INFOLINK UNIVERSITY COLLEGE

HAWASSA CAMPUS

Operations Management

Instructor:
Dr. Sintayehu Assefa (Ph.D.)
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 Chapter One

NATURE OF OPERATIONS MANAGEMENT

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Time allotted: 4hrs
 NATURE OF OPERATIONS MANAGEMENT
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OBJECTIVES

After studying this chapter, you should be able to:

 Define operations management

 Explain the distinction between goods and services
 Compute single-factor productivity
 Compute multifactor productivity
LEARNING

 Identify the critical variables in enhancing

productivity
Introduction to Operations Management
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 Production is the creation of goods and services

 And, operations is as a transformation process that takes a set of

inputs and transforms them in some way to create outputs which
either goods or services that a customer values.
Viewing Operations as a Transformation Process
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Conti…
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Conti…
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The transformation process can be:

Physical Manufacturing operations

Locational Transportation or warehouse operations

Exchange Retail operations

Physiological Health care
Psychological Entertainment
Informational Communication

Thus, operations management is defined as the set of activities that

create value in the form of goods and services by transforming
inputs into outputs.
Value added Figure
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The operations functions
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 To create goods and services, all organizations perform three(3)

functions. These functions are the necessary ingredients not only
for production but also for an organization’s survival. They are

 1. Marketing: which generates the demand, or at least takes

the order for a product or service(nothing happens until there is
a sale)

 2. Production/operations: which creates the product.

 3. Finance/accounting: which tracks how well the organization

is doing, pays the bills, and collects the money.
 Organizational Charts
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Commercial Bank

Operations Finance Marketing

Teller Scheduling Investments Loans
Check Clearing Security Commercial
Collection Real estate Industrial
Transaction Financial
processing Accounting Personal
Facilities Mortgage
design/layout
Treasury operations Auditing
Maintenance Trust Department
Security
Why Study OM?
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 We study OM because of the following reasons:

 We want (and need) to know how goods and services are

produced

 We want to understand what operations managers do

 OM is such a costly part of an organization

Ten Critical Decisions of Operations Management
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 Design of goods and services

 What good or service should we offer?
 How should we design these products and services?

 Managing quality
 How do we define quality?
 Who is responsible for quality?

 Process and capacity design

 What process and what capacity will these products
require?
 What equipment and technology is necessary for these
processes?
Conti…
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 Location strategy
 Where should we put the facility?

 On what criteria should we base the location decision?

 Layout strategy
 How should we arrange the facility?

 How large must the facility be to meet our plan?

 Human resources and job design

 How do we provide a reasonable work environment?

 How much can we expect our employees to produce?

Conti…
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 Supply chain management

 Should we make or buy this component?

 Who are our suppliers and who can integrate into our e-
commerce program?

 Inventory, material requirements planning, and JIT

 How much inventory of each item should we have?

 When do we re-order?
Conti…
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 Intermediate and short–term scheduling

 Are we better off keeping people on the payroll during
slowdowns?
 Which jobs do we perform next?

 Maintenance
 Who is responsible for maintenance?

 When do we do maintenance?
Significant Events in OM
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Manufacturing operations and service operation
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 An operating system (function) of an organization is the part of an

organization that produces the organization’s physical goods and
services.

 Operations in an organization can be categorized into

manufacturing operations and service operations.

 Manufacturing operations that includes manufacturing and yields

a tangible output: a product, whereas, a conversion process that
includes service yields an intangible output: a deed, a
performance, an effort.
Characteristics of Goods
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 Tangible product
 Consistent product definition
 Production usually separate
from consumption
 Can be inventoried
 Low customer interaction
Characteristics of Service
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 Intangible product
 Produced and consumed at
same time
 Often unique
 High customer interaction
 Inconsistent product definition
 Often knowledge-based
 Frequently dispersed
Goods Versus Services
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New Trends in OM
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Conti…
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Productivity Measurement
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 Competitiveness as “the degree to which a nation can produce

goods and services that meet the test of international markets
while simultaneously maintaining or expanding the real incomes
of its citizens.”

 The most common measure of competitiveness is productivity.

 Productivity is calculated by dividing units of output by units of

input.

Units produced
Productivity =
Labor-hours used
Conti…
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 Measure of process improvement

 Represents output relative to input

 Only through productivity increases can our standard of living

improve
Conti…
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 For example, if units produced = 1,000 and labour-hours used is

250, then: Productivity is
1,000
= = 4 units/labor-hour
250

 The use of just one resource input to measure productivity, as

shown in the above example is known as Single-factor
productivity.

 However, a broader view of productivity is multifactor

productivity, which includes all inputs (e.g., capital, labour,
material, energy).
Conti…
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 Multifactor productivity is also known as total factor productivity.

It is calculated by combining the input units as shown here:
Conti…
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 Example: Collins Title wants to evaluate its labor and

multifactor productivity with a new computerized title-search
system. The company has a staff of four, each working 8
hours per day (for a payroll cost of $640/day) and overhead
expenses of $400 per day. Collins processes and closes on 8
titles each day. The new computerized title-search system will
allow the processing of 14 titles per day. Although the staff,
their work hours, and pay are the same, the overhead
expenses are now $800 per day.

 Compute labour and multi factor productivity?

Conti…
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 Labour productivity with the old system

= 8 titles per day/32 labour -hours
= 0.25 titles per labor-hour

 Labour productivity with the new system

= 14 titles per day/32 labour -hours
= 0.4375 titles per labour-hour
Conti…
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 Multifactor productivity with the old system

= 8 titles per day/$640+400
= 0.0077 titles per dollar

 Multifactor productivity with the new system

=14 titles per day/$640+800
= 0.0097 titles per dollar

 Labour productivity has increased from 0.25 to 0.4375. the change

is (0.4375 - 0.25)/0.25 = 0.75, or a 75% increase in labour
productivity. Multifactor productivity has increased from 0.0077 to
0.0097. This change is (0.0097- 0.0077)/0.0077 = 0.26 or 26%
increase in multifactor productivity.
Conti…
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 Use of productivity measures aids managers in determining how

well they are doing. But results form the two measures can be
expected to vary.

 If labour productivity growth is entirely the results of capital

spending, measuring just labour distorts the results. Multifactor
productivity is usually better, but more complicated.

 Labour productivity is the more popular measure. The multifactor-

productivity measures provide better information about the
tradeoffs among factors, but substantial measurement problems
remain.
Measurement Problems
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 Quality may change while the quantity of inputs and outputs

remains constant.

 External elements may cause an increase or decrease in

productivity for which the system under study may not be directly
responsible.

 Precise units of measure may be lacking

Productivity Variables
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 Productivity increases are dependent on

three(3) productivity variables:

 Labor - contributes about 10% of the

annual increase
 Capital - contributes about 38% of the
annual increase
 Management - contributes about 52%
of the annual increase

 These three factors are critical to improved

productivity. They represent the broad areas
in which managers can take action to
improve productivity.
Key Variables for Improved Labor Productivity
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 Basic education appropriate for an effective labor force

 Diet of the labor force

 Social overhead that makes labor available, such as

transportation and sanitation

 Maintaining and enhancing skills in the midst of rapidly

changing technology and knowledge
Productivity and the service sector
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 Productivity of the service sector has proven difficult to improve

because service-sector work is:

 Typically labor intensive. (For example, counseling,

teaching)
 Frequently focused on unique individual attributes or desires
(For example, investment advice)
 Often an intellectual task performed by professionals. (For
example, medical diagnosis)
 Often difficult to mechanize and automate. (For example, a
haircut)
 Often difficult to evaluate for quality. (For example,
performance of a law firm)
Ethics and Social Responsibility
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 Challenges facing operations managers:

 Efficiently developing and producing safe, quality products

 Maintaining a clean (sustainable) environment
 Providing a safe workplace
 Honoring community or stakeholders commitments
 End of Chapter 1

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