1-1 Introduction to Operations Management

Operations Management
1-2 Introduction to Operations Management

Operations Management
Figure 1.1

The management of systems or processes

that create goods and/or provide services

Organization

Finance Operations Marketing

1-3 Introduction to Operations Management

Definition

 Operations Management is the

activity of managing the resources,
which produce and deliver goods
and services (Slack et al., 2010).
1-4 Introduction to Operations Management
Need/ Importance/Why we study
production/operations management?
 OM provides users to be competitive in the environment
through doing activities efficiently and effectively.
 Operation lies at the heart of business activities.
 A business education is incomplete without OM because of
working in an organisation.
 OM presents interesting career opportunities.
 Operation management helps to manage operating costs
and improve its profitability and enhance its service to
society.
 OM provides a systematic way of looking at organizational
processes.
1-5 Introduction to Operations Management

Historical Evolution of Operations Management

Table 1.7
 Industrial revolution (1770’s)
 Scientific management (1911)
 Mass production
 Interchangeable parts

 Division of labor

 Human relations movement (1920-60)

 Decision models (1915, 1960-70’s)

 Influence of Japanese manufacturers

1-6 Introduction to Operations Management

Contd…
 Division/specialization of Labor – specialization of labor result in greater
productivity and efficiency than the assignment of many tasks to a single
worker. The first economist to discuss the division of labor was Adam Smith,
author of the classic “Wealth of Nations” (1776). Later, in 1832, Charles
Babbage expanded on these ideas in his study of pin manufacturing. He noted
 Standardization of parts. When Henry Ford introduced the moving
automobile assembly line in 1913, his concept required standardized parts as
well as specialization of labor.
 Industrial revolution – it was in essence the substitution of machine power for
human power. Great impetus was given to this revolution in 1764 by Games
Watt’s stem engine,
 Scientific study of Work
 Human Relations
 Decision Models
 Computers
1-7 Introduction to Operations Management

The Operations Function

1-8 Introduction to Operations Management

Business Operations Overlap

Figure 1.5

Operations

Marketing Finance
1-9 Introduction to Operations Management

Operations Interfaces
Industrial
Engineering
Maintenance
Distribution

Purchasing Public
Operations Relations

Legal
Personnel

Accounting MIS
1-10 Introduction to Operations Management
Operation function and its
environment/Operations System
1-11 Introduction to Operations Management

Value-Added
Figure 1.2
The difference between the cost of inputs
and the value or price of outputs.
Value added
Inputs
Transformation/ Outputs
Land
Conversion Goods
Labor
process Services
Capital
Feedback

Control
Feedback Feedback
1-12 Introduction to Operations Management

 physical, as in manufacturing operations;

 locational, as in transportation or warehouse operations;
 exchange, as in retail operations;
 physiological, as in health care;
 psychological, as in entertainment; or
 informational, as in communication.
1-13 Introduction to Operations Management

Types of Operations
Table 1.4
Operations Examples
Goods Producing Farming, mining, construction,
manufacturing, power generation
Storage/Transportation Warehousing, trucking, mail
service, moving, taxis, buses,
hotels, airlines
Exchange Retailing, wholesaling, banking,
renting, leasing, library, loans
Entertainment Films, radio and television,
concerts, recording
Communication Newspapers, radio and television
newscasts, telephone, satellites
1-14 Introduction to Operations Management

Responsibilities of Operations Management

Table 1.6

Planning Organizing
– Capacity – Degree of centralization
– Location – Process selection
– Products & services Staffing
– Make or buy – Hiring/laying off
– Layout – Use of Overtime
– Projects Directing
– Scheduling – Incentive plans
Controlling/Improving – Issuance of work orders
– Inventory – Job assignments
– Quality
– Costs
– Productivity
1-15 Introduction to Operations Management

Key Decisions of Operations Managers

 What
What resources/what amounts
 When
Needed/scheduled/ordered
 Where
Work to be done
 How
Designed
 Who
To do the work
1-16 Introduction to Operations Management

Trends in Business
 Major trends
 The Internet, e-commerce, e-business
 Management technology

 Globalization

 Management of supply chains

 Agility
1-17 Introduction to Operations Management

Goods-service Continuum
Figure 1.3

Steel production Home remodeling Auto Repair Maid Service Teaching

Automobile fabrication Retail sales Appliance repair Manual car wash Lawn mowing

High percentage goods Low percentage goods

Low percentage service High percentage service
1-18 Introduction to Operations Management

Manufacturing operation versus

service operations
1-19 Introduction to Operations Management

Food Processor
Table 1.2

Inputs Processing Outputs

Raw Vegetables Cleaning Canned
Metal Sheets Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment
1-20 Introduction to Operations Management

Hospital Process
Table 1.2

Inputs Processing Outputs

Doctors, nurses Examination Healthy

Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy
1-21 Introduction to Operations Management

Manufacturing or Service?

Tangible Act
1-22 Introduction to Operations Management

Production of Goods vs. Delivery of Services

 Production of goods – tangible output

 Delivery of services – an act

 Service job categories

 Government
 Wholesale/retail

 Financial services

 Healthcare

 Personal services

 Business services

 Education
1-23 Introduction to Operations Management

Key Differences

1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of productivity
6. Production and delivery
7. Quality assurance
8. Amount of inventory
1-24 Introduction to Operations Management

Manufacturing vs Service

Characteristic Manufacturing Service

Output Tangible Intangible
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Measurement of productivity Easy Difficult
Opportunity to correct High Low
quality problems
High
1-25 Introduction to Operations Management
Operations Decision making and operations
strategies
 Strategic decision – are decisions related to
products, processes and facilities.
 Product and production process:.

 Production technology:

 Allocating resource to strategic alternatives:

 Long range capacity planning and facility

location
 Facility layout:
1-26 Introduction to Operations Management

 Operating decisions: concerned with decisions about planning production

to meet demand.
 Production planning systems

 Independent demand inventory system

 Resource/materials requirement planning system:

 Shop-floor planning and control:

 Planning and scheduling service operations:

 Materials management and purchasing:

 Control Decisions –Major decision areas include:

 Productivity of employees:

 Total quality management:

 Quality control:

 Maintenance management and reliability:

1-27 Introduction to Operations Management

Quantitative Approaches

 Decision Making Under Certainty:

 Decision Making Under Risk: Example. ABC
manufacturing firms wants to meet the excess
demand to its products. The firm’s management is
concerning three alternative courses of action.
 Arrange for subcontracting

 Begin overtime production

 Construct new facilities

1-28 Introduction to Operations Management

Alternatives Profit if Demand is (Birr)

Low (0.1) Medium (0.5) High (0.4)

Arrange for sub contract 10,000 50,000 50,000

(A1)
Over time (A2) -20,000 60,000 100,000

New facilities (A3) -150,000 20,000 20,000

 1-29 Introduction to Operations Management

 We can use expected monetary value approach and decision tree to answer this question.
 Expected Monetary Value (EMV) – Determine the expected payoff of each alternative and
choose the alternative that has the best expected payoff.


 EMV (A1) =10,000X0.1+0.5X 50,000+0.4X50, 000

 =1000+25,000+20,000
 =46,000


 EMV (A2) = -20,000X0.1+60,000X0.5+100,000X0.4

 = -2,000+30,000+40,000
 = Br. 68,000
 EMV (A3) = 150,000X0.1+20,000X0.5+200,000X0.4
 = -15,000+10,000+80,000
 = Br.75, 000 (highest expected value)
 Decision: The best alternative is to construct new facilities because it has the highest expected
value.
1-30 Introduction to Operations Management

 Decision Making Under Uncertainty: At the opposite

extreme is complete uncertainty, no information is
available on how likely the various states of nature are
under these conditions, five possible decision criteria are:
 Minimax regret – “ worst best”

 Maximax –optimistic approach

 Laplace – determine the average payoff, and choose the

alternative with the best average.
 Maximin- “ best worst”.


1-31 Introduction to Operations Management

 Example: Based on the above pay off table and

assuming that there is not probability value of
occurrence of each outcome, determine which
alternative would be chosen under each of these
strategies.
 Maximin b. Maximax c. Laplace
1-32 Introduction to Operations Management

 Solution:
A) Maximin Criteria: The worst pay off for the alternatives are Br. 10,000 for
subcontracting, Br. -20,000 for overtime and Br. -150,000 for new facilities and 10,000
is the best out of the worst; hence, the decision is to choose subcontracting as an
alternative using the maximin criteria.

B) Maximax Criteria: The best pay off for each alternative, that is, for Sub contracting is
50,000, over time Br. 100,000, and New facilities is Br. 2000,000. The decision is to
construct new facility which is an alternative with the best payoff value i.e., Br. 200,000

C) Laplace Criteria: The average payoff of each alternative is;

 A1 = 10,000+50,000+50,000/3 = 36,667

 A2 = -20,000 + 60,000 + 100000 /3 = 46,667

 A3 == -150,000 + 20,000 + 200000 / 3 = 23,333

 Decision: use overtime to absorb the excess demand.

1-33 Introduction to Operations Management

Productivity measurements

Productivity = Total outputs of the firm

Total inputs used by the
firm
1-34 Introduction to Operations Management
1-35 Introduction to Operations Management

 Illustration:
 A furniture manufacturing company has provided
the following data. Compare
 Partial productivities for Labor; and materials
and supplies
 Multifactor productivities for labor, and material
and supplies; and labor, capital and other
 Total productivity of 2006 and 2007.
1-36 Introduction to Operations Management

2006 2007
Output Sales revenue 22,000 35,000
Input Labor 10,000 15,000
Raw materials and supplies 8,000 12,500
Capital equipment depreciation 700 1,200
Other 2,200 4,800
 1-37 Introduction to Operations Management
Solution:

2006 2007
Partial productivities
Labor 2.20 2.33
Raw materials and supplies 2.75 2.80
Multifactor productivity
Labor and materials and supplies 1.22 1.27
Labor, capital equipment depreciation and 1.71 1.67
others
Total productivity 1.05 1.04
1-38 Introduction to Operations Management
 Exercise:
 A small scale shoe factory has provided you the following data
over the past tow fiscal budge years

2006 2007
Output Sales revenue 60,000 80,000
Input Labor 22,000 30,000
Raw materials 26,000 35,500
 Compare
Supplies 2,000 3,000
 Partial productivities for Labor; Raw materials; and Depreciation
Depreciation 6,000 9,000
 Multifactor productivities for labor, and supplies; and for Raw materials,
supplies and Depreciation.
 Total productivity of 2006 and 2007.