Operations Management - Chapter 1 - BAIS

College of Business and Economics
School of Commerce
Logistics and Supply Chain Management Program Unit
Operations Management (LSCM 3072)

By
Zelalem Bayisa(PhD)
November 2022
Addis Ababa, Ethiopia
11/23/2022 Zelalem Bayisa (PhD) 1

Course Contents
PART I: INTRODUCTION TO OPERATIONS MANAGEMENT
✓ Introduction
✓ Manufacturing Operations and Service Operations
✓ Historical Development of Operation Management
✓ Operations strategy & competitiveness
✓ Productivity Measurement
PART II:DESIGN OF THE OPERATION SYSTEM
✓ Product and service design
✓ Strategic Capacity Planning
✓ Facility Location & Layout
✓ Job Design and Work Measurement
PART III:OPERATIONS PLANNING & CONTROL
✓ Aggregate production planning
✓ Material Requirement Planning
✓ Operations Scheduling

Chapter 1
Introduction

Chapter Learning Objectives
At the end of this chapter, you will be able to:
• Define the term operations management

• Identify the three major functional areas of organizations and describe
how they interrelate
• Identify similarities and differences between production and service
operations
• Describe the operations function and the nature of the operations
manager’s job
• Summarize the two major aspects of process management
• Explain the key aspects of operations management decision making
• Briefly describe the historical evolution of operations management
• Characterize current trends in business that impact operations
management

What is Operations Management?
Operations management is the

branch of management that
administers the complete
production timeline of a service/
product from the input stage to
the finished stage, including
planning, organizing, and directing
and controlling the operations,
manufacturing and production
processes, and service delivery to
lead to the desired outcome of
high-quality product/service that
meets the demands of the
customers.

What is OM?...
OM involves the management of the transformation of
input into outputs efficiently and effectively as depicted
in the following diagram

OM as a system

OM as a system…

OM as a system…

What is Transformation process in OM?
➢ A transformation
process in operations
management is the act
of changing some part
of the operations to
improve it in some way.
For example, to make it
more effective, faster,
more reliable, less
expensive, and so on.

A transformation process in OM
will typically involve some of the
following components:
➢ Changing physical
characteristics of materials
used in the operation, for
example switching from a type
of plastic to another.
➢ Changing the location of
materials or customers, for
example having customers pay
at the table instead of at the
counter for a restaurant (for
the process of collecting
payment, which is operational
in a restaurant).

A transformation process in operation

management will typically involve
some of the following components:
➢ Changing who owns materials or
information, for example switching
from a “buy” approach to a “lease”
or rent approach, or even
outsource part of the things your
company traditionally performed
internally.
➢ Changes to the information, for
example collecting more
information as goods move
through the warehouse by using
RFIDs

➢ In a nutshell, transformation
process in OM system involves
value adding activities to produce
product having higher value than
its original state.
➢ It may take form:
▪ Physical as in manufacturing
operations
▪ Locational as in transportation
operations
▪ Exchange (ownership) as in retail
operations
▪ Physiological as in health care
▪ Psychological as in entertainment
▪ Informational as in communication
▪ Storage as in warehousing

OM as a system…

Goods or Services?
• Goods are physical items

that include raw
materials, parts,
subassemblies, and final
products. E.g.,
Automobile, Computer
• Services are activities
that provide some
combination of time,
location, form or
psychological value. E.g.,
Air travel, Education,
Haircut, Legal counsel

Goods versus services?

Manufacturing versus Service Continuum

Why study OM?
• It lies at the heart of all
business activities
(Technical core)
• We want to know how
goods and services are
produced
• To know what operations
managers do so that we
develop skills
• Career Opportunity
• Operations represent
such costly part of the
organization

Evolution of OM
• Production and OM is as
old as human being
started to produce goods
& services. Let’s examine
what have been done in
the last 200+ years

Evolution of OM…

Evolution of OM…
The discipline has been evolving since the 1960s very significantly (See the diagram
below)

Evolution of OM…

Evolution of OM…

Evolution of OM…

Evolution of OM…

Group Assignment I (10%)
Instruction: Critically review, analyse and discuss key

developments under the following era in the evolution of
Operations Management in not more than 10 pages!
Group 1: Industrial Revolution
Group 2: Scientific Management
Group 3: Human Relations Movement
Group 4: Operations Research
Group 5: Quality Revolution
Group 6: Internet Revolution
Group 7: Globalization
Due date for submission: 17 November 2022

Operations Function and its Environment
• Environment
– Internal:
• Marketing, Finance, Procurement, HR, Accounting,
Engineering, etc.
– External:
• Economic, Natural, Political/legal, Market, Supply, Labor,
etc.
Operations Function and its Environment
OM Decision Making Areas
Operation vs, Marketing

• The marketing department constantly influences the management of
production by delivering information concerning the following:
– Sales forecasts of future levels of demand ….to plan how much to produce.
– Data on sales orders which helps to determine what to produce.
– Customer quality requirement that helps to determine which machines, workers ,
tools, processes can fit this quality.
– New products and processes.
• New product and process ideas can radically change the production system.
– Customer feedback of products.
Operation vs. Accounting

• The function of Accounting Department is collecting, summarizing
and interpreting financial information for management decisions.
• Thus, accountants need to understand the basics of
– inventory management,
– capacity utilizations and
– labor time standards
to develop accurate cost data , performs audits, and prepare financial reports.
Operation vs. Finance

• Finance involves the provision of and management of money and other assets.
• Information to the Production Department from Finance can be conceived as
follows :
– Budgetary information
– Analysis of investment:
• …..investments in equipment and inventories, rate of returns, depreciation, sinking funds,
payback periods, compound interest, etc.
– Provision of money for improvements: ……funds available
– Provision of information on the general condition of the firm
Operation vs, Procurement

• The procurement function deals with the acquisition of proper materials,
equipment, service and supplies of the right qualities, in the right quantities,
for the right price s, at the right time, and from the right place.
• The information to exchange between the procurement and production
functions is:
• Determination of items to be purchased
• Determination of delivery schedules
• The discovery of new products, materials , and processes:
• Inventory control
Operation vs. Engineering

• Engineering develops product-service designs and develop
production methods.
• The Engineering functional unit supports Operations
Managers in the following areas:
– Method analysis
– Work measurement information
– Plant layout and material handling information
– Plant maintenance information
• Operations management professionals make a number of key decisions that affect

the entire organization.
• These include the following:
– What: • Where:
• What resources will be needed, and in • Where will the work be done?
what amounts?
• How:
– When:
• How will the product or service be
• When will each resource be needed?
• When should the work be scheduled? designed?
• When should materials and other
• How will the work be done (organization,
supplies be ordered? methods, equipment)?
• When is corrective action needed? • How will resources be allocated?
• Who:
• Who will do the work?
• What do Operations Managers Do?

–Make Decisions (Three Categories of OM
Decisions)
• Strategic
• Operating
• Controlling
• Strategic decisions
– Long term and strategic in nature
– Includes decisions related to:
• New product design and development
• Process design and selections
• Facility locations
• Facility layout
• Long range capacity planning
• Operating Decisions
– Include decisions relating to planning and implementing production to
meet an estimated demand for intermediate period
– Example:
• Production planning
• Manufacturing resource planning (MRP II)
• Materials requirement planning (MRP I)
• Shop-floor planning
• Scheduling-service and production
• Inventory planning
POM Decision Making Areas
• Controlling Decisions
– Concerned about the day-to-day activities of
operations which includes:
• Quality management and control (TQM)
• Productivity measurement
• Project management
• Maintenance
Steps in Decision Making
• What is Decision making?

– the process of selecting the best course of action among
given alternatives.
– is complex as the systems with which manager deal are
complex and involves multiple goals & criteria
1. Defining the problems and its parameters (relevant variables) .

– Identification of the relevant cause instead of symptoms
2. Establishing decision criteria/objectives
– It reflects the goals/purposes of work efforts
– It could be
• maximizing profit,
• minimizing cost,
• achieving high productivity,
• stability,
• increasing market share,
• growth
3. Formulation of decision model

✓ It lies at the heart of decision making process
✓ Models are abstractions of the reality
✓ i.e. describing the essence of the problem or relationship by abstracting relevant
variables
✓ a simplified representation of something
✓ They develop relationship which is expressed in testable form and studied
in isolation
Types of Models
– Verbal models:
– Physical models:
– Schematic models:
Types of Models
– Verbal models:
• express relationship among variables in words
– Physical models: …. look like their real-life counterparts
• scaled down version of things
• their visual correspondence with reality
• Examples include
– miniature cars, trucks, airplanes, toy animals and trains, and scale-
model buildings.
Types of Models
– Schematic models:
• show pictorial relationship among variables
• are more abstract than their physical counterparts
• they have less resemblance to the physical reality
• they are often relatively simple to construct and change
• they have some degree of visual correspondence
• e.g., graphs and charts, blueprints, pictures, and drawings
Types of Models
• Probabilistic models:
– statement of relationship among variables and constant in which
statistical probabilities are associated with one or more of the
variables
– Applied when risk exists
– Involves the use of empirical probabilities (based on observed data)
or subjective probabilities (based on personal experience or
judgment).
Types of Models
• Mathematical model:
– A statement expressed as equation of relationship among the
variables and constants associated with a problem It may
incorporate factors that cannot readily be visualizes
– Symbols such as x, y, a, b, … are used
Types of Models
4. Generate alternatives by varying the values of the

parameters
- Evaluation of alternatives & select the best one
5. Implementation & monitoring .
✓ It is not strictly part of the decision process, but they are
essential for completing the management activities
✓ Greater cautions must be taken during implementation
OM Strategy and Competitiveness
• Competitiveness
– How effectively an
organization meets the wants
and needs of customers
relative to others that offer
similar goods or services.
– Core competencies
• those special attributes or
abilities possessed by an
organization that give it a
competitive edge
Competitiveness…

Competitiveness three main factors
• Identifying consumer needs and

wants
• Pricing
• Advertising and promotion

OM Competitiveness- other important factors
• Operations has a major influence on competitiveness through

– product and service design,
– Cost of an organization’s output is a key,
– Location……in terms of cost and convenience for customers,
– quality,
– response time……Quick response,
– Flexibility….. the ability to respond to changes,
– Inventory management ….effectively matching supplies of goods with demand
– Supply chain management ….. coordinating internal and external operations.
– Services …. after-sale activities customers perceive as value-added, …extra
attention
– Managers and workers ….. competent and motivated
Why some organizations fail?

Competitiveness-Two important questions?

Competitive Dimensions of OM
• How operations functions contribute to the company’s

competitive position?
– Cost: Make it Cheap
• Lean production
– Waste elimination
» relentlessly pursuing the removal of all waste
– providing low costs through disciplined operations
• Examination of cost structure
– looking at the entire cost structure for reduction potential

– Speed: Make it fast
• fast moves, fast adaptations
• Delivery speed
• New product introduction speed
– Quality: Make it good
• Provide the maximum value as perceived by customer.
• Minimizing defect rates or conforming to design specifications;
please the customer

– Flexibility
• Ability to provide variety
• ability to adjust to changes in product mix, production volume, or design
– Reliability
• Quality reliability-deliver product as promised
• Delivery reliability-deliver product when promised
– Service: Support it
• After sale service
OM Strategy Formulation

Productivity Measurement
• What is productivity?
– Productivity is the ratio of outputs (goods
and services) divided by the inputs
(resources such as labor and capital)
– The goal of productivity management is to
make the ratio as large as practical
𝑼𝒏𝒊𝒕𝒔 𝒑𝒓𝒐𝒅𝒖𝒄𝒆𝒅
– Productivity= 𝑰𝒏𝒑𝒖𝒕 𝒖𝒔𝒆𝒅
– Outputs and Inputs must be quantifiable
measures to obtain meaningful
productivity ratio.
– Productivity is a common measure of how
well a country, industry, or business
organizations using its resources.
– Productivity represents output relative to
input
• The most common factor which affect competitiveness of a company as well as a

nation
• Only through productivity increases can our standard of living improve
• Output
– Desired result
– Sales made, products produced, customers served, meals delivered, or calls answered
• Input
– Resources used
– labor hours, investment in equipment, material usage, space usage, and/or energy
usage
• Measures of Productivity
– Single-factor (Partial) productivity
– Multi-factor productivity
– Total factors productivity
• Single-factor (Partial) productivity

– Measures the productivity of a single resource used in production
– The productivity of labor, materials, energy, space, capital etc. will be
measured separately
– Labor Productivity
=
𝑳𝒂𝒃𝒐𝒓 − 𝒉𝒐𝒖𝒓𝒔 𝒖𝒔𝒆𝒅
Top Ten Countries in terms of National Productivity
Index

• Single-factor (Partial) productivity

– Material Productivity
=
𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 𝒖𝒔𝒆𝒅
– Machine Productivity
=
𝑴𝒂𝒄𝒉𝒊𝒏𝒆 𝒉𝒐𝒖𝒓𝒔 𝒖𝒔𝒆𝒅
– Space Productivity
=
𝑺𝒑𝒂𝒄𝒆 𝒇𝒐𝒐𝒕𝒂𝒈𝒆 𝒖𝒔𝒆𝒅
Some examples of partial productivity measures

• Labor productivity
– Units of output per labor hour
– Units of output per shift
– Value-added per labor hour
– Birr value of output per labor hour
• Machine productivity
– Units of output per machine hour
– Birr value of output per machine hour
Some examples of partial productivity measures

• Capital productivity
– Units of output per birr input
– Birr value of output per birr input
• Energy productivity
– Units of output per kilowatt hour
– Birr value of output per kilowatt hour
• Multi-factor productivity
– Relates output to a combination of inputs, such as (labor + capital) or (labor
+ capital + energy)
– Example: productivity of labor, materials, an energy
=
𝑳𝒂𝒃𝒐𝒓 + 𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 + 𝑬𝒏𝒆𝒓𝒈𝒚
• Total factors productivity

– Compares the total quantity of goods or services produced with all the inputs used to produce them
=
𝑳𝒂𝒃𝒐𝒓 + 𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 + 𝑬𝒏𝒆𝒓𝒈𝒚 + 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 + 𝑴𝒊𝒔𝒄𝒆𝒍𝒍𝒂𝒏𝒆𝒐𝒖𝒔
• Summary
• Example
– Units Produced: …….….100,000
– Labor hours used: ….…10,000
– Machine hours: ………..5,000
– Cost of materials: ….…..Birr 35,000
– Cost of energy: ………...Birr 15,000
– Cost of labor per hour: ..Birr 20
– Cost per machine hour: .Birr 10
– Selling price per unit: ….Birr 100
From the data above, calculate:
A. Single factor or partial productivity of Labor and Machine
B. The multifactor productivity of labor, machine, and materials
C. The total factors productivity
D. The total factor productivity
A. Single factor or partial productivity of Labor and Machine

Labor Productivity =
𝑳𝒂𝒃𝒐𝒓 − 𝒉𝒐𝒖𝒓𝒔 𝒖𝒔𝒆𝒅
𝟏𝟎𝟎,𝟎𝟎𝟎
= = 𝟏𝟎 𝒖𝒏𝒊𝒕𝒔/𝒍𝒂𝒃𝒐𝒓 Hr
𝟏𝟎,𝟎𝟎𝟎
Machine Productivity =
𝑴𝒂𝒄𝒉𝒊𝒏𝒆 − 𝒉𝒐𝒖𝒓𝒔 𝒖𝒔𝒆𝒅
𝟏𝟎𝟎,𝟎𝟎𝟎
= = 𝟐𝟎 𝒖𝒏𝒊𝒕𝒔/𝒎𝒂𝒄𝒉𝒊𝒏𝒆 Hr
𝟓𝟎𝟎𝟎
B. The multifactor productivity of labor, machine, and materials

• Productivity =
𝑳𝒂𝒃𝒐𝒓+𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍+𝑴𝒂𝒄𝒉𝒊𝒏𝒆
• Productivity = 𝑳𝒂𝒃𝒐𝒓 𝒄𝒐𝒔𝒕 +𝑴𝒂𝒕𝒆𝒓𝒊𝒂𝒍 𝒄𝒐𝒔𝒕 +𝑴𝒂𝒄𝒉𝒊𝒏𝒆 𝒄𝒐𝒔𝒕
𝟏𝟎𝟎,𝟎𝟎𝟎
• Productivity = (𝟏𝟎,𝟎𝟎𝟎×𝟐𝟎)+𝟑𝟓,𝟎𝟎𝟎+(𝟓,𝟎𝟎𝟎×𝟏𝟎)
𝟏𝟎𝟎,𝟎𝟎𝟎
Productivity = = 𝟎. 𝟑𝟓 units/Birr spent on labor hr, machine
𝟐𝟖𝟓,𝟎𝟎𝟎
hr, and material
Productivity Measurement (cont.)
OR
Value of Output
Productivity =
Cost of labor, machine, and
materials
100,000 X birr100
Productivity =
(10,000 X 20) + 35,000 + (5,000 X 10)
10,000,000/
= = birr35.09/birr spent on labour-hour
285,000 machine-hour, and material
C) The total factor productivity

Value of Output
Productivity = Cost of all factors of
production used
Value of Output
Productivity = Cost of labor + cost of
machine + cost of materials +
cost of energy
10,000,000
Productivity = 200,000 + 50,000 + 35,000 +
15,000
10,000,000
= = birr33.33/birr spent on total factors
300,000
Exercise 1
❖ Based on the following data answer the questions that
follow
❖ Output (sales) Birr 400,000
❖ Inputs used for the given output
– Raw materials 8000 units
– Labor hours 2000 hours
– Machine hours 4000 hours
❖ Hourly cost of labor is Birr 2, which is twice that of
machine. The raw material cost incurred per single labor
hour is Birr 20.
❖ Calculate
✓ A) Single factor productivity of raw material = 10
✓ B) Multifactor productivity of labor and machine = 5
✓ C) Total measure of productivity = 8.3
Factors Affecting
• Labor,
– which contributes about 17% of the annual increase.
• Capital,
– which contributes about 17% of the annual increase.
• Management,
– which contributes about 66 % of the annual increase.
• Labor
– Improvement in the contribution of labor to productivity is
the result of a healthier, better-educated, and better-nourished
labor force.
– Three key variables for improved labor productivity are:
• Basic education appropriate for an effective labor force.
• Diet of the labor force.
• Social overhead that makes labor available, such as transportation
and sanitation.
– Improvements in labor productivity are possible; however,
they can be expected to be increasingly difficult and
expensive.
• Labor
– Overcoming shortcomings in the quality of labor is a
major challenge,
– improvements can be found not only through
increasing competence of labor but also via better
utilized labor with a stronger commitment, training,
motivation, team building, and other HR strategies.
– improved education, may be among the many
techniques that will contribute to increased labor
productivity.
• Capital
– Capital investment provides those tools used
• Raw Materials, Building, Machinery
– Inflation & tax increase the cost of capital
– When the capital investment per employee drops,
results drop in productivity
• Management/ Leadership
– is responsible for ensuring that labor and capital are
effectively used
– accounts for over half of (50%) the annual increase
in productivity.
– This increase includes improvements made through
the use of knowledge and the application of
technology.
Improving Productivity
• Develop productivity
measures
• Determine critical (bottleneck)
operations
• Develop methods for
productivity improvements
• Establish reasonable goals
• Get management support
• Measure and publicize
improvements
• Don’t confuse productivity
with efficiency
Ways of Making the Productivity Ratio Bigger
There are 5 ways or strategies to make the ratio

bigger
1. Make the output larger for the same input
2. Make the input smaller for the same output
3. Increasing the output while decreasing the input
4. Increasing the output greater than the input increase
5. Decreasing the output lesser than the input decrease
End of Chapter one
Thank You
Zelalem.bayisa@aau.edu.et

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College of Business and Economics

Operations Management (LSCM 3072)

11/23/2022 Zelalem Bayisa (PhD) 1

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• Define the term operations management

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Operations management is the

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A transformation process in operation

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• Goods are physical items

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Instruction: Critically review, analyse and discuss key

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Operation vs, Marketing

Operation vs. Accounting

Operation vs. Finance

Operation vs, Procurement

Operation vs. Engineering

• Operations management professionals make a number of key decisions that affect

• What do Operations Managers Do?

• What is Decision making?

1. Defining the problems and its parameters (relevant variables) .

3. Formulation of decision model

4. Generate alternatives by varying the values of the

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• Identifying consumer needs and

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• Operations has a major influence on competitiveness through

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• How operations functions contribute to the company’s

• How operations functions contribute to the company’s

• How operations functions contribute to the company’s

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• The most common factor which affect competitiveness of a company as well as a

• Single-factor (Partial) productivity

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