Department of Management

UNIT ONE

Nature of Operations Management

1.1. Introduction

Today companies are competing in a very different environment than they were only a few years
ago. To survive they must focus on quality, time-based competition, efficiency, international
perspectives, and customer relationships. The purpose of this course is to help prepare you to be
successful in this new business environment.

What is Operations Management?

Every business is managed through three major functions: finance, marketing, and operations
management. Other business functions – such as etc. support these three major functions.
Finance is the function responsible for managing cash flow, current assets, and capital
investments. Marketing is responsible for sales, generating customer demand, and understanding
customer wants and needs. Most of us have some idea of what finance and marketing are about,
but what does operations management do?

Operations Management (OM) is the business function that plans, organizes, coordinates, and
controls the resources needed to produce a company’s goods and services. Operations
management is a management function. It involves managing people, equipment, technology,
information, and many other resources. Operations management is the central core function of
every company. This is true whether the company is large or small, provides a physical good or a
service, and is for profit or not for profit. Every company has an operations management
function. Actually, all the other organizational functions are there primarily to support the
operations functions. Without operations, there would be no goods or services to sell. Consider a
retailer such as Gap that sells casual apparel. The marketing function provides promotions for the
merchandise, and the finance function provides the needed capital. It is the operations function,
however, that plans and coordinates all the resources needed to design, produce, and deliver the
merchandise to the various retail locations. Without operations, there would be no goods or
services to sell to customers.

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For operations management to be successful, it must add value during the transformation
process. We use the term value added to describe the net increase between the final value of a
product and the value of all the inputs. The greater the value added, the more productive a
business is. An obvious way to add value is to reduce the cost of activities in the transformation
process. Activities that do not add value are considered a waste; these include certain jobs,
equipment, and processes. In addition to value added, operations must be efficient. Efficiency
means being able to perform activities well, and at the lowest possible cost. An important role of
operations is to analyze all activities, eliminate those that do not add value, and restructure
processes and jobs to achieve greater efficiency. Today’s business environment is more
competitive than ever, and the role of operations management has become the focal point of
efforts to increase competiveness, by improving value added and efficiency.

1.2. Historical Development of Operation Management (Reading Assignment)

1.3. Manufacturing Operations and Service Operations

Organizations can be divided into two broad categories: manufacturing operations and service
operations, each posing unique challenges for the operations function. There are two primary
distinctions between these categories. First, manufacturing operations produce physical, tangible
goods that can be stored in inventory before they are needed. By contrast, service operations
produce intangible products that cannot be produced ahead of time. Second, in manufacturing
operations most customers have no direct contact with the operation. Customer contact is made
through distributors and retailers. For example, a customer buying a car at a car dealership never
comes into contact with the automobile factory. However, in service operations the customers
are typically present during the creation of the service. Hospitals, colleges, theaters, and barber
shops are examples of service operations in which the customer is present during the creation of
the service.

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Figure: Characteristics of manufacturing and service operations

DEGREE OF CUSTOMER CONTACT
Low High

Manufacturing Operations
Physical product
Product can be inventoried
Low customer contact
Capital intensive
Long response time

Intangible product
Product connect be inventoried
High customer contact
Labor intensive
Short response time

Service Operations

Even in pure service companies some segments of the operation may have low customer contact
while others have high customer contact. The former can be thought of as “back room” or
“behind the scenes” segments. Think of a fast-food operation such as Wendy’s, for which
customer service and customer contact are important parts of the business. However, the kitchen
segment of Wendy’s operation has no direct customer contact and can be managed like a
manufacturing operation. Similarly, a hospital is a high-contact service operation, but the patient
is not present in certain segments, such as the lab where specimen analysis is done. In addition to
pure manufacturing and pure service, there are companies that have some characteristics of each
type of organization. For these companies it is difficult to tell whether they are actually
manufacturing or service organizations. Think of a post office, an automated warehouse, or a
mail-order catalog business.

These companies have low customer contact and are capital intensive, yet they provide a service.
We call these companies quasi-manufacturing organizations.

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Manufacturing vs Service
Characteristic Manufacturing Service
 Out put Tangible Intangible
 Customer contact Low High

 Uniformity of input High Low

 Labor content Low High

High Low
 Uniformity of output
Easy difficult
 Measurement of productivity
High Low
 Opportunity to correct
quality problems

It is important to understand how to manage both service and manufacturing operations.

However, managing service operations is of especially high importance. The reason is that the
service sector constitutes a dominant segment of the world economy.

1.4. Productivity

What is Productivity?

Productivity is the value of outputs (goods and services) produced divided by the values of the
input resources (wages cost of equipment and the like) used or the ratio of outputs (goods and
services) to inputs (e.g. labor and materials). In other words, productivity is a measure of how
efficiently inputs are being converted into outputs. It measures how well resources are used. The
more efficiently a company uses its resources, the more productive it is:

output
Productivity =
input

We can use this equation to measure the productivity of one worker or many, as well as the
productivity of a machine, a department, the whole firm, or even a nation. The possibilities are
shown in the following table.

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Table: Productivity measures

Productivity measures
outputproduced
Total productivity measure =
allinputsused
output output output output
partial productivity measure = ∨ ∨ ∨
labor mac h ines materials captial
Multifactor productivity measures =
output output output
∨ ∨
labor+mac h ines labor+ materials labor+ captial+ energy

When we compute productivity for all inputs, such as labor, machines, and capital, we are
measuring total productivity. Total productivity describes the productivity of an entire
organization. For example, let’s say that the weekly dollar value of a company’s outputs, such as
finished goods and work in progress is $10,000 and that the value of its inputs such as labor,
materials, and capital is $8,600. The company’s total productivity would be computed as
follows:

output $ 10,200
Total productivity = = =1.186
input $ 8,600

Often it is much more useful to measure the total productivity of one input variable at a time in
order to identify how efficiently each is being used. When we compute productivity as the ratio
of output relative to a single input, we obtain a measure of partial productivity also called single
factor productivity. Following are two examples of the calculation of partial productivity:

1. A bakery oven produces 346 pastries in 4 hours. What is its productivity?

numberpastires 346 pastires
Machine productivity = = =86.5 pastries /hour
overtime 4 hours
2. Tow workers paint tables in a furniture shop. If the workers paint 22 tables in 8 hours,
what is their productivity?
22tables
Labor productivity = =1.375tables /hour
2 workersx 8 hours

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Sometimes we need to compute productivity as the ratio of output relative to a group of inputs,
such as labor and materials. This is a measure of multifactor productivity. For example, let’s say
that output is worth $382 and labor and materials costs are $168 and $98, respectively.

A multifactor productivity measure of out use of labor and materials would be

output $ 382
Multifactor productivity = = =1.436
labor+materials $ 168+ $ 98

Interpreting Productivity Measures

To interpret the meaning of a productivity measure, it must be compared with a similar

productivity measure. For example, if one worker at a pizza shop produces 17 pizzas in 2 hours,
the productivity of that worker is 8.5 pizzas per hour. This number by itself does not tell us very
much. However, if we compare it to the productivity of two other workers, one who produces 7.2
pizzas per hour and another 6.8 pizzas per hour, it is much more meaningful. We can see that the
first worker is much more productive than the other two workers. But how do we know do we
know whether the productivity of all three workers is reasonable? Standard needs to be
developed in order to go through such cases.

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Unit Two

Operations Strategy and Competitiveness

To maintain a competitive position in the marketplace, a company must have a long-range plan.
This plan needs to include the company’s long-term goals, an understanding of the marketplace,
and a way to differentiate itself from its competitors. All other decisions made by the company
must support this long-rang plan. Otherwise, each person in the company would pursue goals
that he or she considered important, and the company would quickly fall apart.

 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 strategyis a long-range plan for the operations function that
specifies the design and use of resources to support the business strategy. Just as the
players on a football team support the team’s strategy, the role of everyone in the
company is to do his or her job in a way that supports the business strategy.

In today’s highly competitive, internet-based, and global marketplace, it is important for

companies to have a clear plan for achieving their goals.

The Role of Operations Strategy

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. Operations strategy is the
plan that specifies the design and use of resources to support the business strategy. This includes
the location, size, and type of facilities available; worker skills and talents required; use of
technology, special processes needed, special equipment; and quality control methods. The
operations strategy must be aligned with the company’s business strategy and enable the
company to achieve its long-term plan.

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Business Strategy Defines long-range plan for company

Marketing Strategy Operations Strategy Finance Strategy

Defines marketing plans to support the business
Develops strategy
a plan for the operations function to support
Develops
thefinancial
businessplans
strategy
to support the business strategy

Figure: Relationship between the business strategy and the functional strategy

Developing an Operations Strategy

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.

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Figure: Operations strategy and the design of the operations function

BUSINESS STRATEGY a) Competitive Priorities

Defines the long-range plans for the company
Operations managers must work closely with

marketing in order to understand the competitive

OPERATIONS STRATEGY
situation in the company’s market before they can
operations function focusing on specific competitive priorities in order to meet the long-range plan
Competitive -Cost determine which competitive priories are important.
Priorities - Quality
-Time
- Flexibility
There are four broad categories of competitive

priorities:

1. Cost- Competing based on cost means offering

a product at a low price relative to the prices of

DESIGN OF THE OPERATIONS FUCNTION
Developed to focus on the identified competitive properties competing products. The need for this type of
Structure: Facilities, flow of goods, technology
competition emerges from the business strategy.
Infrastructure: Planning & control system, workers, pay, quality
The role of the operations strategy is to develop

a plan for the use of resources to support this

type of completion.

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 company competing on cost.

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.

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2. Quality- Many companies claim that quality is their top priority, and many customers say that
they look for quality in the products they buy.

3.Time or speed is one of the most important competitive priories today. Companies in all
industries are competing to deliver high-quality products in as short a time as possible.

4.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 {not standardized} them to the unique needs of clients. This is
calledproduct 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.

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, which are concepts, developed by Terry Hill, a
professor at Oxford University. 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.

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