OM W01 + OM Introduction, Function and Objective

OPERATIONS MANAGEMENT
Unit 1 : Introduction
“ Introduction to Operations
Management”
Week : 01
OPERATIONS
MANAGEMENT
UNIT 1: INTRODUCTION
“ I N T R O D U C T I O N TO O P E R AT I O N S M A N A G E M E N T ”
WEEK: 01
UNIT’S LEARNING OUTCOME
•Compare the results of observed time, standard time and
supplemental work time.
•Apply productivity concepts to both production and service
activities
Source: Heizer, Jay (2020), Operations Management: Sustainability and Supply Chain Management. 12th Ed.
3
Prepared by Prof Augusto Choy
Unit 1 : INTRODUCTION TO OPERATIONS MANAGEMENT AND ITS APPLICATION IN
DIFFERENT SECTORS
INTRODUCTION
◦ Course Introduction
◦ Introduction to Operations Management
◦ Definitions, operations function and its surroundings
◦ Challenges in Operations Management

4
Operations Management
Class Outline
Organizing to Produce Goods and Services

What Operations Managers Do
Brief History of Operations Management
Operations for Goods and Services
The Productivity Challenge
5
What is Operations Management?

It creates value.
In manufacturing the product is tangible
In a service facility the product isn’t tangible.
The production activities that go on in the organization are
referred to as operations or operations management.
6
Organizing to Produce Goods and Services

To create goods and services, all organizations perform three functions
These functions are the necessary ingredients not only for production but also for an organization’s
survival
Wathc video: Strategic Role of Operations:
https://www.youtube.com/watch?v=AbDUEpFrIy4
These functions are:

Marketing/Sales: generates the demand
Production/Operations: makes the products
Finance/Accounting: tracks the organization’s performance, collects the money and pays the bills
7
Organization Chart for a Bank
8
Organization Chart for an Airline
9
Organization Chart for a Manufacturing Company
10
Organizing to Produce Goods and Services
Value is created through these three functions and the suppliers of goods
and services to transform inputs into outputs
The Supply Chain is a global network of organizations and activities that
supply a firm with goods and services
Specialization is the common factor in companies. No single player does
everything, competition is between supply chains.
11
Why Study OM?
There are four reasons:
OM is one of the three major functions of an organization.

OM tells us how goods and services are produced.
To understand what Operations Managers do.
Because it is a costly part of an organization.
12
Mini-case
Lets examine the options for increasing contribution:
Fisher Technologies is a small firm that must double its dollar contribution to fixed
cost and profit in order to be profitable enough to purchase the next generation of
production equipment. Management has determined that if the firm fails to increase
contribution, its bank will not make the loan and the equipment cannot be
purchased. If the firm cannot purchase the equipment, the limitations of the old
equipment will force Fisher to go out of business and, in doing so, put its employees
out of work and discontinue producing goods and services for its customers.
13
Examining the options for increasing contribution:
Option Marketing
The table shows a simple profit-and-
loss statement and three strategic Current Up Revenue 50%
options (marketing, Sales 100,000 150,000

finance/accounting, and operations) Costs of -80,000 -120,000
for the firm. The first option is a Goods Sold
marketing option , where excellent Gross Margin 20,000 30,000

marketing management may increase Finance Cost -6,000 -6,000
sales by 50%. By increasing sales by
Subtotal 14,000 24,000
50%, contribution will in turn increase
71%. But increasing sales 50% may be Taxes 25% -3,500 -6,000
difficult; it may even be impossible. Contribution 10,500 18,000
Source: Heizer, Jay (2020), Operations Management: Sustainability and Supply Chain Management. 12th Ed. Increase 71%
14
Option Finance
The table shows finance/accounting
option for the firm. The second Current Drop Finance 50%
option is a finance/accounting Sales 100,000 100,000

option, where finance costs are cut Costs of -80,000 -80,000
in half through good financial Goods Sold
management. But even a reduction Gross Margin 20,000 20,000

of 50% is still inadequate for Finance Cost -6,000 -3,000
generating the necessary increase
Subtotal 14,000 17,000
in contribution. Contribution is
increased by only 21%. Taxes 25% -3,500 -4,250
Contribution 10,500 12,750
Source: Heizer, Jay (2020), Operations Management: Sustainability and Supply Chain Management. 12th Ed. Increase 21%
15
Option OM
The table shows Current Drop Finance 50%
finance/accounting option for the
Sales 100,000 100,000
firm. The third option is an OM
option , where management Costs of
Goods Sold
-80,000 -64,000
reduces production costs by 20%
Gross Margin 20,000 36,000
and increases contribution by 114%
Finance Cost -6,000 -6,000
Subtotal 14,000 30,000
Taxes 25% -3,500 -7,500
Contribution 10,500 22,500

Increase 114%
16
Given the conditions of our brief example, Fisher Technologies has

increased contribution from $10,500 to $22,500. It may now have a bank
willing to lend it additional funds.
The OM option not only yields the greatest improvement in contribution

but also may be the only feasible option. Increasing sales by 50% and
decreasing finance cost by 50% may both be virtually impossible.
Reducing operations cost by 20% may be difficult but feasible.
What is the impact of only a 15% decrease in costs in the OM option?

17
What do Operations Managers do?
All good managers perform the basic functions of the management process. The
management process consists of planning, organizing, staffing, leading, and controlling .
Operations managers apply this management process to the decisions they make in the
OM function.
Successfully addressing each of these decisions requires planning, organizing, staffing,

leading, and controlling.
18
Decisions Operations Managers make:
 Design of goods and services.  Human resources and job design.
 Managing quality.  Supply chain management.
 Process and capacity strategy.  Inventory management.
 Location strategy.  Scheduling.
 Layout strategy.  Maintenance.

19
What do Operations Managers do?
The following professional organizations provide various certifications that may enhance your
education and be of help in your career:
◆ APICS, the Association for Operations Management ( www.apics.org )

◆ American Society for Quality (ASQ) ( www.asq.org )
◆ Institute for Supply Management (ISM) ( www.ism.ws )
◆ Project Management Institute (PMI) ( www.pmi.org )
◆ Council of Supply Chain Management Professionals ( www.cscmp.org )
20
Brief History of OM
21
Brief History of OM
22
Brief History of OM
1913 - Henry Ford and Charles Sorensen - standardized parts/quasi-assembly
lines
1924 – Walter Shewhart - Quality control
1950 - W. Edwards Deming (1950) - Management must do more/quality can be

improved.
Operations management improves with decision making methods.

23
Brief History of OM
Innovations from the physical sciences.
Information technology - the systematic processing of data to yield information.
Decisions -> analytical tools, in information technology, and other fields such as
the biological or physical sciences.
24
Operations for Goods and Services
Manufacturers -> tangible product,
Service -> intangible product.
Many products -> good + service.
The distinction between goods and services may not be clear-cut.
25
Differences Between Goods and Services
26
The Productivity Challenge
Goods
Resources
Services
27
The operations manager’s job is to enhance (improve) this ratio of outputs to
inputs. Improving productivity means improving efficiency.
This improvement can be achieved in two ways: reducing inputs while keeping
output constant or increasing output while keeping inputs constant.
28
In an economic sense, inputs are labor, capital, and management, which are
integrated into a production system.
Outputs are goods and services.
Production is the making of goods and services.
High production may imply only that more people are working and that
employment levels are high (low unemployment), but it does not imply high
productivity.
Watch this Video on your own time: https://www.youtube.com/watch?v=MevKTPN4ozw

29
Measurement of productivity is an excellent way to evaluate a country’s ability

to provide an improving standard of living for its people. Only through increases
in productivity can the standard of living improve.
Only through increases in productivity can labor, capital, and management

receive additional payments.
30
If returns to labor, capital, or management are increased without increased

productivity, prices rise.
Downward pressure is placed on prices when productivity increases because

more is being produced with the same resources.
31
The U.S. has increased its productivity at an average rate of almost 2.5% per
year.
Such growth has doubled U.S. wealth every 30 years.
The manufacturing sector, has on occasion seen annual productivity increases
exceeding 4%, and service sector increases of almost 1%.
U.S. annual productivity growth in the early part of the 21st century is slightly
below the 2.5% range.
The economy as a whole and in recent years has been trending down.
32
For well over a century (from about 1869), the U.S. has been able to increase
productivity at an average rate of almost 2.5% per year. Such growth has
doubled U.S. wealth every 30 years.
The manufacturing sector, although a decreasing portion of the U.S. economy,

has on occasion seen annual productivity increases exceeding 4%, and service
sector increases of almost 1%. However, U.S. annual productivity growth in the
early part of the 21st century is slightly below the 2.5% range for the economy
as a whole and in recent years has been trending down.
33
34
Productivity Measurement
The measurement of productivity can be quite direct. Such is the case when
productivity is measured by labor-hours per ton of a specific type of steel.
Although labor-hours is a common measure of input, other measures such as

capital (dollars invested), materials (tons of ore), or energy (kilowatts of
electricity) can be used.
35
An example of this can be summarized in the following equation

[Single factor Productivity]:
__Units produced__
Productivity =
Input used
Example: units produced = 1,000 units, labor-hours used = 250 then:
__Units produced_ = __1,000__

Productivity = =4 units/labor-hour
Input used 250
36

[Multifactor Productivity]:
________________Outputs_____________________
Multifactor Productivity =
Labor + Material + Energy + Capital + Miscellaneous
• To aid in the computation of multifactor productivity, the

individual inputs (the denominator) can be expressed in dollars
37
Example:
Collins Title Insurance Ltd. 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.
38
Example:
Collins uses the Single Productivity Equation to compute labor

productivity and the Multi Productivity Equation to compute
multifactor productivity.
39
[Single Factor Productivity]:
To aid in the computation of multifactor productivity, the

individual inputs (the denominator) can be expressed in dollars
Labor Productivity Old System = __8 titles per day_
= 0.25 titles per labor-hour
32 labor-hours
Labor Productivity New System = _14 titles per day_ = 0.4375 titles per labor-hour
32 labor-hours
40

[Multifactor Productivity]:
________________Outputs____________________
Multifactor Productivity =
Labor + Material + Energy + Capital + Miscellaneous
To aid in the computation of multifactor productivity, the individual

inputs (the denominator) can be expressed in dollars
Multifactor Productivity Old System = _8 titles per day_
= 0.0077 titles per dollar
$640 + $400
Multifactor Productivity Old System = _14 titles per day_ = 0.0097 titles per dollar
$640 + $800
41
Example:
Labor productivity has increased from .25 to .4375. The change is
(.4375 - .25) /.25 = 0.75, or a 75% increase in labor productivity.
Multifactor productivity has increased from .0077 to .0097. This
change is
(.0097 - .0077) /.0077 = 0.26, or a 26% increase in multifactor
productivity.
42
Example:
Both the labor (single-factor) and multifactor productivity

measures show an increase in productivity. However, the
multifactor measure provides a better picture of the increase
because it includes all the costs connected with the increase in
output
43
Example:
If the overhead goes to $960 (rather than $800), what is the
multifactor productivity?
44
Productivity Variables
Productivity increases are dependent on three productivity variables :
Labor, which contributes about 10% of the annual increase.
Capital, which contributes about 38% of the annual increase.
Management, which 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.
45
Labor
Improvement in the contribution of labor to productivity. Three
key variables for improved labor productivity are:
◦ Basic education.
◦ Proper nutrition.
◦ Social infrastructure.
In developed nations, the challenge is to maintain and enhance
the skills of labor in the midst of rapidly expanding technology
and knowledge.
46
Capital
Capital investment provides for the tools required to improve productivity.
Inflation and taxes increase the cost of capital, making capital investment
increasingly expensive.
◦ A reduction in Capital investment drops productivity.
◦ Becoming labor intensive reduces unemployment but it drops
productivity and lowers wages in the long run.
The trade-off between capital and labor is continually in flux.
◦ The higher the cost of capital or perceived risk, the less capital is invested.
47
Management
Management is a factor of production and an economic
resource, it is responsible for effective use of labor and capital.
Knowledge and technology are critical in postindustrial societies
also known as knowledge societies.
Knowledge societies are those in which much of the labor force
has migrated from manual work to technical.
The expanding knowledge base of contemporary society requires
that managers use technology and knowledge effectively
48
Challenges in OM
Operations managers work in an exciting and dynamic environment.
Some of the challenges they meet are:
◦ Globalization
◦ Supply-chain partnering
◦ Sustainability
◦ Rapid product development
◦ Mass customization
◦ Lean operations
49
Ethics, Social Responsibility and Sustainability
The systems that operations managers build are complex.
Conflicting perspectives of stakeholders.
The goal is to identify ethical and socially responsible solutions.
At the same time sustainable processes.
And effective and efficient productive systems.
Managers are also challenged to:
◦ Develop and produce safe, high-quality green products
◦ Train, retain, and motivate employees in a safe workplace
◦ Honor stakeholder commitments
50
References
Heizer, J. Render, B. & Munson, C. (2020). Operations Management,

Sustainability and Supply Chain Management. (12th Ed) Boston. Pearson.
James, T. (2011) Operations Strategy. (2011 Ed) Ventus Publishing ApS,
BookBoon.com
Stevenson, W.J. (2018). Operations Management. (13th Ed.) NY: Mc Graw Hill.
51
Thank-you

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OPERATIONS MANAGEMENT

◦ Introduction to Operations Management

◦ Definitions, operations function and its surroundings

◦ Challenges in Operations Management

Organizing to Produce Goods and Services

What is Operations Management?

Organizing to Produce Goods and Services

These functions are:

OM is one of the three major functions of an organization.

options (marketing, Sales 100,000 150,000

marketing option , where excellent Gross Margin 20,000 30,000

option is a finance/accounting Sales 100,000 100,000

management. But even a reduction Gross Margin 20,000 20,000

Contribution 10,500 12,750

Subtotal 14,000 30,000

Taxes 25% -3,500 -7,500

Contribution 10,500 22,500

Given the conditions of our brief example, Fisher Technologies has

The OM option not only yields the greatest improvement in contribution

What is the impact of only a 15% decrease in costs in the OM option?

Successfully addressing each of these decisions requires planning, organizing, staffing,

 Design of goods and services.  Human resources and job design.

 Managing quality.  Supply chain management.

 Process and capacity strategy.  Inventory management.

 Location strategy.  Scheduling.

 Layout strategy.  Maintenance.

◆ APICS, the Association for Operations Management ( www.apics.org )

1924 – Walter Shewhart - Quality control

1950 - W. Edwards Deming (1950) - Management must do more/quality can be

Operations management improves with decision making methods.

Innovations from the physical sciences.

Information technology - the systematic processing of data to yield information.

Manufacturers -> tangible product,

Service -> intangible product.

Many products -> good + service.

The distinction between goods and services may not be clear-cut.

Watch this Video on your own time: https://www.youtube.com/watch?v=MevKTPN4ozw

Measurement of productivity is an excellent way to evaluate a country’s ability

Only through increases in productivity can labor, capital, and management

If returns to labor, capital, or management are increased without increased

Downward pressure is placed on prices when productivity increases because

The manufacturing sector, although a decreasing portion of the U.S. economy,

Although labor-hours is a common measure of input, other measures such as

An example of this can be summarized in the following equation

Example: units produced = 1,000 units, labor-hours used = 250 then:

__Units produced_ = __1,000__

An example of this can be summarized in the following equation

• To aid in the computation of multifactor productivity, the

Collins Title Insurance Ltd. wants to evaluate its labor and

Collins uses the Single Productivity Equation to compute labor

To aid in the computation of multifactor productivity, the

An example of this can be summarized in the following equation

To aid in the computation of multifactor productivity, the individual

Both the labor (single-factor) and multifactor productivity

Heizer, J. Render, B. & Munson, C. (2020). Operations Management,

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__Units produced_ = 1,000