CHAPTER-ONE

NATURE OF OPERATIONS MANAGEMENT

1.1. Introduction

Operations management is the activity of managing the

resources which are devoted to the production and delivery

of products and services. f
The operations function is the part of the organization that

is responsible for this activity.

Every organization has an operations function because every
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organization produces some type of products and/or services.
 However, not all types of organization will necessarily call the

operations function by this name.

 (Note in addition that we also use the shorter terms ‘the

operation’ or ‘operations’ interchangeably with the ‘operations

function’.)

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Operations managers are the people who have

particular responsibility for managing some, or all, of

the resources which comprise the operations function.
Again, 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.
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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 neither the only nor necessarily the most
important function. It is, however, one of the three core
functions of any organization.
These are:

 Finance,

 Marketing and

 Operations management

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 Furthermore, we can say operations management (OM) is the
business function that plans, organizes, coordinates, and controls
the resources needed to produce a company’s goods and services.

It involves managing people, equipment, technology, information,

and many other resources.

Operations management is the central core function of every

company.

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 Cont’d
This is true whether the company is large or small, provides
a physical good or a service, is for-profit or not-for-profit.
Every business is managed through three major functions:
finance, marketing, and operations management.
Other business functions, such as accounting, purchasing,
human resources, and engineering, support these three
major functions.

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 Cont’d
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 in organization?
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 Cont’d
Every company has an operations management function.
Actually, all the other organizational functions are there
primarily to support the operations function.
Without operations, there would be no goods or services
to sell.
The marketing function provides promotions for the
merchandise, and the finance function provides the
needed capital.
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 Cont’d
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.

The role of operations management is to transform a company’s

inputs into the finished goods or services.
Inputs include human resources (such as workers and managers),
facilities (such as buildings and equipment) and processes as well
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as materials, technology, and information.
 Cont’d
Outputs are the goods and services a company
produces.
At a factory the transformation is the physical
change of raw materials into products, such as
transforming leather and rubber into sneakers, denim
into jeans, or plastic into toys.
At a hospital it is organizing resources such as
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doctors, medical procedures, and medications to
 Cont’d

Organizational Chart Showing the Three Major Business

Functions

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 Cont’d
Operations management is responsible for arranging all the
resources needed to produce the final product.
This includes:
 designing the product

 deciding what resources are needed

 arranging schedules, equipment, and facilities;

 managing inventory

 controlling quality

 designing the jobs to make the product; and

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 designing work methods.
 Cont’d
Basically, operations management is responsible for all
aspects of the process of transforming inputs into
outputs.
Customer feedback and performance information are
used to continually adjust the inputs, the transformation
process, and characteristics of the outputs.
The transformation process is dynamic in order to
adapt to changes in the environment.
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 Cont’d
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.
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 Cont’d
Activities that do not add value are considered as 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.
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 Cont’d
Because today’s business environment is more competitive
than ever, the role of operations management has become the
focal point of efforts to increase competitiveness by
improving value added and efficiency.

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 Cont’d
The Transformation Process

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 Generally, why is operations management so important?

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.

In fact, an efficient operation can give four types of advantage

to the business.

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 It can reduce the costs of producing products and services and

being efficient;
 It can increase revenue by increasing customer satisfaction

through good quality and service;

 It can reduce the amount of investment (sometimes called capital

employed) that is necessary to produce the required type and

quantity of products and services by increasing the effective
capacity of the operation and by being innovative in how it uses its
physical resources;
 It can provide the basis for future innovation by building a solid

19 base of operations skills and knowledge within the business.

 Cont’d
1.2.Historical Development of OM

Business did not always recognize the importance of operations

management.

In fact, following World War II the marketing and finance functions

were predominant in American corporations.

The United States had just emerged from the war as the undisputed
global manufacturing leader due in large part to efficient operations.

At the same time, Japan and Europe were in ruins, their businesses
and factories destroyed.
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 Cont’d
U.S. companies had these markets to themselves, and so the
post-World War II period of the 1950s and 1960s
represented the golden era for U.S. business.

The primary opportunities were in the areas of marketing, to

develop the large potential markets for new products, and in
finance to support the growth.

Since there were no significant competitors, the operations

function became of secondary importance, because
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companies could sell what they produced.
 Cont’d
American companies experienced large declines in
productivity, growth, and international competition began to
be a challenge in many markets.

It appeared that U.S. firms had become lax due to the lack of
competition in the 1950s and 1960s.

They had forgotten about improving their methods and

processes.

In the meantime, foreign firms were rebuilding their facilities

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and designing new production methods.
 Cont’d
By the time foreign firms had recovered, many U.S. firms found
themselves unable to compete.

To regain their competitiveness, companies turned to operations

management, a function they had overlooked and almost
forgotten about the new focus on operations and competitiveness
has been responsible for the recovery of many corporations, and
U.S. businesses experienced resurgence in the 1980s and 1990s.

Operations became the core function of organizational

competitiveness.
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 Cont’d
Although U.S. firms have rebounded, they are fully aware of
continued global competition, scarcity of resources, and increased
financial pressure.

When we think of what operations management does namely,

managing the transformation of inputs into goods and services, we
can see that as a function it is as old as time.
Think of any great organizational effort, such as organizing the
first Olympic Games, building the Great Wall of China, or erecting
the Egyptian pyramids, and you will see operations management at
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work.
 Cont’d
Operations management did not emerge as a formal field of
study, however, until the late 1950s and early 1960s, when
scholars began to recognize that all production systems face
a common set of problems and to stress the systems approach
to viewing operations processes.

Many events helped shape operations management.

We will describe some of the most significant of these

historical milestones and explain their influence on the
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development of operations management.
 historical development of operations management
Concept Time Explanation
    Brought in innovation that changed production by using machine power
Industrial Revolution Late 1700s instead of man power

    Brought the concepts of analysis and measurement of the technical

Scientific Early 1900s aspects of work design and development of moving assembly lines and
Management mass production.

    Focused of understanding human elements of job design, such as

Human Relation 1930s to 1960s worker motivation and job satisfaction.
Movement
Management Science 1940s to 1960s Focused on the development of quantitative techniques to solve
operations problems.
    Elaborated processing of large amount of data and allowed widespread
Computer Age 1960s use of quantitative procedures.

Environmental Issues 1970s Considered waste reduction, the need for recycling, and product reuse.

Just-in-time System 1980s Designed to achieve high-volume production with minimum

26 inventories.
 Cont’d
Concept Time Explanation

Sought to eliminate causes of production defects.

Total Quality Management 1980s

    Required reengineering the company’s process in order to provide greater

Reengineering 1980s efficiency and cost reduction.

1980s Designed operations to compete in the global market.

Global Competition

1990s Offered customization on a mass scale.

Flexibility

1990s Based on time, such as speed of delivery.

Time-Based Competition

    Focused on reducing the overall cost of the system that manages the flow of
Supply Chain Management 1990s materials and information from suppliers to final customers.

2000s Uses the Internet and World Wide Web for conducting business activities.
Electronic Commerce

    Convergence of technology has enabled outsourcing of virtually any job

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Outsourcing and Flattening of the World 2000s imaginable from anywhere around the globe therefore flattening the world.
 Today’s OM Environment
Today’s OM environment is very different from what it was just a
few years ago.

Customers demand, better quality, greater speed, and lower costs.

To achieve this ability, many companies are implementing a

concept called lean systems.

Lean systems take a total system approach to creating an efficient

operation and pull together best practice concepts, including JIT,
TQM), continuous improvement, resource planning, and supply
chain management (SCM).
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 Cont’d
The need for efficiency has also led many companies to
implement large information systems called enterprise
resource planning (ERP).

ERP systems are large, sophisticated software programs for

identifying and planning the enterprise-wide resources
needed to coordinate all activities involved in producing and
delivering products to customers.

To gain an advantage over their competitors, companies are

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continually looking for ways to better respond to customers.
 Cont’d
This requires them to have a deep knowledge of their customers
and to be able to anticipate their demands.
The development of customer relationship management (CRM)
has made it possible for companies to have this detailed
knowledge.
Another characteristic of today’s Operation Management
environment is the increased use of cross-functional decision
making, which requires coordinated interaction and decision
making among the different business functions of the organization.
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 Cont’d
Until recently, employees of a company made decisions in
isolated departments, called “functional silos.”

Today many companies bring together experts from different

departments into cross-functional teams to solve company
problems.

Employees from each function must interact and coordinate

their decisions, which require employees to understand the
roles of other business functions and the goals of the
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business as a whole, in addition to their own expertise.
 Cont’d
1.3. Manufacturing and Service Operations

Organizations can be divided into two broad categories:

manufacturing organizations and service organizations, each
posing unique challenges for the operations function.

Manufacturing Operations

Manufacturing organizations produce physical, tangible

goods that can be stored in inventory before they are needed.

In manufacturing organizations most customers have no

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 Cont’d
Service Operations

Service organizations produce intangible products that cannot be

produced ahead of time. Hospitals, colleges, theaters, and barber
shops are examples of service organizations in which the customer
is present during the creation of the service.

In service organizations the customers are typically present during

the creation of the service.

Think of a fast-food operation such as Wendy’s, for which customer

service and customer contact are important parts of the business.
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 Cont’d
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.

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 Cont’d
Characteristics of Manufacturing Operation and Service
Operations
Manufacturing Operation Services Operation

Physical products Intangible, perishable products

Product can be resold Reselling a service is unusual

Output can be inventoried Many Outputs cannot be inventoried

Low customer contact High customer contact

Long response time to demand Short response time to demand

Regional, national or international markets Local Markets

Large facilities with economies of scale Small facilities (often difficult to automate)
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 Cont’d
Manufacturing Operation Services Operation

Capital intensive Labor intensive

Site of the facility is important for cost Site of the facility is important for
customer contact

Selling is distinct from production Selling is often a part of the service

Production precedes consumption Production and consumption are

simultaneous

Product is transportable Only the provider, not product, is

transportable
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 Cont’d
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

our economy.
Since the 1960s, the percentage of jobs in the service-producing
industries of the U.S. economy has increased from less than 50 to over
80 percent of total nonfarm jobs.

The remaining 20 percent are in the manufacturing and goods-

producing industries.
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 Cont’d
1.4. Operations Decision Making

In this section we look at some of the specific decisions that

operations managers have to make.

The best way to do this is to think about decisions we would

need to make if we started our own company.

Strategic decisions are decisions that set the direction for the
entire company; they are broad in scope and long-term in nature.

Long-term decisions that set the direction for the entire

organization are called strategic decisions.
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 Cont’d
They are broad in scope and set the tone for other, more
specific decisions.

They address questions such as: What are the unique features
of our product? What market do we plan to compete in?
What do we believe will be the demand for our product?

On the other hand, Short-term decisions that focus on

specific departments and tasks are called tactical decisions.

Tactical decisions focus on more specific day-to-day issues,

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such as the quantities and timing of specific resources.
 Cont’d
Strategic decisions are made first and determine the direction of
tactical decisions, which are made more frequently and routinely.
Therefore, we have to start with strategic decisions and then move
on to tactical decisions.
Tactical decisions must be aligned with strategic decisions because
they are the key to the company’s effectiveness in the long run.

Tactical decisions provide feedback to strategic decisions, which

can be modified accordingly.
Decisions are critical to all types of companies, large and small.
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 Cont’d
In large companies these decisions are more
complex because of the size and scope of the
organization.
Large companies typically produce a greater variety
of products, have multiple location sites, and often
use domestic and international suppliers.
Managing OM decisions and coordinating efforts
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can be a complicated task, and the OM function is
 Cont’d
The Relationship between Strategic and Tactical Decisions

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 Cont’d
1.6. Productivity Measurement

Sound business strategy and supporting operations strategy

make an organization more competitive in the marketplace.

But how does a company measure its competitiveness? One

of the most common ways is by measuring productivity.

In this section we will look at how to measure the

productivity of each of a company’s resources as well as the
entire organizational activities.
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 Cont’d
Recall that operations management is responsible for managing the
transformation of many inputs into outputs, such as goods or
services.

A measure of how efficiently inputs are being converted into

outputs is called productivity.

Productivity measures how well resources are used.

It is computed as a ratio of outputs (goods and services) to inputs

(e.g., labor and materials).

The more efficiently a company uses its resources, the more

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productive it is:
 Cont’d
Productivity =
This equation can be used 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.
When we compute productivity for all inputs combined,
such as labor, machines, and capital, we are measuring total
productivity.

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 Cont’d
For example, let us say that the weekly dollar value of a
company’s output, such as finished goods and work in
progress, is $10,200 and that the value of its inputs, such as
labor, materials, and capital, is $8600.
The company’s total weekly productivity would be
computed as follows:
Total Productivity = = = 1.186.
Often it is much more useful to measure the productivity of
one input variable at a time in order to identify how
efficiently each is being used.

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 Cont’d
When we compute productivity as the ratio of output
relative to a single input, we obtain a measure of
partial (fractional) productivity, also called single-
factor productivity.
Following are two examples of the calculation of
partial productivity:
A bakery oven produces 346 pastries in 4 hours.
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What is its productivity
 Cont’d
Machine Productivity = Number of Pastries/Oven time = =
86.5 Pastries/hour
Two workers paint tables in a furniture shop.
If the workers paint 22 tables in 8 hours, what is their
productivity?
Labor Productivity = = 1.375 tables/hour

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 Cont’d
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 us say that output is worth $382 and labor
and materials costs are $168 and $98, respectively.
A multifactor productivity measure of our use of labor and
materials would be:
Multifactor Productivity = = = = 1.436

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 Cont’d
Productivity and Competitiveness

Productivity is essentially a scorecard of how efficiently

resources are used and a measure of competitiveness.

Productivity is measured on many levels and is of interest to a

wide range of people.

As we showed in earlier examples, productivity can be

measured for individuals, departments, or organizations.

It can track performance over time and help managers identify

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problems.
 Cont’d
Similarly, productivity can be measured for an entire
industry and even a country.

The economic success of a nation and the quality of life of

its citizens are related to its competitiveness in the global
marketplace.

Increases in productivity are directly related to increases in a

nation’s standard of living.

That is why business and government leaders continuously

monitor the productivity at the national level and by industry
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 Cont’d
Productivity and Service Sector
Service sector companies have a unique challenge when
trying to measure productivity.
The reason is that traditional productivity measures tend
to focus on tangible outcomes, as seen with goods-
producing activities.
Services primarily produce intangible products, such as
ideas and information, making it difficult to evaluate
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 Cont’d
Consequently, accurately measuring productivity improvements
can be difficult.

A good example of the difficulty in using traditional productivity

measures in the service sector is the emergency room.

Here inputs are the medical staff, yet outputs may not exist if no
one needed treatment on that shift. In that case, by traditional
measures, productivity would be zero.

The real issue in this type of environment is the level of

readiness, and the challenge is to adequately measure it.
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 Example
Long Beach Bank employs three loan officers, each working eight
hours per day.
Each officer processes an average of five loans per day.
The bank’s payroll cost for the officers is $820 per day, and there
is a daily overhead expense of $500.
The bank has just purchased new computer software that should
enable each officer to process eight loans per day, although the
overhead expense will increase to $550.
Evaluate the change in labor and multifactor productivity before
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and after implementation of the new computer software.
 Solution
 Labor Productivity (Old) = = = 0.625 Loans/Labor hours
 Labor Productivity (New) = = = 1.00 Loans/Labor hours
 Multifactor Productivity (Old) = = = 0.0113 Loans/dollar
 Multifactor Productivity (New) = = = 0.0175 Loans/dollar
 The change in labor productivity is from 0.625 to 1.00 loans per labor-hour.
This results in an increase of 1.00/0.625 1.6, or an increase of 60 percent.
The change in multifactor productivity is from 0.0113 to 0.0175 loans per
dollar. This results in an increase of 0.0175/0.0113 1.55, or an increase of 55
percent.

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