Chapter 1

Operations Management: Trends &

Issues
 Why Study OM?
1. OM is one of three major functions of any organization; we
want to study how people organize themselves for productive
enterprise
2. We want (and need) to know how goods and services are produced
3. We want to understand what operations managers do
4. OM is such a costly part of an organization
 Operations Management
Definition
• An operations system is defined as one in which
 several activities are performed
 to transform a set of inputs into useful output
 using a transformation process
• Operations Management is
 a systematic approach to
 address all the issues pertaining to
 the transformation process that converts some inputs into
output that are useful, and
 could fetch revenue to the operations system
 Operations Management (OM)
Salient Aspects
• OM is a systematic approach
using scientific tools & techniques and solution
methodologies to analyze problems
• OM is about addressing several issues
varying in terms of time horizon, nature of decisions
• Transformation processes are central to Operations
• Focusing on keeping costs to the minimum
• Developing a set of measures to assess performance of the
system
 Operations
A key functional area in an Organisation
 Organizing to Produce Goods and Services

• Essential functions:
1. Marketing – generates
demand
2.Production/operations
– creates the product
3. Finance/accounting –
tracks how well the
organization is doing,
pays bills, collects the
money
 Operations for Goods and Services

Services – Economic
activities that typically
produce an intangible
product (such as
education, entertainment,
lodging, government,
financial, and health
services)
 Differences Between Goods and Services
TABLE

CHARACTERISTICS OF SERVICES CHARACTERISTICS OF GOODS

Intangible: Ride in an airline seat Tangible: The seat itself

Produced and consumed simultaneously: Beauty salon produces a haircut that Product can usually be kept in inventory (beauty care products)
is consumed as it is produced

Unique: Your investments and medical care are unique Similar products produced (iPods)

High customer interaction: Often what the customer is paying for (consulting, Limited customer involvement in production
education)

Inconsistent product definition: Auto Insurance changes with age and type of Product standardized (iPhone)
car

Often knowledge based: Legal, education, and medical services are hard to Standard tangible product tends to make automation feasible
automate

Services dispersed: Service may occur at retail store, local office, house call, or Product typically produced at a fixed facility
via internet.

Quality may be hard to evaluate: Consulting, education, and medical services Many aspects of quality for tangible products are easy to evaluate (strength of a
bolt)

Reselling is unusual: Musical concert or medical care Product often has some residual value
Organizational Charts
Organizational Charts
Organizational Charts
 Options for Increasing Contribution
TABLE

FINANCE/ ACCOUNTING
MARKETING OPTION OPTION OM OPTION

INCREASE SALES REDUCE FINANCE REDUCE PRODUCTION

CURRENT REVENUE 50% COSTS 50% COSTS 20%
Sales $100,000 $150,000 $100,000 $100,000

Cost of goods –80,000 –120,000 –80,000 –64,000

Gross margin 20,000 30,000 20,000 36,000

Finance costs –6,000 –6,000 –3,000 –6,000

Subtotal 14,000 24,000 17,000 30,000

Taxes at 25% –3,500 –6,000 –4,200 –7,500

Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

Increasing sales 50% increases contribution by $7,500, or 71% (7,500/10,500).
Reducing finance costs 50% increases contribution by $2,250, or 21%
(2,250/10,500).
Reducing production costs 20% increases contribution by $12,000, or 114%
(12,000/10,500).
Contribution to fixed cost (excluding finance costs) and profit.

SOLUTION Given the conditions of our brief example, XYZ Technologies has increased
contribution from $10,500 to $22,500. It may now have a bank willing to lend it
additional funds.
INSIGHT 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.
 Assignment
Discuss about any organization and identify the possible
marketing, finance and operations features in detail by
describing the product of that organization.

Also highlight the complex nature of the product

offerings, and how will you go about making necessary
changes towards increasing profitability by reducing costs.
 Operations Function
Linkages with other functions
Operations Management
A systems Perspective
 Manufacturing of Mahindra’s XUV
500

Right click on the URL below to open the hyperlink in the web browser…

http://www.youtube.com/watch?v=q5-7ZeORixk
 Productivity Challenge

Productivity is the ratio of outputs (goods and services)

divided by the inputs (resources such as labor and capital)

The objective is to improve

productivity!

Important Note!
Production is a measure of output only and
not a measure of efficiency
Improving Productivity at
Starbucks

Operations
improvements have
helped Starbucks
increase yearly
revenue per outlet by
$250,000 to
$1,000,000.
Productivity has
improved by 27%, or
about 4.5% per year.
 Productivity
Units produced
Productivity =
Input used

• Measure of process improvement

• Represents output relative to input
• Only through productivity increases can our standard of living
improve
 Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor-hours used

1,000
= = 4 units/labor-hour
250

One resource input  single-factor productivity

 Multi-Factor Productivity
Output
Multifactor =
Labor + Material + Energy +
Capital + Miscellaneous

► Also known as total factor productivity

► Output and inputs are often expressed in dollars

Multiple resource inputs  multi-factor productivity

Solve-
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.
 Productivity at Taco Bell
Improvements:
▶ Revised the menu
▶ Designed meals for easy
preparation
▶ Shifted some preparation to
suppliers
▶ Efficient layout and automation
▶ Training and employee empowerment
▶ New water and energy saving grills
 Classroom Assignment
Labor productivity is sometimes perceived to be driven by employee
motivation. Discuss effective ways to motivate hourly employees vs.
salaried managers. If productivity of these workers is below expectation,
what are good and poor ways to try to motivate them? What methods
might work well with blue collar employees but not white collar
employees, and vice versa? What methods might work well in the short
run but not in the long run.

Discuss your ideas to the whole class.

 Measurement Problems
1. Quality may change while the quantity of inputs
and outputs remains constant

2. External elements may cause an increase or

decrease in productivity
3. Precise units of measure may be lacking
 Operations Management
Functions
Design Issues Operational Control Issues
Product & Service Design Forecasting the Demand
Process Design Operations Planning & Control
Quality Management Supply Chain Management
Location & Layout of Facilities Maintenance Management
Capacity Planning Continuous Improvement of Operations

• Design issues in Operations Management lay down overall constraints under which the operations
system functions
• Operational Control issues focuses on optimizing the use of available resources in the short-term
while delivering goods and services as per plan under the given design constraints
 Current Challenges in OM
• Globalization
• Supply-chain
partnering
• Sustainability
• Rapid product
development
• Mass
customization
• Lean operations
 Operations Management
Challenges

• Competitive Pressures due to economic reforms

 Falling Prices
The on road price of a Hyundai Santro has not changed much between 2000
and 2014
 Shrinking Delivery Quote
Textile Manufacturers are expected to cut their lead time from order
placement to final delivery down to 2 months
 Build-to-Order Requirements
Need systems that allows customers to self-configure, customize and
visualize their own version of products & services
 Operations Management
Challenges

• Growing customer expectations

Examples: Tariff plans and options provided by mobile operators,
options in passenger car
Customers tend to demand more and refine their expectations
Manufacturing & Service organizations must learn to respond to
these expectations
Need to develop capabilities to bring newer products and services
faster and yet profitably
Ethics, Social Responsibility, and
Sustainability
Challenges facing Stakeholders
operations managers:
Those with a vested
interest in an
• Develop and produce safe, high-quality
organization, including
green products
customers,
• Train, retrain, and motivate employees in a distributors, suppliers,
safe workplace owners, lenders,
• Honor stakeholder commitments employees, and
community members.
 Operations Management
Implications & Priorities

• Relate operations system to Customer/ Market

• Acquire Capabilities to tolerate product proliferation
• Develop systems and procedures that promote
learning
• Develop Green Manufacturing Practices
Other Supplementary Material

Videos
1. Modern Marvels, “The Assembly Line”
The first part of this History Channel production shows Henry Ford and the Ford assembly line,
with real historical footage. It describes the poor working conditions, as well as Ford’s response,
which was to pay a very high hourly rate for the time.

2. Loose Bolts, Michael Keaton

Offers a more modern perspective on assembly lines and highlights the difficulties of making
changes in existing organizations when implementing productivity improvement programs.

3. Ford Historic Model T, CarDataVideo (5:16),

http://www.youtube.com/watch?v=S4KrIMZpwCY
This narrated video has a very detailed look at the first assembly lines at the original Ford auto
plant, plus some driving scenes with the Model T.
 Assignment

Different organizations will offer different service packages and

specialize in different areas. Pick two organizations that demonstrate
differences and compare and contrast their services, their areas of
specialization, and their approach to productivity. That is, explain how
they are similar and how they are different. Make sure you include
examples from their websites that support your analysis. (Two examples
are Alexander Proudfoot at http://www.proudfootconsulting.com/ and
West Monroe Partners at http://www.westmonroepartners.com/.)
END