OPERATION MANAGEMENT

After completing this unit, students will be able to:

➢ Define Operations management
➢ Discuss history of operations management
➢ Discuss manufacturing and service operations
➢ Explain operations decision making
➢ Discuss productivity measurement
1.1.Introduction
Operations management is the activity of managing the resources which produce and deliver
products and services. It is a process, which combines and transforms various resources used in
the production/operations subsystem of the organization into value added product/services in a
controlled manner as per the policies of the organization. Therefore, it is that part of an
organization, which is concerned with the transformation of a range of inputs into the required
(products/services) having the requisite quality level. The set of interrelated management
activities, which are involved in producing certain goods and services, is called as operation
management. The operations function is the part of the organization that is responsible for this
activity. Every organization has an operations function because every organization produces some
type of products and/or services.
DEFINITIONS
There is no one single definition given to the term operations management (OM). The following
are few of the definitions given by different writers. Operation Management is composed of two
words-operations and management.
• Operations- is those activities concerned with the acquisition of raw materials, their
conversation into finished product, and the supply of that finished product to the customer
(Galloway, 1999). Operation is what the company does. Operation is common to all
organization-be it small or large, private or government, local or international,
manufacturing or service giving.
• Management is the process of planning, organizing, leading, and controlling an
organization’s human and capital resources in order to accomplish its objectives.
Then operations management can be defined as:
➢ Operations management (OM): is the business function that plans, organizes, coordinates,
and controls the resources needed to produce a company‘s goods and services.
➢ Operation Management- is the design, operation, and improvement of those systems that
create and deliver the firms primary products and services. Without operations, there would
 be no goods or services to sell. Operation Management is functional field of business with
clear line management responsibility (Chase, Aqullano & Jacobs, 2001).
➢ Operation management deals with the production of goods and services that people buy
and use every day. It is a function that enables organization to achieve their goals through
efficient acquisitions and utilization of resources.
➢ OM refers to the interaction and control of the process that transform input into finished
goods and services.
➢ OM may be defined as the design, operation and improvement of the production systems
that create the firm’s primary products or services.
➢ OM may be defined as the management of the direct resources required to produce the
goods and services provided by an organization. It is the derivative of the organization
strategy and mission.
➢ Joseph G. Monks defines Operations Management as the process whereby resources,
flowing within a defined system, are combined and transformed in a controlled manner to
add value in accordance with policies communicated by management.
Operations managers are the people who have particular responsibility for managing some, or
all, of the resources which compose the operations function.
The operations managers have the prime responsibility for processing inputs into outputs. They
must bring together under production plan that effectively uses the materials, capacity and
knowledge available in the production facility. Given a demand on the system work must be
scheduled and controlled to produce goods and/or services required. Control must be exercised
over such parameters such as costs, quality and inventory levels.
In some organizations the operations manager could be called by some other name. For example,
he or she might be called the ‘fleet manager’ in a distribution company, the ‘administrative
manager’ in a hospital, or the ‘store manager’ in a supermarket.
Operations in the organization
The operations function is central to the organization because it produces the goods and services
which are its reason for existing, but it is not the only function. It is, however, one of the three core
functions of any organization. These are:
➢ Marketing: which generates demand or at least takes the order for a product or service.
The marketing (including sales) function – which is responsible for communicating the
organization’s products and services to its markets in order to generate customer requests
for service;
 ➢ Operations: which creates the product/delivery services. The operations function – which
is responsible for fulfilling customer requests for service through the production and
delivery of products and services. Operations are at the core of any enterprise. The effective
management of operations is therefore one of the most critical success factors for an
organization.
➢ Finance/Accounting: which tracks how well the organization is doing, pays bills, and
collect the money. Which provides the information to help economic decision-making and
manages the financial resources of the organization;
In addition, there are other supportive functions which enable the core functions to operate
effectively. These include, for example:
➢ The human resources function – which recruits and develops the organization’s staff as
well as looking after their welfare
➢ Public relation: has a responsibility for building and maintaining a positive public image
of the organization
➢ Purchasing: Has a responsibility for procurement of raw materials, supplies and equipment
Remember that different organizations will call their various functions by different names and will
have a different set of support functions. Almost all organizations, however, will have the three
core functions, because all organizations have a fundamental need to sell their services, satisfy
their customers and create the means to satisfy customers in the future. Operations function as
comprising all the activities necessary for the day-to-day fulfilment of customer requests. This
includes sourcing products and services from suppliers and transporting products and services to
customers.
Concept of operation function
Operation function is that part of an organization, which is concerned with the transformation of a
range of inputs into the required outputs (products) having the requisite quality level. Production
is defined as “the step-by-step conversion of one form of material into another form through
chemical or mechanical process to create or enhance the utility of the product to the user.” Thus
production is a value addition process. At each stage of processing, there will be value addition.
Inputs can come in conventional forms as direct labor, direct materials, and other direct costs.
Inputs can also be capital items that are not consumed in the operation. The idea of capital as cash
wealth invested for a specific purpose (such as technology, equipment, and land) has broadened to
include human capital (labor), intellectual capital (knowledge), and social capital (reputation,
brand equity, customer loyalty, and so on).
Outputs can also be classified as tangible or intangible, in the sense that something is tangible if it
can be perceived by touch. Clearly, products are tangible. Production waste is tangible. Facilitating
goods are tangible. Even some services—such as a haircut, car wash, or packing/moving service—
are tangible. Intangible outputs tend to be emotional or experiential results such as satisfaction,
relaxation, convenience, and ambience.
The objective of combining resources under controlled conditions is to transform them into goods
and services having a higher value than the original inputs. The transformation process applied
will be in the form of technology to the inputs. The effectiveness of the production factors in the
transformation process is known as productivity. The productivity refers to the ratio between
values of output per work hour to the cost of inputs. The firms overall ratio must be greater than
1, then we can say value is added to the product. Operations manager should concentrate improving
the transformation efficiency and to increase the ratio.
The essence of the operations function is to add value during the transformation process. Value
added is the term used to describe the difference between the costs of inputs and the value or price
of out puts. Typical examples are given in the table 1.1 below.
 Table 1.1 Input transformation output relationship for typical systems
System Primary Inputs Resources Transformation Functions Typical Output
Hospital Patients MDS, Nurses, Examination, surgery, monitoring ,
Medical supplies, medication and Therapy Healthy individual
Equipment
Restaurant Hungry Food, chef, waiter Well prepared well served food agreeable
Customers staff, environment environment (physical and exchange Satisfied customers

Automobile Sheet steel, Tools, equipment, Fabrication and assembly of cars High quality
factory engine parts workers physical) automobile

College or High school Teachers book, Imparting knowledge & skills via lecture Educated
university graduates classrooms (informational) individuals

Department Shoppers Displays, stocks of Attract customers promote Sales to satisfied

store goods, sales products fill orders (exchange) customers
clerks

Operations management is important in all types of organization

In some types of organization it is relatively easy to visualize the operations function and what it
does, even if we have never seen it. For example, most people have seen images of automobile
assembly. But what about an advertising agency? We know vaguely what they do – they produce
the advertisements that we see in magazines and on television – but what is their operations
function? The clue lies in the word ‘produce’. Any business that produces something, whether
tangible or not, must use resources to do so, and so must have an operations activity. Also the
automobile plant and the advertising agency do have one important element in common: both have
a higher objective – to make a profit from producing their products or services. Yet not-for-profit
organizations also use their resources to produce services, not to make a profit, but to serve society
in some way. Look at the following examples of what operations management does in four very
different organizations and some common themes emerge.
➢ Automobile assembly factory – Operations management uses machines to efficiently
assemble products that satisfy current customer demands
➢ Physician (general practitioner) – Operations management uses knowledge to effectively
diagnose conditions in order to treat real and perceived patient concerns
➢ Management consultant – Operations management uses people to effectively create the
services that will address current and potential client needs
 ➢ Advertising agency – Operations management uses our staff’s knowledge and experience
to creatively present ideas that delight clients and address their real needs
Start with the statement from the ‘easy to visualize’ automobile plant. Its summary of what
operations management did was that... ‘Operations management uses machines to efficiently
assemble products that satisfy current customer demands.’ The statements from the other
organizations were similar, but used slightly different language. Operations management used, not
just machines but also... ‘Knowledge, people, “our and our partners’ resources” ’ and ‘our staff’s
experience and knowledge’, to efficiently (or effectively, or creatively) assemble (or produce,
change, sell, move, cure, shape, etc.) products (or services or ideas) that satisfy (or match or exceed
or delight) customers’ (or clients’ or citizens’ or society’s) demands (or needs or concerns or even
dreams). So whatever terminology is used there is a common theme and a common purpose to how
we can visualize the operations activity in any type of organization: small or large, manufacturing
or service, public or private, profit or not-for-profit. Operations management uses resources to
appropriately create outputs that fulfil defined market requirements.
However, although the essential nature and purpose of operations management is the same in every
type of organization, there are some special issues to consider, particularly in smaller organizations
and those whose purpose is to maximize something other than profit.

Benefits of Operations Management

All the activities of operations management can very significantly contribute to the success of any
organization by using its resources effectively to produce goods and services in a way that satisfies
its customers. To do this it must be creative, innovative and energetic in improving its processes,
products and services.
1. Product Quality The first crew in a company that verifies durability and safety in a product is
the operations management. Operations management reviews to quality of products which would
suit customers on and after delivery.
2. Productivity: Productivity is actually the ratio of input and output. It is the only way to measure
employees' effort. Operations management ensures the best staffing to maximize the output of a
company. The only way to secure productivity is through an active operations management.
3. Customer Satisfaction Operation management helps to enhance the goodwill and presence of
the organization. It assures that best quality products are delivered to all customers that could
provide them with better satisfaction and make them happy.
4. Utilization of Resources Operation management concentrates on maximum utilization of all
resources of the company. It frames appropriate strategies and subsequently continues all
operations of the organization. Operation managers keep a control of all activities and ensure that
all resources are used by only useful means and are not wasted.
5. Maximize Revenue Operational management directly affects the profitability of the
organization. It focuses on cutting down the cost of operations to business by reducing the misuse
of resources. Operations managers review every production activity and take all significant steps
for maintaining productivity in the organisation. Operations managers try to keep an appropriate
balance between cost and revenue.
6. Improve Innovation Operation management implements innovative changes in organizational
activities. All decisions regarding production planning are taken by operation managers by
conducting research and study of prevailing market conditions. It considers all technological
changes and develops a strong base of knowledge and operations. This brings various innovations
into operations of the business
WHY WE STUDY OM?
We study OM for the following reasons:
1. OM is one of the three major functions of any organization, and it is integrally related to all
the other business functions. All organizations market (sell), finance (account), and produce
(operate), and it is important to know how the OM activity functions. Therefore, we study how
people organize themselves for productive enterprise.
2. We study OM because we want to know how goods and services are produced. The production
function is the segment of our society that creates the products and services we use.
3. We study OM to understand what operations managers do. Regardless of your job in an
organization, you can perform better if you understand what operation managers do.
4. In addition, understanding OM will help you explore the numerous and lucrative career
opportunities in the field.
5. We study OM because it is such a costly part of an organization. A large percentage of the
revenue of most firms is spent in the OM function. Indeed, OM provides a major opportunity for
an organization to improve its profitability and enhance its service to society.

1.2.HISTORICAL DEVELOPMENT OF OPERATION MANAGEMENT

For over two century’s operations and production management has been recognized as an
important factor in a country’s economic growth. The traditional view of manufacturing
management began in eighteenth century when Adam Smith recognized the economic benefits of
specialization of labor. He recommended breaking of jobs down into subtasks and recognizes
workers to specialized tasks in which they would become highly skilled and efficient. In the early
twentieth century, F.W. Taylor implemented Smith’s theories and developed scientific
management. From then till 1930, many techniques were developed prevailing the traditional view.
Brief information about the contributions to manufacturing management is shown in the Table 1.2.
Production Management becomes the acceptable term from 1930s to 1950s. As F.W. Taylor’s
works become more widely known, managers developed techniques that focused on economic
efficiency in manufacturing. Workers were studied in great detail to eliminate wasteful efforts and
achieve greater efficiency. At the same time, psychologists, socialists and other social scientists
began to study people and human behavior in the working environment. In addition, economists,
mathematicians, and computer socialists contributed newer, more sophisticated analytical
approaches.
With the 1970s emerge two distinct changes in our views. The most obvious of these, reflected in
the new name Operations Management was a shift in the service and manufacturing sectors of the
economy. As service sector became more prominent, the change from “production” to
“operations” emphasized the broadening of our field to service organizations. The second, more
suitable change was the beginning of an emphasis on synthesis, rather than just analysis, in
management practices.
1.3. MANUFACTURING OPERATIONS AND SERVICE OPERATIONS
Operations in an organization can be categorized into manufacturing operations and service
operations. Manufacturing operations is a conversion process that includes manufacturing yields
a tangible output: a product, whereas, a conversion process that includes service yields an
intangible output: a deed, a performance, an effort. Manufacturing organizations produce physical,
tangible items which can be stored as inventory before delivery to the customer. Service
organization produces intangible items that cannot be produced ahead of time.
Because service cannot be stored its production and consumption will occur at the same time
that implies that the producer of the service will come into contact with the customer. In fact the
customer will be involved to a greater or lesser extent in the actual delivery of the operation.
Manufacturing operations will often compensate for fluctuations in demand by fulfilling demand
from finished goods inventory produced during a slack period. This option is not open to service
operations and they must focus on trying to alter the demand pattern to meet capacity by such
strategies as discounting the price of the service during periods of low demand.
Because the output of a service is intangible it is more difficult to assess performance by such
measures as productivity or output. For example, a manufacturer can simply count the volume of
output of its product range, but an administration service for example will have more difficulty in
measuring the productivity of their employees.
1.3.1 MANUFACTURING OPERATIONS
Manufacturing is the transformation of raw materials into finished goods for sale, or intermediate
processes involving the production or finishing of semi-manufactures. Manufacturing implies
production of a tangible output such as an automobile while service generally implies as act such
as a doctor’s examination.
1.3.2 SERVICE OPERATIONS
Service is defined as either as Services are deeds, processes, and performances or a service is a
time-perishable, intangible experience performed for a customer acting in the role of a co-
producer. Service enterprises are organizations that facilitate the production and distribution of
goods, support other firms in meeting their goals, and add value to our personal lives.
Manufacturing and services are often similar in terms of what is done but different in terms of how
it is done. For example, both involve design and operating decisions. Manufacturers must decide
how large a factory is needed and service organizations (e.g. hospitals) must decide how large a
building they need. Both must make locations decision and both involved in scheduling and
controlling operations and allocating scarce resources. Most of the differences between
manufacturing and service organizations relate to manufacturing being product-oriented and
service being act-oriented.
Following characteristics can be considered for distinguishing Manufacturing Operations with
Service Operations:
1. The nature and customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
 5. Measurement of productivity
6. Quality Assurance
1) The nature and customer contact
Service involves a much higher degree of customer contact than manufacturing does. The
performance of a service typically occurs at the point of consumption. That is, the two often occurs
simultaneously. On the other hand, manufacturing allows a separation of production and
consumption, so that manufacturing often occurs in an isolated environment away from the
customers. Service operations because of their contact with customers can sometimes be much
more limited in their range of options in these areas. The product oriented operations can build up
inventories of finished goods, which enable them to absorb some of the shocks caused by varying
demand. However, service operations cannot build up inventories of time, so service capacity is
much more sensitive to demand variability
2) Uniformity of inputs
Services operations are subject to more variability of inputs than manufacturing operations. There
is often the ability in manufacturing to carefully control the amount of variability of inputs, so it
is often possible to achieve low variability. Consequently, job requirement for manufacturing are
generally more uniform than for services.
3) Labor content of Jobs.
Because of on the site consumption of services and because of the high degree of variation of
output, service requires high labor content whereas manufacturing can be more capital intensive
(i.e. mechanized)
4) Uniformity of output
High mechanizations generates products with low variability, so manufacturing tends to be smooth
and efficient; service activities sometimes appear to be slow and awkward, and output is more
variable.
5) Measurement of productivity
Measurement of productivity is relatively straight forward in manufacturing due to the high degree
of uniformity of most manufactured items. However, in many cases variations in demand intensity
as well as variations in service requirement from job to job, make productivity measurement
considered by more difficult. For example, the work load of the two doctors might be compared.
One may have had a large number of routine cases while the other did not, so their productivity
would appear to differ unless a very careful analysis is made.
 6) Quality Assurance
Quality assurance is more challenging in services when production and consumption occurs at the
same time. Moreover, the higher variability of input creates additional opportunity for the quality
of output to suffer unless quality assurance is actively managed. Quality at the point of creation is
typically more important for services than for manufacturing, where errors can be corrected before
the customer receives the outputs.
Generally the differences between manufacturing and service are:
Characteristics Manufacturing operation Service operation
Product Tangible, durable product Intangible, perishable product
Inventory Output can be inventoried Output cannot be inventoried
Customer contact Low High
Uniformity of input High Low
Intensity Capital intensive Labour intensive
Measurement of productivity Easy Difficult
Quality measurement Quality easily measured Quality not easily measured

Similarities between manufacturing and service operations

In spite of the differences already discussed there are compelling similarities between
manufacturing and service operation. Since manufacturing and service operations are often similar
in terms of what is done but different in terms of how it is done. For instance both involve the
following characteristics.
➢ Firstly both have processes that must be designed and managed effectively.
➢ Secondly, some type of technology be it manual or computerized, must be used in each process.
➢ Thirdly, both of them are usually concerned about quality, productivity and the timely response
to customers.
➢ Fourthly they must make choices about capacity, location, and layout of their facilities.
➢ Fifthly, both deal with suppliers of outside services and materials, as well as scheduling
problems.
➢ Finally, matching staffing levels and capacities with forecasted demand is a universal problem.
1.4.OPERATIONS DECISION MAKING
Thousands of business decisions are made every day. Not all the decisions will make or break the
organization. But each one adds a measure of success or failure to the operations. Even minor
decisions determine the company’s success or failure. It ranges from simple judgmental to
complex analysis which can also involve judgment (past experience & common sense). They
involve a way of blending objective and subjective data to arrive at a choice. The use of
quantitative methods of analysis adds to the objectivity of such decisions.
Operations Management Decisions
The major areas in which operations managers make decisions are: Strategic (long term) decision
Tactical (intermediate term) decision Operational planning and control (short term) decision
A) Strategic (long term) decision: It involves high amount, more effort and it is periodical.
The strategic decision includes Product design, Process design, and selection and Location
decision. The strategic issue usually broad, addressing questions such as
❖ How will we make the product?
❖ When do we locate the facility or facilities?
❖ How much capacity do we need? When should we add more capacity?
Operations management decisions at the strategic level affect the company's long range
effectiveness in terms of how it can address its customers' needs. Thus, for the firm to succeed,
these decisions must be in alignment with the corporate strategy. Decision made at the strategic
level become the fixed conditions or operating constraints under which the firm must operate in
both the intermediate and short term.
B) Tactical (intermediate term) decisions
The tactical decision primarily address how to efficiently schedule material and labour within the
constraints of previously made strategic decisions. An issue on which OM concentrates on this
level includes:
❖ How many workers do we need?
❖ When do we need them?
❖ Should we work over time?
❖ When should we have material delivered?
❖ Should we have a finished goods inventory?
These tactical decisions, in turn, become the operating constraints under which operations planning
and control decisions are made.
C) Operational planning & control (short term) decision.
Management with the respect to operational planning control is narrow and short term. Issues at
this level include:
❖ What jobs do we work on today or this week?
❖ Whom do we assign to what tasks?
❖ What jobs have priority?
The significant or long lasting decisions deserve more considerations than routine ones. Plant
investment, which is a long-range decision, may deserve more thorough analysis. The time
availability and the cost of analysis also influence the amount of analysis. The degree of
complexity of the decision increases when many variables are involved, variables are highly
independent and the data describing the variables are uncertain.
Business decision-makers have always had to work with incomplete and uncertain data. Fig. 1.2
below depicts the information environment of decisions. In some situations a decision- maker has
complete information about the decision variables; at the other extremes, no information is
available. Operations management decisions are made all along this continuum.
Complete certainty in decision-making requires data on all elements in the population. If such data
are not available, large samples lend more certainty than do small ones. Beyond this, subjective
information is likely to be better than no data at all.

1.5.PRODUCTIVITY MEASUREMENT
Productivity is defined in terms of utilization of resources, like material and labor. In simple terms,
productivity is the ratio of output to input. For example, productivity of labor can be measured as
units produced per labor hour worked. Productivity is closely linked with quality, technology and
profitability. Hence, there is a strong stress on productivity improvement in competitive business
environment. Productivity can be improved by:
(a) controlling inputs,
(b) improving process so that the same input yields higher output, and
(c) by improvement of technology
Productivity can be measured at firm level, at industry level, at national level and at international
level.
Factor Productivity and Total Productivity
When productivity is measured separately for each input resource to the production process it is
called factor productivity or partial productivity. When productivity is measured for all the factors
of production together, it is called total factor productivity. Generally factor productivity
calculations are required at firm level and industry level, whereas total factor productivity
calculations are made for measuring productivity at national and international level. Productivity
of materials can be measured as output units per unit material consumed. It can also be measured
in terms of value generated per unit expenditure in materials. For measuring productivity of
different groups of operatives, different ratios can be used, which are indicative of output/input
relationship. For example, the productivity of assembly line work can be measured as output units
per man-hour or alternatively, the value of good produced per cost of labour on assembly line.
One of the primary responsibilities of an operation manger is to achieve productive use of
resources. Productivity measures the relationship between output (goods and Services) and inputs
(labor, capital, materials, or other resources) used to produce them. Productivity usually expressed
the ratio of quantity of output to quantity of input.
Thus, Productivity = Output
Input Productivity may be expressed as partial measures, multifactor measures, or total measures.
i. Partial productivity (A single input)
Productivity = Output or Output or Output or Output & so on.
Labour Capital Materials Energy
ii. Multifactor productivity (Based on more than one input)
It reflects a combination of some or all of the resources used to obtain a certain output.
Productivity= Output/Labor +Capital
Or
Output/ Labor + Capital +Material
iii. Total productivity (Based on total measure or on all inputs)
Productivity= Output = Goods or services produced
Input All inputs used to produce them
Example 1.
Three employees process 600 insurance policies in a week. They work 8 hrs. Per day, 5-days per
week. Find labour productivity.
Solution:
Labor Productivity = [Policies Issued]/[Employee Hours]
P of labor = 600 policies/ [(3 employees) (40 hrs/employee)] P labor = 5 Policies/hr.
Example 2.
A team of workers make 400 units of a product, which is valued by its standard cost of 10 birr
each (before mark-ups for other expenses and profit). The accounting department reports that for
this job the actual costs are:
400 birr for labour, and
1 000 birr for materials
Calculate multi-factor productivity.
Solution:
Multi-Factor Productivity = [Quantity at standard cost]/[Labour cost + Materials cost]
Pmf = [400 Units x 10]/ [400+1000] = 4000 / 1400
Pmf = 2.86
Productivity comparisons can be made in two ways:
First, a company can compare itself with similar operations within its industry or it can use
industry data when such data are available. For example, comparing productivity among the
different stores in a franchise. Second, to measure productivity overtime with in the same
operations. I.e. A Company can compare its productivity in one time period with that of the next.

Factors Affecting Productivity

Numerous factors affect productivity. However some of the principal factors influencing
productivity are:
1. Capital/labor ratio: It is a measure of whether enough investment is being made in plant,
machinery, and tools to make effective use of labor hours.
2. Scarcity of some resources: Resources such as energy, water and number of metals will
create productivity problems.
3. Work-force changes: Change in work-force effect productivity to a larger extent, because
of the labor turnover.
4. Innovations and technology: This is the major cause of increasing productivity.
5. Managerial factors: Managerial factors are the ways an organization benefits from the
unique planning and managerial skills of its manager.
6. Quality of work life: It is a term that describes the organizational culture, and the extent
to which it motivates and satisfies employees.
1.6. SCOPE OF OPERATIONS MANAGEMENT
Operations management concern with the conversion of inputs into outputs, using physical
resources, so as to provide the desired utilities to the customer while meeting the other
organizational objectives of effectiveness, efficiency and adoptability. It distinguishes itself from
other functions such as personnel, marketing, finance, etc., by its primary concern for ‘conversion
by using physical resources. Following are the activities which are listed under operations
management functions:
1. Location of facilities
2. Plant layouts and material handling
3. Product design
4. Process design
5. Production and planning control
6. Quality control
LOCATION OF FACILITIES
Location of facilities for operations is a long-term capacity decision which involves a long term
commitment about the geographically static factors that affect a business organization. It is an
important strategic level decision-making for an organization. It deals with the questions such as
‘where our main operations should be based?’ The selection of location is a key-decision as large
investment is made in building plant and machinery. An improper location of plant may lead to
waste of all the investments made in plant and machinery equipment. Hence, location of plant
should be based on the company’s expansion plan and policy, diversification plan for the products,
changing sources of raw materials and many other factors. The purpose of the location study is to
find the optimal location that will results in the greatest advantage to the organization.
PLANT LAYOUT AND MATERIAL HANDLING
Plant layout refers to the physical arrangement of facilities. It is the configuration of departments,
work centers and equipment in the conversion process. The overall objective of the plant layout is
to design a physical arrangement that meets the required output quality and quantity most
economically. According to James Moore, “Plant layout is a plan of an optimum arrangement of
facilities including personnel, operating equipment, storage space, material handling equipment
and all other supporting services along with the design of best structure to contain all these
facilities”.
Material Handling: refers to the ‘moving of materials from the store room to the machine and from
one machine to the next during the process of manufacture’. It is also defined as the ‘art and science
of moving, packing and storing of products in any form’. It is a specialized activity for a modern
manufacturing concern, with 50 to 75% of the cost of production. This cost can be reduced by
proper section, operation and maintenance of material handling devices. Material handling devices
increases the output, improves quality, speeds up the deliveries and decreases the cost of
production. Hence, material handling is a prime consideration in the designing new plant and
several existing plants.
PRODUCT DESIGN
Product design deals with conversion of ideas into reality. Every business organization have to
design, develop and introduce new products as a survival and growth strategy. Developing the new
products and launching them in the market is the biggest challenge faced by the organizations. The
entire process of need identification to physical manufactures of product involves three functions:
marketing, product development, and manufacturing.
Product development translates the needs of customers given by marketing into technical
specifications and designing the various features into the product to these specifications.
Manufacturing has the responsibility of selecting the processes by which the product can be
manufactured. Product design and development provides link between marketing, customer needs
and expectations and the activities required to manufacture the product.
PROCESS DESIGN
Process design is a macroscopic decision-making of an overall process route for converting the
raw material into finished goods. These decisions encompass the selection of a process, choice of
technology, process flow analysis and layout of the facilities. Hence, the important decisions in
process design are to analyze the workflow for converting raw material into finished product and
to select the workstation for each included in the workflow.
QUALITY CONTROL
Quality Control (QC) may be defined as ‘a system that is used to maintain a desired level of quality
in a product or service’. It is a systematic control of various factors that affect the quality of the
product. Quality control aims at prevention of defects at the source, relies on effective feed back
system and corrective action procedure. Quality control can also be defined as ‘that industrial
management technique by means of which product of uniform acceptable quality is manufactured’.
It is the entire collection of activities which ensures that the operation will produce the optimum
quality products at minimum cost. The main objectives of quality control are: To improve the
companies income by making the production more acceptable to the customers i.e., by providing
long life, greater usefulness, maintainability, etc. To reduce companies cost through reduction of
losses due to defects. To achieve interchangeability of manufacture in large scale production. To
produce optimal quality at reduced price. To ensure satisfaction of customers with productions or
services or high quality level, to build customer goodwill, confidence and reputation of
manufacturer. To make inspection prompt to ensure quality control. To check the variation during
manufacturing.
 CHAPTER TWO

OPERATIONS STRATEGY & COMPETITIVENESS

2.1 INTRODUCTION TO OPERATIONS STRATEGY

The long-range plan of a business, designed to provide and sustain shareholder value, is called the
business strategy. For a company to succeed, the business strategy must be supported by each of
the individual business functions, such as operations, finance, and marketing.

Operations strategy is a long-range plan for the operations function that specifies the design and
use of resources to support the business strategy. Operations strategy is a long term plan for the
production of a company’s products/rendering services and it provides a road map for what the
production/operations function must do if business strategies are to be achieved. Operations
strategy is the total patterns of decisions and actions which set the role, objectives and activities of
the operation so that they contribute to, and support the organisation’s business strategy.
Operations strategy is the decisions which shape the long-term capabilities of the company’s
operations and their contribution to overall strategy through the on-going reconciliation of market
requirements and operations resources.

The role of operations strategy is to provide a plan for the operations function so that it can make
the best use of its resources. Operations strategy specifies the policies and plans for using the
organization’s resources to support its long-term competitive strategy.

Developing a Business Strategy

A company’s business strategy is developed after its managers have considered many factors and
have made some strategic decisions. These include developing an understanding of what business
the company is in (the company’s mission), analyzing and developing an understanding of the
market (environmental scanning), and identifying the company’s strengths (core competencies).
These three factors are critical to the development of the company’s long-range plan, or business
strategy. In this section, we describe each of these elements in detail and show how they are
combined to formulate the business strategy

Mission: A statement defining what business an organization is in, who its customers are, and how
its core beliefs shape its business. The mission defines the company. In order to develop a long-
term plan for a business, you must first know exactly what business you are in, what customers
you are serving, and what your company’s values are. If a company does not have a welldefined
mission it may pursue business opportunities about which it has no real knowledge or that are in
conflict with its current pursuits, or it may miss opportunities altogether.

Environmental Scanning: A second factor to consider is the external environment of the

business. This includes trends in the market, in the economic and political environment, and in
society. These trends must be analyzed to determine business opportunities and threats.
Environmental scanning is the process of monitoring the external environment. To remain
competitive, companies have to continuously monitor their environment and be prepared to change
their business strategy, or long-range plan, in light of environmental changes.

Environmental scanning allows a company to identify opportunities and threats. For example,
through environmental scanning we could see gaps in what customers need and what competitors
are doing to meet those needs. A study of these gaps could reveal an opportunity for our company,
and we could design a plan to take advantage of it. On the other hand, our company may currently
be a leader in its industry, but environmental scanning could reveal competitors that are meeting
customer needs better — for example, by offering a wider array of services. In this case,
environmental scanning would reveal a threat and we would have to change our strategy so as not
to be left behind. Just because a company is an industry leader today does not mean it will continue
to be a leader in the future.

The external business environment is always changing. To stay ahead of the competition, a
company must constantly look out for trends or changing patterns in the environment, such as
marketplace trends. These might include changes in customer wants and expectations, and ways
in which competitors are meeting those expectations. For example, in the computer industry
customers are demanding speed of delivery, high quality, and low price.

In addition to market trends, environmental scanning looks at economic, political, and social trends
that can affect the business. Economic trends include recession, inflation, interest rates, and general
economic conditions. Suppose that a company is considering obtaining a loan in order to purchase
a new facility. Environmental scanning could show that interest rates are particularly favorable
and that this may be a good time to go ahead with the purchase. Political trends include changes
in the political climate — local, national, and international — that could affect a company. There
has been a change in how companies view their environment, a shift from a national to a global
perspective. Companies seek customers and suppliers all over the globe. Many have changed their
strategies in order to take advantage of global opportunities, such as forming partnerships with
international firms, called strategic alliances.
Finally, social trends are changes in society that can have an impact on a business. An example is
the awareness of the dangers of smoking, which has made smoking less socially acceptable. This
trend has had a huge impact on companies in the tobacco industry. In order to survive, many of
these companies have changed their strategy to focus on customers overseas where smoking is still
socially acceptable, or have diversified into other product lines.

Core Competencies: The third factor that helps define a business strategy is an understanding of
the company’s strengths. These are called core competencies. In order to formulate a long-term
plan, the company’s managers must know the competencies of their organization. Core
competencies could include special skills of workers, such as expertise in providing customized
services or knowledge of information technology. Another example might be flexible facilities
that can handle the production of a wide array of products. To be successful, a company must
compete in markets where its core competencies will have value.

Highly successful firms develop a business strategy that takes advantage of their core
competencies or strengths. To see why it is important to use core competencies, think of a student
developing plans for a successful professional career. Let’s say that this student is particularly
good at mathematics but not as good in verbal communication and persuasion. Taking advantage
of core competencies would mean developing a career strategy in which the student’s strengths
could provide an advantage, such as engineering or computer science. On the other hand, pursuing
a career in marketing would place the student at a disadvantage because of a relative lack of skills
in persuasion. Increased global competition has driven many companies to clearly identify their
core competencies and outsource those activities considered noncore. Outsourcing is when a
company obtains goods or services from an outside provider. By outsourcing noncore activities a
company can focus on its core competencies.

Putting It Together:

The figure shows how the mission, environmental scanning, and core competencies help in the
formulation of the business strategy. This is an ongoing process that is constantly allowed to
change. As environmental scanning reveals changes in the external environment, the company
may need to change its business strategy to remain competitive while taking advantage of its core
competencies and staying within its mission.
Make sure that you understand the role of the business strategy in defining a company’s long-term
plan. Without a business strategy the company would have no overriding plan. Such a plan acts
like a compass, pointing the company in the right direction. To be effective, a long-range plan
must be supported by each of the business functions. The operations strategy looks at the business
strategy and develops a long-range plan specifically for the operations function. In the next section
we will see how the operations strategy is developed.

DEVELOPING OPERATIONS STRATEGY

An operations strategy is a strategy for the operations functions that is linked to the business
strategy and other functional strategy, leading to a consistence pattern of decision making and
competitive advantage for the firm. An operations strategy consists of a sequence of decisions that,
over time, enables a business unit to achieve a desired operations structure, infrastructure, and set
of specific capabilities in support of the competitive priorities.

Once a business strategy has been developed, an operations strategy must be formulated. This will
provide a plan for the design and management of the operations function in ways that support the
business strategy. The operations strategy relates the business strategy to the operations function.
It focuses on specific capabilities of the operation that give the company a competitive edge. These
capabilities are called competitive priorities. By excelling in one of these capabilities, a company
can become a winner in its market.

Competitive Priorities

Operations managers must work closely with marketing in order to understand the competitive
situation in the company’s market before they can determine which competitive priorities are
important. There are four broad categories of competitive priorities:
Low-cost leadership/Competing based on Cost: Competing based on cost means offering a
product at a low price relative to the prices of competing products. The need for this type of
competition emerges from the business strategy. Note that a low-cost strategy can result in a higher
profit margin, even at a competitive price. Also, low cost does not imply low quality. Let’s look
at some specific characteristics of the operations function we might find in a company competing
on cost.

It requires examining each of the 10 OM decisions in a relentless effort to drive down costs while
meeting customer expectations of value. A low-cost strategy does not imply low value or low
quality.

To develop this competitive priority, the operations function must focus primarily on cutting costs
in the system, such as costs of labor, materials, and facilities. Companies that compete based on
cost study their operations system carefully to eliminate all waste. They might offer extra training
to employees to maximize their productivity and minimize scrap. Also, they might invest in
automation in order to increase productivity. Generally, companies that compete based on cost
offer a narrow range of products and product features, allow for little customization, and have an
operations process that is designed to be as efficient as possible.

Quality: Many companies claim that quality is their top priority, and many customers say that they
look for quality in the products they buy. Yet quality has a subjective meaning; it depends on who
is defining it. When companies focus on quality as a competitive priority, they are focusing on the
dimensions of quality that are considered important by their customers. Quality as a competitive
priority has two dimensions. The first is high-performance design. This means that the operations
function will be designed to focus on aspects of quality such as superior features, close tolerances,
high durability, and excellent customer service. The second dimension is goods and services
consistency, which measures how often the goods or services meet the exact design specifications.

A company that competes on this dimension needs to implement quality in every area of the
organization. One of the first aspects that needs to be addressed is product design quality, which
involves making sure the product meets the requirements of the customer. A second aspect is
process quality, which deals with designing a process to produce error-free products. This includes
focusing on equipment, workers, materials, and every other aspect of the operation to make sure it
works the way it is supposed to. Companies that compete based on quality have to address both of
these issues: the product must be designed to meet customer needs, and the process must produce
the product exactly as it is designed.
Time: Time or speed is one of the most important competitive priorities today. Companies in all
industries are competing to deliver high-quality products in as short a time as possible. A
competitive priority focusing on speed and on-time delivery. When time is a competitive priority,
the job of the operations function is to critically analyze the system and combine or eliminate
processes in order to save time. Often companies use technology to speed up processes, rely on a
flexible workforce to meet peak demand periods, and eliminate unnecessary steps in the production
process.

Flexibility: As a company’s environment changes rapidly, including customer needs and

expectations, the ability to readily accommodate these changes can be a winning strategy. This is
flexibility. There are two dimensions of flexibility. One is the ability to offer a wide variety of
goods or services and customize them to the unique needs of clients. This is called product
flexibility. A flexible system can quickly add new products that may be important to customers or
easily drop a product that is not doing well. Another aspect of flexibility is the ability to rapidly
increase or decrease the amount produced in order to accommodate changes in the demand. This
is called volume flexibility.

Differentiation is concerned with providing uniqueness. Distinguishing the offerings of

an organization in a way that the customer perceives as adding value. A firm’s opportunities for
creating uniqueness are not located within a particular function or activity but can arise in virtually
everything the firm does. Moreover, because most products include some service, and most
services include some product, the opportunities for creating this uniqueness are limited only by
imagination. Indeed, differentiation should be thought of as going beyond both physical
characteristics and service attributes to encompass everything about the product or service that
influences the value that the customers derive from it. Therefore, effective operations managers
assist in defining everything about a product or service that will influence the potential value to
the customer. This may be the convenience of a broad product line, product features, or a service
related to the product. Such services can manifest themselves through convenience (location of
distribution centers, stores, or branches), training, product delivery and installation, or repair and
maintenance services. In the service sector, one option for extending product differentiation is
through an experience. Differentiation by experience in services is a manifestation of the growing
“experience economy.” The idea of experience differentiation is to engage the customer—to use
people’s five senses so they become immersed, or even an active participant, in the product.

The Need for Trade-Offs:

You may be wondering why the operations function needs to give special focus to some priorities
but not all. Aren’t all the priorities important? As more resources are dedicated toward one priority,
fewer resources are left for others. The operations function must place emphasis on those priorities
that directly support the business strategy. Therefore, it needs to make trade-offs between the
different priorities. For example, consider a company that competes on using the highest quality
component parts in its products. Due to the high quality of parts the company may not be able to
offer the final product at the lowest price. In this case, the company has made a tradeoff between
quality and price. Similarly, a company that competes on making each product individually based
on customer specifications will likely not be able to compete on speed. Here, the trade-off has been
made between flexibility and speed. It is important to know that every business must achieve a
basic level of each of the priorities, even though its primary focus is only on some. For example,
even though a company is not competing on low price, it still cannot offer its products at such a
high price that customers would not want to pay for them. Similarly, even though a company is
not competing on time, it still has to produce its product within a reasonable amount of time;
otherwise, customers will not be willing to wait for it.

Order Winners and Qualifiers:

To help a company decide which competitive priorities to focus on, it is important to distinguish
between order winners and order qualifiers. Order qualifiers are those competitive priorities that a
company has to meet if it wants to do business in a particular market. Order winners, on the other
hand, are the competitive priorities that help a company win orders in the market. Consider a
simple restaurant that makes and delivers pizzas. Order qualifiers might be low price (say, less
than $10.00) and quick delivery (say, under 15 minutes), because this is a standard that has been
set by competing pizza restaurants. The order winners may be “fresh ingredients” and “home-made
taste.” These characteristics may differentiate the restaurant from all the other pizza restaurants.
However, regardless of how good the pizza, the restaurant will not succeed if it does not meet the
minimum standard for order qualifiers. Knowing the order winners and order qualifiers in a
particular market is critical to focusing on the right competitive priorities.

TEN STRATEGIC OM DECISIONS

Managers make effective decisions on 10 areas of OM. These are collectively known as operations
decisions. The 10 decisions of that support missions and implement strategies are:
 1. Goods and service design: Designing goods and services defines much of the transformation
process. Costs, quality, and human resource decisions are often determined by design decisions.
Designs usually determine the lower limits of cost and the upper limits of quality.
2. Quality: The customer's quality expectations must be determined and policies and procedures
established to identify and achieve that quality.
3. Process and capacity design: Process options are available for products and services. Process
decisions commit management to specific technology, quality, human resource use, and
maintenance. These expenses and capital commitments determine much of the firm's basic cost
structure.
4. Location selection: Facility location decisions for both manufacturing and service organizations
may determine the firm's ultimate success. Errors made at this juncture may overwhelm other
efficiencies.
5. Layout design: Material flows, capacity needs, personnel levels, technology decisions, and
inventory requirements influence layout.
6. Human resources and job design: People are an integral and expensive part of the total system
design. Therefore, the quality of work life provided, the talent and skills required, and their costs
must be determined.
7. Supply-chain management: These decisions determine what is to be made and what is to be
purchased. Consideration is also given to quality, delivery, and innovation, all at a satisfactory
price. Mutual trust between buyer and supplier is necessary for effective purchasing.
8. Inventory: Inventory decisions can be optimized only when customer satisfaction, suppliers,
production schedules, and human resource planning are considered.
9. Scheduling: Feasible and efficient schedules of production must be developed; the demands on
human resources and facilities must be determined and controlled.
10. Maintenance: Decisions must be made regarding desired levels of reliability and stability, and
systems must be established to maintain that reliability and stability.
Why Some Organizations Fail

Organizations fail, or perform poorly, for a variety of reasons. Being aware of those reasons can
help managers avoid making similar mistakes. Among the chief reasons are the following:

1. Neglecting operations strategy.

2. Failing to take advantage of strengths and opportunities, and/or failing to recognize competitive
threats.
3. Putting too much emphasis on short-term financial performance at the expense of research and
development.
4. Placing too much emphasis on product and service design and not enough on process design and
improvement.
5. Neglecting investments in capital and human resources.
6. Failing to establish good internal communications and cooperation among different functional areas.
7. Failing to consider customer wants and needs.
The key to successfully competing is to determine what customers want and then directing efforts
toward meeting (or even exceeding) customer expectations. Two basic issues must be addressed.
First: What do the customers want? (Which items on the preceding list of the ways business
organizations compete are important to customers?) Second: What is the best way to satisfy those
wants?

Operations must work with marketing to obtain information on the relative importance of the
various items to each major customer or target market. Understanding competitive issues can help
managers develop successful strategies.

Service sector firms face some of the same challenges as manufacturing firms, and some unique
challenges of their own. First, services are increasingly either managed or traded internationally,
and so service firms need to devise plans for how this will be accomplished. Where services and
manufacturing are closely linked in the overall provision to customers, the role of services can be
vital. In the past, companies often located manufacturing facilities in different countries to take
advantage of local resources and wage rates and the emphasis was on the manufacturing element.
However, today multinational corporations are locating services where they can access highly
trained workers at reasonable costs. Service organizations may choose one of three generic
strategies:

1. Customer-oriented focus – providing a wide range of services to a limited range of customers, using
a customer-centred database and developing new offerings to existing customers
2. Service-oriented focus – providing a focused, ‘limited menu’ of services to a wide range of
customers, usually through specialization in a narrow range of services
3. Customer- and service-oriented focus – providing a limited range of services to a highly targeted
set of customers.
Ensuring service quality is a key competitive objective for most service organizations. Unlike
manufacturing, customer contact in services means that both front-line employees and customers
influence the quality and perception of the service.
Service failures occur when the service is unavailable, too slow, or does not meet organizational
or customer standards. Two ways that companies can mitigate service failures are service
guarantees and service recovery.

Many companies now offer service guarantees as a way of ensuring customer satisfaction. For
example, overnight document delivery service Federal Express guarantees delivery of packages
by 10.30 am the morning after the package was mailed, otherwise the entire cost will be refunded.
Although most organizations strive for 100 per cent ‘right-first-time’ performance, occasionally
something goes wrong. Service recovery describes how the company makes up for problems with
the service. Research suggests that effective service recovery can in fact lead to more loyal
customers (quoted in Zeithaml and Bitner, 2000). One trend in service is to have customers become
partners in the service delivery system by transferring at least part of production to them, variously
known as co-production or consumerization of production. For example:

• Fast-food restaurants – customers collect their food from the counter, transport it to where they will
eat it, and clear away afterwards
• Petrol stations – customers pump their own petrol and may pay for it at the pump, eliminating all
contact with employees
• Banks – customers use automated teller machines (ATMs) to perform many activities formerly
requiring tellers, including cash deposits and withdrawals and account status queries.
In becoming part of the production process, making the client productive can take place in the
following ways.

• The first way to make clients productive is to involve them in the specification of custom-
tailored services. There are many familiar services that rely on customer specification, such
as kitchen design.
• A second way is to include customers in the production of the service, thus turning them
into ‘involuntary unpaid labour’. Most of us have become accustomed to eating at least
occasionally in fast-food restaurants, where we (instead of employees) are responsible for
clearing tables, etc. In return, these offer (at least in theory) faster service and lower costs,
since employees have less work to perform.
• A third way is to make the customer responsible for quality control. A popular restaurant
trend has been restaurants such as the ‘Mongolian Wok’ chain, where customers select
their own ingredients from a buffet, and then hand them over to a chef for stir-frying – they
can include their favorite ingredients and exclude those they dislike, rather than accepting
a standard range.