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OCCIDENTAL MINDORO STATE COLLEGE

Labangan, San Jose, Occidental Mindoro
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Learning Module
In
Fundamentals of Operations
Management

Compiled by:
Viviene Ann E. Culla

Academic Year:
2021-2022

The compiler does not own any of the contents of this learning module. Due credits and
acknowledgment are given to the authors, internet sources, and researchers listed on the
reference page. Such sources are reserved to further explain concepts and cannot be credited to
the compiler and the school. All diagrams, charts, and images are used for educational purposes
only. The sole objective of this instructional material is to facilitate independent learning and
not for monetary gains because this is NOT FOR SALE.

2023 Revision

i
 CHAPTER 1. OPERATIONS AND PRODUCTIVITY

TOPICS
1. Production and Operations Management
2. Purpose of Operations Management
3. What Operations Managers Do?
4. Organizing To Produce Goods And Services
5. Differences Between Goods And Services
6. The Productivity Challenge

LEARNING OUTCOMES
At the end of the lesson, student should be able to:
1. Define or identify production and productivity, operations
management, what does operation manager do, goods and
services.
2. Describe or explain importance of operation management, the
process of developing a plan to produce goods and services and
measuring productivity

PRODUCTION AND OPERATIONS MANAGEMENT

PRODUCTION AND OPERATIONS MANAGEMENT,

DEFINED

The creations of goods and services is called production. Operations

Management (OM) is the set of activities that creates goods and services by transforming
inputs into outputs. Activities creating goods and services takes place in all organizations.
In manufacturing firms, the production activities that create goods are usually quite
obvious. In them, we can see the creations of a tangible product such as Honda Cars and
Motors.
In organizations that do not create physical products, the production function may
be less obvious. It may be “hidden” from the public and even from the customer. An
example is the transformation that place at a college or in the industry of security.
Often when services are performed, no tangible goods are produced. Instead, the
product may take such forms as the transfer of education to students or of safeguarding
the lives and properties of an individual or a group of entity. Regardless of whether the
end product is a good or service, the production activities that go in the organization are
often referred to as operations / operation management.

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PURPOSE OF OPERATIONS MANAGEMENT
The goal of operations management (OM) is to standardize the manufacturing
process and commercial operations as efficiently as feasible. To optimize net operating
profit, OM experts try to balance operational expenses and revenue.

WHAT 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 see Figure 1.1.

FIGURE 1.1

An operations manager can be responsible for a lot of different things. Unlike

other executive positions, operations management is cross-dependent. A Chief Marketing
Officer specifically works with the marketing department. Chief Finance Officer with
finance and so on. A Chief Operating Officer, on the other hand might need to work with
just about every department. Thus, operations managers are often the glue that holds
an organization together. In a nutshell, it’s the smooth running of operations in any
organization or company.
There are a number of tasks unique to operations managers. For instance, you
must be able to match individuals to client needs in order to balance objectives and goals
from both sides. The role also involves driving growth strategy and balancing global
needs.

ORGANIZING TO PRODUCE GOODS AND SERVICES

To create goods and services, all organizations perform three functions (see
Figure1.2). These functions are the necessary ingredients not only for production but also
for an organization’s survival. They are:
1. Marketing. It generates the demand, or at least takes the order for a product or
service (nothing happens until there is sale).

2. Production-operations. It creates the product.

3. Finance/accounting. It tracks how the organization is doing, pay the bills, and
collects the money.

2
FIGURE 1.2. Typical Organizational Chart
Source: https://www.slideshare.net/profmanishparihar/introduction-to-operations-
management-9685100

DIFFERENCES BETWEEN GOODS AND SERVICES

Let’s examine some of the differences between goods and services:

• Services are usually intangible (for example, your purchase of a ride in an empty
airline seat between two cities) as opposed to a tangible good.
• Services are often produced and consumed simultaneously; there is no stored
inventory. For instance, beauty salon produces a haircut that is “consumed”
simultaneously.
• Services are often unique. A haircut produced for you is not exactly like anyone
else’s.
• Services have high customer interaction. Services are often difficult to standardize
automate, and make as efficient as we would like because customer interaction
demands uniqueness. In fact, in many cases this uniqueness is what the customer
is paying for; therefore, the operations manager must ensure that the product is
designed so that it can be delivered in the required unique manner.
• Services have inconsistent product definition. Product definition may be rigorous,
as in the case of an auto insurance policy, but inconsistent because policyholders
change cars and mature.
• Services are often knowledge-based, as in the case of security, educational,
medical and legal services and therefore hard to automate.
• Services are frequently dispersed. Dispersion occurs because services are
frequently brought to the client/customer via a local office, retail outlet, or even
a house call.

Having made the distinction between goods and services, we should point out that
in many cases, the distinction is not clear-cut. In reality, almost all services are a mixture
of a service and a tangible product; similarly, the sale of most goods includes or requires
a service. For instance, many products have the service components of financing and
transportation (e.g., automobile sales). Manny also require after-sale training and
maintenance (e.g., office copiers).

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 Moreover, any “service” activities take place within goods-producing operations.
Human resource management, logistics, accounting, training, field service and repair are
all service activities, but they take place within a manufacturing organization just as they
take place in the larger service sector of the economy.

When a tangible product is not included in the service, we may call it a pure
service. Although there are not very many pure services, one example is counseling.
Figure 1.3 shows the range of services in a product. The range is extensive and shows the
pervasiveness of service activities.

FIGURE 1.3 MOST GOODS CONTAIN A SERVICE AND MOST SERVICES CONTAIN A GOOD
Source: Based on Earl W. Sasser, Jr., R.P. Olsen, and D. Daryl Wyckoff, Management of Service
Operations (Boston, Allyn and Bacon, 1978), p.11

THE PRODUCTIVITY CHALLENGE

The creation of goods and services requires changing resources into goods and
services. The more efficiently we make this change, the more productive we are.
Productivity is the ration of output (goods and services) divided by the inputs (resources,
such as labor and capital). The operation manager’s job is to enhance this ratio of outputs
to inputs. Improving productivity means improving efficiency.

The improvement can be achieved in two ways: a reduction in inputs while output
remains constant, or an increase in output while inputs remain constant. Both represent
an improvement in productivity. In an economic sense, inputs are land, labor, capital and
management, which are combined into a production system. Management creates this
production system, which provides the conversion of inputs to outputs. Outputs are
goods and services, including such diverse items as guns, butter, education, improved
security system and so on. Production is the total goods and services produced. High
production may imply only that more people are working and that employment levels are
high, but it does not imply high productivity.

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

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productivity can labor, capital and management receive additional payments. If returns
of labor, capital or management are increased without increased productivity, prices rise.
On the other hand, downward pressure is placed on prices when productivity increase,
because more is being produced with the same resources.

Productivity Measurement
The measurement of productivity can be quite direct. Such is the case when
productivity can be measured as labor-hours per ton of a specific type of steel or as the
energy necessary to generate a kilowatt of electricity. An example of this can be
summarized in the following equation:

Units produced
Productivity =
Input used

For example, if units produced = 1000 and labor-hours used is 250, then:

Units produced 1,000

Productivity = = = 4 units per labor
Labor-hours used 250

The use of just one resource input to measure productivity, as shown above, is
known as single-factor productivity. However, a broader view of productivity is
multifactor productivity, which includes all inputs (e.g. labor, material, energy, capital).
Multifactor productivity is also known as total factor productivity. Multifactor
productivity is calculated by combining the input units, as shown below:

Units produced
Productivity =
Labor + Material + Energy + Capital + Miscellaneous

For example, to produce 200 units of a product, per unit material cost is $6.50 per
unit. The selling price of the product is $12 for each unit. The required labor hours are 40
hours and at the rate of $10 for an hour. So, the total productivity will be calculated as
below:

200 units * 12 per unit

Productivity =
(200 units * $6.50 per unit) + (40 hours * $10 per hour)

= 2400
(1300 + 400)

= 1.41

Productivity measurement is particularly difficult in the service sector, where the

end product can be hard to define. For example, the quality of your haircut and the service
in providing safety and security in the security industry are all ignored in the economic
data.

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Answer the questions below.
1. How does an operations manager optimize a company's profit while also
improving its societal service?

2. In the industry of security, what is the range of service in a product?

The output should be submitted on time. The rubric below will be used.
Needs
Excellent Good Satisfactory
Improvement
(9-10) (7-8) (5-6)
(0-4)
Idea Thoroughly Ideas Ideas Little or no
Explanation Explained Explained somewhat explanation of
explained ideas
Coherency Extremely Coherent Somewhat Lacks
coherent writing coherent Coherency
writing
Grammar Few errors Some errors Many errors Many errors
that hurt
understanding

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 CHAPTER 2: OPERATIONS STRATEGY FOR COMPETITIVE ADVANTAGE

TOPICS
1. Identifying Mission, Vision and Strategy
2. What are the Three Strategies
3. Achieving Competitive Advantage
4. Ten Operations Decisions
5. Issues in Operations Strategy
6. SWOT Analysis

LEARNING OUTCOMES
At the end of the lesson, student should be able to:
1. Define or identify mission, vision and strategy, ten decisions of
OM, SWOT Analysis
2. Describe or explain specific approaches used by OM to achieve
strategic concepts such as differentiation, low cost, response

IDENTIFYING MISSIONS AND STRATEGIES

An effective operations management effort must have a mission so it knows
where it is going and a strategy so it knows how to get there.

MISSION
Economic success, indeed survival, is the result of identifying missions to satisfy a
customer’s needs and wants. We define the organization’s mission as its purpose – what
it will contribute to society. Mission statements provide boundaries and focus for
organizations and the concept around which the firm can rally. The mission states the
rationale for the organization’s existence.

VISION

A vision refers to any aspirations of what you hope your business will achieve and
become. It’s about looking forward and creating a visual image of the ideal state you wish
to achieve with your business. Essentially, your vision should reflect what you think your
business will look like in 5 or even 10 years from now. The vision statement needs to be
inspirational and aspiration. It should challenge your employees and motivate them to
want to be a part of and contribute to your business’s culture. See Figure 2.1 for mission
and vision example.

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FIGURE 2.1 MISSION, VISION AND STRATEGY OF MEGAFORCE SECURITY
Source: https://ru.pinterest.com/pin/209769295123535224/

STRATEGY
With the mission established, strategy and its implementation can begin. Strategy
is an organization’s action plan to achieve the mission. Each functional area has a strategy
for achieving its mission and for helping the organization reach the overall mission. These
strategies exploit opportunities and strengths, neutralized threats and avoid weaknesses.

What are the Three Strategies?

Firms achieve missions in three conceptual ways: differentiation, cost leadership
and quick response. This means operations managers are called on to deliver goods and
services that are better or at least different, cheaper, and more responsive. Operations
managers translate these strategic concepts into tangible tasks to be accomplished. Any
one or combination of these three strategic concepts can generate a system that has a
unique advantage over competitors.

Differentiation

Differentiation is concerned with providing uniqueness. A firm’s opportunities for

creating uniqueness are not located within a particular function or activity, but can arise
in virtually everything that the firm does. Moreover, because most products include some
service and most services include some product, the opportunities for creating this
uniqueness are limited only by imagination. Indeed, differentiation should be thought of
as going beyond both physical characteristics and service attributes to encompass
everything about the product or service that influences the value that the customers
derive from it. Therefore, effective operations managers assist in defining everything
about a product or service that will influence the potential value to the customer. This
may be the convenience of a broad product line, product features, or product service.

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Product service can manifest itself through convenience (location of distribution centers
or stores), training, product delivery and installation, or repair and maintenance services.

Cost Leadership
One driver of a low-cost strategy is a facility that is effectively utilized. Meaning,
companies that use low-cost strategies must utilize its resources effectively. For example,
identifying the optimum size can allow firms to spread overhead costs over enough units
to drive down costs and to provide a cost advantage.
Low-cost leadership entails achieving maximum value as defined by your
customer. It requires examining each of the 10 OM decisions is a relentless effort to drive
down costs while meeting customer expectations of value. Allow-cost strategy does not
imply low value or low-quality.

Quick Response
The third strategy option is response. Response is often thought of as flexible
response, but it also refers to reliable and quick response. Indeed, we define response as
including the entire range of values related to timely product development and delivery,
as well as reliable scheduling and flexible performance.
Flexible response may be thought of as the ability to match changes in a
marketplace in which design innovations and volumes fluctuate substantially.
Compaq is an exceptional example of a firm that has demonstrated flexibility in
both design and volume changes in the volatile world of personal computers. Compaq’s
products often have a life cycle of months, and volume and cost changes during the brief
life cycle are dramatic. However, Compaq has been successful at institutionalizing the
ability to change products and volume to respond to dramatic changes in product design
and cost – thus building a sustainable competitive advantage.
The second aspect of response is the reliability of scheduling. One way the
German machine industry has maintained its competitiveness despite having the world’s
highest labor costs is through reliable response. This response manifests itself in reliable
scheduling. German machine firms have meaningful schedules – and they perform to
these schedules. Moreover, the results of these schedules are communicated to the
customer and the customer can, in turn, rely upon them. Consequently, the competitive
advantage generated through reliable response has value to the end customer.
The third aspect of response is quickness. Johnson Electric, discussed in the Om in
Action box, competes on speed – speed in design, production and delivery. Whether it is
a production system at Johnson Electric, a lunch delivered in 15 mins at Bennigan’s, or
customized pagers delivered in three days from Motorola, the operations manager who
develop systems that respond quickly can have a competitive advantage.
In practice, these three concepts – differentiation, low cost and response – are
often implemented via the six specific strategies, namely: flexibility in design and volume,
low price, delivery, quality, after-sale service and broad product line. Through these six
specific strategies, OM can increase productivity and generate a sustainable competitive
advantage.

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ACHIEVING COMPETITIVE ADVANTAGE
Each of the three strategies provides an opportunity for operations managers to
achieve competitive advantage. Competitive advantage implies the creation of a system
that has a unique advantage over competitors. The idea is to create customer value in an
efficient and sustainable way. Pure forms of these strategies may exist, but operations
managers will more likely be called on to implement some combination of them.

TEN OPERATIONS DECISIONS

These three ideas come into play when operations managers make smart
decisions in the 10 areas of operations management known as operational decisions (see
Figure 2.1). OM's ten decisions are as follows:
1. Goods and services design. Designing goods and services defines much of the
transformation process. Cost, quality and human resource decisions interact
strongly with design decisions. Designs usually determine the lower limits of cost
and the upper limits of quality.
2. Quality. The customer’s quality expectations must be determined and policies and
procedures established to identify and achieve that quality.
3. Process and capacity design. Process options are available for products and
services. Process decisions commit management to specific technology, quality,
human resource use, and maintenance. These expenses and capital commitments
will determine much of the firm’s basic cost structure.
4. Location selection. Facility-location decisions for both manufacturing and service
organizations may determine the firm’s ultimate success. Errors made at this
juncture may overwhelm other efficiencies.
5. Layout design. Capacity needs, personnel levels, purchasing decisions, and
inventory requirements influence layout. Additionally, processes and materials
must be sensibly located in relation to each other.
6. Human resources and job design. People are an integral and expensive part of the
total system design. Therefore, the quality of work life provided, the talent and
skills required, and their costs must be determined.
7. Supply-chain management. These decisions determine what is to be made and
what is to be purchased. Consideration is also given to quality, delivery and
innovation, all at a satisfactory price. An atmosphere of mutual respect between
buyer and supplier is necessary for effective purchasing.
8. Inventory. Inventory decisions can be optimized only when customer satisfaction,
suppliers, production schedules, and human resource planning are considered.
9. Scheduling. Feasible and efficient schedules of production must be developed; the
demand on human resources and facilities must be determined and controlled.
10. Maintenance. Decisions must be made regarding desired levels of reliability and
stability and systems must be established to maintain that reliability and stability.

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FIGURE 2.2 OPERATIONS MANAGEMENT’S CONTRIBUTION TO STRATEGY
Source: https://shumateblog.wordpress.com/2014/10/05/284/

Both goods and services have the same ten operational decisions. As a result, the
implementation of all three strategies will vary based on the product's percentage of
goods and services, because a few products are entirely goods or entirely services. See
Table 2.1 for how strategy is selected and implemented for both goods and services
through these 10 operations management decisions.
TABLE 2.1. Difference in the Demands of Goods and Services Influence How the 10 Operations
Management Decisions Are Used

Operations Decisions Goods Services

Goods and service design Product is usually tangible Product is not tangible. A
new range of product
attributes—a smile

Quality Many objective quality Many subjective quality

standards. standards.

Process and capacity design Customer is not involved in Customer may be directly
most of the process. involved in the process – a
haircut.

Capacity must match

demand to avoid lost sales –
customers often avoid
waiting.

Location selection May need to be near raw May need to be near

materials or labor force. customer – car rental.
Layout design Layout can enhance Can enhance product as
production efficiency well as production – layout
of a fine-dining restaurant

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 Human resources and job Workforce focused on Direct workforce usually
design technical skills. Labor needs to be able to interact
standards can be well with customer – bank
consistent. Output-based teller.
wage system possible
Labor standards vary
depending on customer
requirements – legal cases.

Supply –chain management Supply – chain relationships Supply – relationships

critical to final product important but not be critical

Inventory Raw materials, work-in- Most services cannot be

process, and finished goods stored so other ways must
may be inventoried. be found to accommodate
changes in demand.

Scheduling Ability to inventory may Primarily concerned with

allow leveling of production meeting the customer’s
rates. immediate schedule.

Maintenance Maintenance is often Maintenance is often

preventive and takes place “repair”
at the production site.

ISSUES IN OPERATIONS STRATEGY

Once a firm has formed a mission, developing and implementing a specific strategy
requires that the operations manager consider a number of issues. We will examine these issues
in three ways.

Research
According to the Strategic Planning Institute, the operations function is critical in
the creation and delivery of the organization's strategy. Based on its PIMS Program (Profit
Impact of Market Strategy), which was formed in collaboration with the General Electric
Corporation, was able to identify some characteristics of high return on investment (ROI)
as a measure of success using the collected data items from around 3,000 participating
firms. Among those characteristics that impact strategic OM decisions are:
1. High product quality (relative to competition).
2. High-capacity utilization.
3. High operating efficiency (the ratio of expected to actual employee productivity).
4. Low investment intensity (the amount of capital required to produce a dollar of
sales).
5. Low direct cost per unit (relative to the competition).
These five findings support a high return on investment and should therefore be
considered as an organization develops a strategy. In the analysis of a firm’s relative
strengths and weakness, these characteristics can be measured and evaluated. The specific
strategic approaches suggested earlier indicate where an operation manager may want to go, but
without achieving the five characteristics of firms with a high return on investment, that journey
may not be successful.

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 Another research study, summarized in Table 2.2, indicates the significant role
that OM can play in competitive strategy. When a wide mix of 248 business were asked
to evaluate the importance of 32 categories in obtaining a sustainable competitive
advantage, 28% of the categories selected fell under operations management. When
quality/service is added, the total goes to 44%. The study supports the major role OM
strategy plays in developing a competitive advantage.
TABLE 2.2. Categories of Strategic Options Where Managers Seek a Sustainable
Competitive Advantage
Percentages Categories
28% Operations Management
Low-cost product
Product-line breadth
Technical Superiority
Product characteristics/differentiation
Continuing production innovation
Low-price/high-value offering
Efficient, flexible operations adaptable to customer
Engineering research development
Location
Scheduling
18% Marketing/distribution
17% Momentum/name recognition
16% Quality/service
14% Good management
4% Financial resources
3% Other

Preconditions
Before establishing and attempting to implement a strategy, the operations
manager needs to understand that the firm is operating in an open system in which a
multitude of factors exists. These factors influence strategy development and execution.
The more thorough the analysis and understanding of both the external and internal
factors, the more the likelihood of success. Although the list of factors to be considered
is extensive, at a minimum it entails an understanding of:
1. Strengths and weaknesses of competitors, as well as possible new entrants into
the market, substitute products, and commitment of suppliers and distributors.
2. Current and prospective environmental, technological, legal, and economic issues.
3. Product life cycle, which may dictate the limitations of operations strategy.
4. Resources available within the firm and within the OM function.
5. Integration of the OM strategy with the company’s strategy and other functional
areas.

Dynamics

All aspects of a business are subject to change or dynamic nature. These changes
can have an influence on a company's strengths and weaknesses and have an impact
before, during, and after a choice is made. As a result, it is critical to examine potential
dynamics. Changes inside the organization – such as personnel, finance, and others – and

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changes in the environment are the two most prevalent. When market and consumer
expectations shift, so must the firm's viability and eventual success.

SWOT ANALYSIS
Once an operations manager understands the challenges involved in developing
an effective strategy, it is critical to take a step back and evaluate the firm. What does it
excel at? What is it lacking? What is going to move it forward? SWOT analysis (for
Strength, Weakness, Opportunities and Threats) is a great tool with which to start.
Beginning with SWOT analyses, firms position themselves, through their strategy, to have
a competitive advantage. The firm may have excellent design skills or great talent at
identifying outstanding locations. However, the firm may recognize limitations of its
manufacturing process or in finding good suppliers. The idea is to maximize opportunities
and maximize threats in the environment while maximizing the advantages of the
organization’s strengths and minimizing the weaknesses. Any preconceived ideas about
mission are then reevaluated to ensure they are consistent with the SWOT analysis.
Subsequently, a strategy for achieving the mission is developed. This strategy is
continually evaluated against the value provided customers and competitive realities.

The students will form groups with 5 members each. They would be introducing a
new product or service. The groups will use the SWOT analysis to:

1. Develop a matrix to identify strengths, opportunities, weakness, and threats.

2. Develop strategies for introducing the new product or service.
3. List the tactics for actually creating or producing the new product or service.

***The compiler does not own any of the contents of this learning module. Due credits and
acknowledgment are given to the authors, internet sources, and researchers listed on the
reference page. Such sources are reserved to further explain concepts and cannot be credited
to the compiler and the school. All diagrams, charts, and images are used for educational
purposes only. The sole objective of this instructional material is to facilitate independent
learning and not for monetary gains because this is NOT FOR SALE. ***

14