation of goods and
services.
Diagrammatically this can be shown below:

The transformation/conversion processes include:

a) Alter: refers to change in the form or state of the inputs. This change may
be physical as in manufacturing such as car assembly.
b) Transport: the entity (input) gets value added through transport because it
may have more value if located somewhere other than where it currently is.
c) Store: the value is enhanced if the entity is kept in a protected environment
for some period of time, such as potatoes in a cold storage.

Operations management is a managerial area that plan, coordinate and control

the resources required to produce the company’s goods and services.
Operations management is found in every kind of organizations be it small or
large; for-profit or non-profit, or manufacturing or service.

Key Concepts in Operations System

A system may be defined as “a purpose full collection of people, objects and

procedures for operating within an environment”. The basic process of the

PREPARED BY: SAMSON WORKU (MBA,MA, COC CERTIFIED) 1

 system converts (transforms) the resource inputs (such as people, plant, part
processes, planning and controlling systems) in to some useful form of outputs.
 Inputs: inputs to the system may be labor, material, machine, facilities,
energy, information, technology etc. Other inputs to operating system
can be: customer in a bank, patient in a hospital, and commuters, files
and papers to an office situation.
 Outputs: similarly output from the system may be in terms of finished
products, transported goods, delivered massages, cured patients,
serviced customers etc.
 Transformation: all operation functions are essentially a part of the
conversion process which transforms entities in shape, size, form,
location, space, time, and state to have higher value than the original
value.
Hence, every organization can be considered essentially as a conversion system
which converts inputs in to outputs through the conversion/transformation
processes.
Illustration:
System Inputs Transformatio Output
ns
Bank Clients Exchange Loan/deposit etc.
College High school Imparting Educated person
graduate Knowledge

Automobil Steel, Sheet, Engine Physical Automobile

e factory
Restaurant Hungry Customer Physical Satisfied customers

The essence of operations function is to add value during the

conversion/transformation process. Here value added is the term used to
describe the difference between the cost inputs and the price of outputs. Thus,
the major objective of the operations management is maximizing the value
generated through the conversion process.
Therefore, operations management is the set of activities that creates value in
the form of goods and services by transforming inputs into outputs.
Productivity
Productivity is a measure of the relationship between outputs generated in a
system and the inputs used to produce them. Productivity is given as a ratio.
The inputs include: Labour (L), Capital (K), Energy (E) and Raw Materials

PREPARED BY: SAMSON WORKU (MBA,MA, COC CERTIFIED) 2

(Rm). Productivity can be measured for operations, departments, and the whole
organization. Even for a country. Productivity is calculated by the following
formula: Productivity=Output/Input. There are different kinds of productivity
measures—The Partial, the Multifactor and Total Productivity.
Productivity—Exercises
1. A health-check clinic has five employees and ‘processes’ 200 patients per
week. Each employee works 35 hours per week. The clinic’s total wage bill
is £3,900 and its total overhead expenses are £2,000 per week. What is the
clinic’s single-factor labour productivity and its multi-factor productivity?

2. The Office of Labor Statistics collects inputs and outputs data from various
countries for comparison purposes. Labour hours are the standard measure of
input. Calculate the output per hour from the following data. Which country
is the most productive?

Country Labour Hour Units of Output

United States 89.5 116
German 83.6 100
Japan 72.7 102

3. Pink Company has opened four new stores in Blue City. Data on monthly
sales volume and labour hours are given below. Which store location has the
highest of labour productivity?

Store A B C D
Sales $ 40,000 $ 12,000 $ 6,000 $ 25,000
Volume
Labour 250 60 500 200

4. Suppose that a company manufacturing electronics calculators produced

10,000 calculators by employing 50 employees, working 8 hours/day for 25
days. What is the productivity of labour?

5. Given:

7040 units of output

Cost of labour $ 1,000
Cost of material $ $ 520
Cost of overhead $ 2,000

Required: What is the multifactor productivity?

Why study OM?

PREPARED BY: SAMSON WORKU (MBA,MA, COC CERTIFIED) 3

1. OM is one of the three major functions (Marketing, Finance, and
Operations) of any organization.
2. To know how goods and services are produced.
3. To understand what operations managers do.
4. OM is a costly part of an operations.
History of Operations Management

Historical Development of OM—Exercise

Outline and discuss HISTORICAL DEVELOPMENT of Operations
Management. (Hint: The list and the discussion starts from Industrial
revolution Late 1700s to Globalization of the world 2000s). Indicate
sources consulted and make use of APA Style).
When we think of what operations management does—namely, managing the
transformation of inputs into goods and services—we can see that as a function
it is as old as time. Think of any great organizational effort, such as organizing
the first Olympic games, building the Great Wall of China, or erecting the
Egyptian pyramids, and you will see operations management at work.
Operations management did not emerge as a formal field of study, however,
until the late 1950s and early 1960s, when scholars began to recognize that all
production systems face a common set of problems and to stress the systems
approach to viewing operations processes.
Many events helped shape operations management. These historical milestones
and current trends are summarized below.
• Industrial revolution Late 1700s
• Scientific management Early 1900s
• Human relations movement 1930s-1960s
• Management science Mid-1900s
• Computer age 1970s
• Environmental Issues 1970s
• Just-in-Time Systems (JIT) 1980s
• Total quality management (TQM) 1980s
• BPR 1990s
• Global competition 1980s
• Flexibility 1990s
• Time-Based Competition 1990s
• Supply chain Management 1990s
• Electronic Commerce 2000s
• Outsourcing flattening of the world 2000s
Forecasting in Operations Management
Forecasting is a process of predicting a future event using past and current data.
Forecasts are vital inputs for the design and the operation of the productive
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systems because they help managers to anticipate the future. Forecasting Time
horizons include short range that covers < 3 months; medium range that covers
3 moths to 3 years and long range that is 3+ years. Forecasting techniques are
generally classified as qualitative or quantitative. Qualitative techniques rely
on judgment, experience, and expertise to formulate forecasts; quantitative
techniques rely on the use of historical data, or associations among variables to
develop forecasts. Some of the techniques are simple, while others are
complex. Examples of Qualitative techniques include: Jury of expert opinion,
Delphi method, consumers’ expectation survey, sales force composite. The
quantitative techniques include: The naïve approach, Moving averages,
Exponential smoothing, Regression Equation etc.
Forecasting in Operations Management—Exercise
1. Pink Company’s performance for the last 5 years is given below.
Year Sales (Units)
1 20,000
2 30,000
3 15,000
4 25,000
5 26,000
Required: A sales forecast in units for the year 6 using the following
methods:
1. The naïve approach.
2. A three period moving average sales forecast.
3. Weighted moving average using weights of 0.4, 0.3,0.2 and 0.1 for the
year 5, 4, 3 and 2 respectively.
4. Regression Equation.
2. Assume that the predicted forecast was 40 units, actual demand was 42 units,
and smoothing constant 0.2, what is the new forecast?
Competitiveness
Companies must be competitive to sell their goods and services in the
marketplace. Competitiveness is an important factor in determining whether a
company prospers, barely gets by, or fails. Business organizations compete
with one another in a variety of ways. These include price, quality, product or
service differentiation, flexibility, and time to perform certain activities.
1. Price is the amount a customer must pay for the product or service. If all
other factors are equal, customers will choose the product or service that
has the lowest price. Organizations that compete on price may settle for
lower profit margins, but most focus on lowering costs of goods or
services.
2. Quality refers to materials and workmanship as well as design. Usually,
it relates to a buyer's perceptions of how well the product or service will

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 serve its intended purpose. Quality refers to the ability of the product to
meet or exceed customer, expectations.
3. Product or service differentiation refers to any special features (e.g.,
design, cost, quality, ease of use, convenient location, warranty) that
cause a product or service to be perceived by the buyer as more suitable
than a competitor's product or service.
4. Location it refers to where you are, customer need convience
(companies located close by.
5. Flexibility is the ability to respond to changes. The better a company or
department is at responding to changes, the greater its competitive
advantage over another company that is not as responsive. The changes
might relate to increases or decreases in volume demanded, or to
changes in the design of goods or services.
6. Responsiveness (Time) refers to a number of different aspects of an
organization's operations. One is how quickly a product or service is
delivered to a customer. This can be facilitated by faster movement of
information backward through the supply chain. Another is how quickly
new products or services are developed and brought to the market. Still
another is the rate at which improvements in products or processes are
made.
7. Service might involve after-sale activities that are perceived by
customers as value added, such as delivery, setup, warranty work,
technical support, or extra attention while work is in progress, such as
courtesy, keeping the customer informed, and attention to little details.

Scope of Operations Management

The scope of operations management includes:
 Product Design
 Process design
 Layout Design
 Capacity design
 Location Planning
 Job design
Product Design
Product design, is the process of deciding on the unique characteristics and
features of the company’s product. That is, its appearance, the materials it is
made of, its dimensions and tolerances, and its performance standards.
Steps in Product Design
Certain steps are common to the development of most product designs: idea
generation, product screening, preliminary design and testing, and final design.
Idea Generation/Development

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All product designs begin with an idea. Product ideas come from different
source. The first source of ideas is customers, the driving force in the design
of goods and services. Marketing is a vital link between customers and product
design. Market researchers collect customer information by studying customer
buying patterns and using tools such as customer surveys and focus groups.
Management may love an idea, but if market analysis shows that customers do
not like it, the idea is not viable.
Competitors are another source of ideas. A company learns by observing its
competitors’ products and their success rate. This includes looking at product
design, pricing strategy, and other aspects of the operation. Studying the
practices of companies considered “best-in-class” and comparing the
performance of one’s own company against theirs is called benchmarking.
Reverse Engineering Another way of using competitors’ ideas is to buy a
competitor’s new product and study its design features. Using a process called
reverse engineering, a company’s engineers carefully disassemble the product
and analyze its parts and features. Ford Motor Company used this approach to
design its Taurus model. Ford engineers disassembled and studied many other
car models, such as BMW and Toyota, and adapted and combined their best
features. Product design ideas are also generated by a company’s R & D
(research and development) department, whose role is to develop product
and process innovation.
Product Screening
After a product idea has been developed, it is evaluated to determine its
likelihood of success. This is called product screening. The company’s product
screening team evaluates the product design idea according to the needs of the
major business functions. In their evaluation, executives from each of the core
functional area may explore issues such as the following:
● Operations: What are the production needs of the proposed new product,
and how do they match our existing resources? Will we need new facilities
and equipment? Do we have the labor skills to make the product? Can the
material for production be readily obtained?
● Marketing: What is the potential size of the market for the proposed new
product? How much effort will be needed to develop a market for the new
product, and what is the long-term market potential for the product?
● Finance: The production of a new product is a financial investment like any
other. What is the proposed new product’s financial potential, cost, and
return on investment? Unfortunately, there is no magic formula for deciding
whether or not to pursue a particular product idea. Managerial skill and
experience, however, are key.
Management analyzes operations, marketing, and financial factors and then
makes the final decision. Companies generate new product ideas all the time,

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whether for a new brand of cereal or a new design for a car door.
Approximately 80 percent of ideas do not make it past the screening stage.
Preliminary Design and Testing
Once a product idea has passed the screening stage, it is time to begin
preliminary design and testing. Prototypes are built and tested. Changes are
made based on test results, and the process of revising, rebuilding a prototype,
and testing continues. For service companies this may entail testing the offering
on a small scale and working with customers to refine the service offering.
Fast-food restaurants are known for this type of testing, where a new menu
item may be tested in only one particular geographic area.
Final Design
Following extensive design testing, the product moves to the final design stage.
This is where final product specifications are drawn up.
Process Design
So far we have discussed issues involved in product design. Though product
design is important for a company, it cannot be considered separately from the
selection of the process. Product and process design decisions are typically
made together. A company can have a highly innovative design for its product,
but if it has not determined how to make the product in a cost-effective way,
the product will stay a design forever.
Process design, is the development of the process necessary to produce the
designed product. All processes can be grouped into two broad categories:
intermittent operations and repetitive operations. These two categories differ in
almost every way. Once we understand these differences, we can easily
identify organizations based on the category of process they use.
Intermittent Operations
Intermittent operations are used to produce a variety of products with
different processing requirements in lower volumes. Examples are an auto
body shop, a tool and die shop, or a healthcare facility. Think about a
healthcare facility. Each patient, “the product,” is routed to different
departments as needed. One patient may need to get an X-ray, go to the lab for
blood work, and then go to the examining room. Another patient may need to
go to the examining room and then to physical therapy.
Repetitive Operations
Repetitive operations are used to produce one or a few standardized products
in high volume. Examples are a typical assembly line, cafeteria, or automatic
car wash.
The most common differences between intermittent and repetitive operations
relate to two dimensions: (1) the amount of product volume produced, and (2)
the degree of product standardization. Product volume can range from making
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a unique product one at a time to producing a large number of products at the
same time. Product standardization refers to a lack of variety in a particular
product. Examples of standardized products are white undershirts, calculators,
toasters, and television sets.
Facility Layout
The next step in production planning is deciding on plant layout—how
equipment, machinery, and people will be arranged to make the production
process as efficient as possible. In this section, we’ll examine three common
types of facility layouts: process, product, and fixed position.
The process layout groups together workers or departments that perform
similar tasks. Goods in process (goods not yet finished) move from one
department to another. At each position, workers use specialized equipment to
perform a particular step in the production process. To better understand how
this layout works, we’ll look at the production process at the Vermont Teddy
Bear Company. Let’s say that you just placed an order for a personalized teddy
bear—a “hiker bear” with khaki shorts, a white T-shirt with your name
embroidered on it, faux-leather hiking boots, and a nylon backpack with
sleeping bag. Your bear begins at the fur cutting workstation, where its honey-
brown “fur” coat is cut. It then moves to the stuffing and sewing workstation to
get its insides and have its sides stitched together. Next, it moves to the
dressing station, where it’s outfitted with all the cool clothes and gear that you
ordered. Finally, it winds up in the shipping station and starts its journey to
your house.

In a product layout, high-volume goods are produced efficiently by people,

equipment, or departments arranged in an assembly line—that is, a series of
workstations at which already-made parts are assembled. Example, a candy
maker located in Bethlehem, Pennsylvania, makes a product called
Marshmallow Peeps on an assembly line. First, the ingredients are combined
and whipped in huge kettles. Then, sugar is added for color. At the next
workstation, the mixture—colored warm marshmallow—is poured into baby-
chick–shaped molds carried on conveyor belts. The conveyor-belt parade of
candy pieces then moves forward to stations where workers add eyes or other
details. When the finished candy reaches the packaging area, it’s wrapped for
shipment to stores around the world.

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Both product and process layouts arrange work by function. At the Vermont
Teddy Bear Company, for example, the cutting function is performed in one
place, the stuffing-and-sewing function in another place, and the dressing
function in a third place. If you’re a cutter, you cut all day; if you’re a sewer,
you sew all day: that’s your function. The same is true for the production of
Marshmallow Peeps at Just Born: if your function is to decorate peeps, you
stand on an assembly line and decorate all day; if your function is packing, you
pack all day.
Fixed-position layouts: Manufacturers use fixed-position layouts in which the
product stays in one place and the workers (and equipment) go to the product.
Examples: Aircrafts, ships, dams, buildings. The diagram next page is an
example of fixed position layout.

Technologies in Product and Process Design

There are also technological uses in product design and development.
Computer-aided design (CAD)—system using computer technology to create
models representing the design of a product. Computer-aided
Manufacturing (CAM)—software system determines the steps needed to
produce the component and instructs the machine that do the work. Computer
Integrated Manufacturing—a term used to describe the integration of product
design, process planning and manufacturing using an integrated computer
system. Automation--using machinery to perform work without human
operators. Robotics—a robot in manufacturing is usually nothing more than a
mechanical arm with a power supply and a computer-control mechanism that
controls the movements of the arm. The arm can be used for many tasks, such

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as painting, welding, assembly, and loading and unloading of machines. Robots
are excellent for physically dangerous jobs such as working with radioactive or
toxic materials. Also, robots can work 24 hours a day to produce a highly
consistent product. Robots vary in their degree of sophistication. Some robots
are fairly simple and follow a repetitive set of instructions.
Capacity Planning
Capacity can be defined as the maximum output rate that can be achieved by a
facility. The facility may be an entire organization, a division, or only one
machine. To decide on the quantity of products that you’ll produce. You begin
by forecasting demand for your product. Once you’ve forecasted the demand
for your product, you can calculate the capacity requirements of your
production facility—the maximum number of goods that it can produce over a
given time under normal working conditions.

Why Is Capacity Planning Important?

Capacity planning is the process of establishing the output rate that can be
achieved by a facility. If a company does not plan its capacity correctly, it may
find that it either does not have enough output capability to meet customer
demands or has too much capacity sitting idle. Example is a bakery. Not
having enough capacity would mean not being able to produce enough baked
goods to meet sales. The bakery would often run out of stock, and customers
might start going somewhere else. Also, the bakery would not be able to take
advantage of the true demand available. On the other hand, if there is too much
capacity, the bakery would incur the cost of an unnecessarily large facility that
is not being used, as well as much higher operating costs than necessary.

Measuring Capacity
When discussing the capacity of a facility, we need two types of information.
The first is the amount of available capacity, which will help us understand
how much capacity our facility has. The second is effectiveness of capacity
use, which will tell us how effectively we are using our available capacity.
Next we look at how to quantify and interpret this information.
Measuring Available Capacity
Let’s return to the bakery example for a moment. Suppose that on the average
we can make 20 pies per day. However, if we are really pushed, such as during
holidays, maybe we can make 30 pies per day. Which of these is the true
capacity? We can make 30 pies per day at a maximum, but we cannot keep up
that pace for long. Saying that 30 per day is our capacity would be misleading.
On the other hand, saying that 20 pies per day is our capacity does not reflect

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the fact that we can, if necessary, push our production to 30 pies. Through this
example you can see that different measures of capacity are useful because they
provide different kinds of information. Following are two of the most common
measures of capacity:
Design capacity is the maximum output rate that can be achieved by a facility
under ideal conditions. In our example, this is 30 pies per day. Design capacity
can be sustained only for a relatively short period of time. A company achieves
this output rate by using many temporary measures, such as overtime,
overstaffing, maximum use of equipment, and subcontracting.
Effective capacity is the maximum output rate that can be sustained under
normal conditions. These conditions include realistic work schedules and
breaks, regular staff levels, scheduled machine maintenance, and none of the
temporary measures that are used to achieve design capacity. Note that
effective capacity is usually lower than design capacity. In our example,
effective capacity is 20 pies per day.
Facility Location Design
Facility location is determining the best geographic location for a company’s
facility. In choosing a location, managers must consider several factors:
 To minimize shipping costs, both for raw materials coming into the
plant and for finished goods going out, managers often want to locate
plants close to suppliers, customers, or both.
 They generally want to locate in areas with ample numbers of skilled
workers.
 They naturally prefer locations where they and their families will enjoy
living.
 They want locations where costs for resources and other expenses—
land, labor, construction, utilities, and taxes—are low.
 They look for locations with a favorable business climate—one in
which, for example, local governments might offer financial incentives
(such as tax breaks) to entice them to do business in their locales.
Various methods are available to identify the best location for a facility: Factor
Rating Method, Weighted Factor Rating Method, Load-Distance method,
Center of Gravity Method, and Break-even point.
Job Design
Job design here refers to the context of non-supervisory work. It refers to the
function of specifying the work activities of an individual or groups in an
organization. There are two approaches to job design:
(1) The rational approach
(2) The behavioral approach

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1. The Rational Approach
 Works are divided into simple and repetitive tasks

 Work simplification and specialization is the outcome of this approach

 The advantage of specialization is that it gives high productivity and low
unit cost (efficiency)
 The disadvantage is that jobs are described as monotonous and are
source of dissatisfaction
2. Behavioral Approach
 attempts to solve the problems created by the rational approach
 Within this approach there are three techniques
(1) Job rotation
(2) Job enlargement
(3) Job enrichment
These techniques are helpful to make jobs more interesting and challenging
1. Job Rotation
In this technique employees rotate from one job to another on a systematic
basis, eventually cycling back to their original tasks.
2. Job enlargement
Job enlargement enhances a job by adding tasks at similar skill levels.
3. Job enrichment
Job enrichment is the third technique that enhances jobs by adding tasks that
increase both responsibility and opportunity.
To conclude, an operations manager designs and redesigns jobs to increase
productivity.

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