BBA 22023

Operations Management
Recommended texts
Operations Management

Operations: a function
Production: the or system that
creation of goods and transforms inputs into
services outputs of greater
value.
 • Operations management (OM) is
the management of systems or
processes (set of activities) that
create value in the form of goods
and/or services by transforming
inputs into outputs.
Operations
Management • Operations Management affects:
• Companies’ ability to compete
• Nation’s ability to compete
internationally
Operations
Management?
• It doesn’t matter if the
application is in an
office, a hospital, a
restaurant, a
department store, or a
factory…

• the production of
goods and services
requires operations
management.
 • Everything you can see
around you has been
produced by an
operation.
• Every service you
consumed today (radio
station, bus service,
Operations lecture, etc.) has also
Management been produced by an
operation
• Operations Managers
create everything you
buy, sit on, wear, eat etc.
Significant Events in OM
Historical
summary
of OM
OPERATIONS AS A
TRANSFORMATION PROCESS

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Transformed and Transforming resources

-Transformed resources-
those that are transformed -Transforming resources-
in some way by the those that are used to
operation to produce the perform the transformation
goods or services that are its process.
outputs.

Ex: Material, Information and Ex: Staff and Facilities

Customers
Transformed resources

Materials – the Information - that Customers – the

physical inputs to is being processed people who are
the process or used in the transformed in
process some way.
 Transforming resources

Staff – the people involved directly Facilities – land, buildings,

in the transformation process or
supporting it.
machines and equipment.
FOOD PROCESSOR

Inputs Processing Outputs

Raw Vegetables Cleaning Canned vegetables
Metal Sheets Making cans
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment
 HOSPITAL PROCESS

Inputs Processing Outputs

Doctors, nurses
Hospital Examination Healthy patients
Medical Supplies Surgery
Equipment Monitoring
Laboratories Medication
Patients Therapy
 TYPES OF OPERATIONS

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

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 ▶ Essential functions:
Organizing Marketing – assessing consumer wants
and needs, generates demand
to Produce
Operations – producing the goods or
Goods and providing the services offered by the
Services organization
Finance/accounting – tracks how well
the organization is doing, pays bills,
collects the money, providing funds for
operations.
 1. OM is one of three major
Why Study functions of any organization; we
OM? 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 a costly part of an
organization
 Responsibilities of Operations Managers
Management is the attainment of organizational goals in an effective and
efficient manner through planning, organizing, leading, and controlling
organizational resources.
Planning : defining goals for future Organizing : assigning tasks, grouping
organizational performance and tasks into departments, delegating
deciding on the tasks and use of authority, and allocating resources
resources needed to attain them. across the organization.
• Capacity production process • Degree of centralization
• Location mix of products and services • Suppliers
• layout • Subcontracting

Leading : influence to motivate Controlling : monitoring employees’

employees to achieve organizational activities, determining whether the
goals organization is on target toward its
• Scheduling goals, and making corrections as
necessary.
• Inventory
• Quality
 • What
What resources will be needed,
and in what amounts?
• When
Resource be needed/work be
scheduled/ materials and
Key Decisions other supplies be ordered
of Operations • Where
Where will the work be done?
Managers • How
How will the product or service
be designed?
How will the work be done?
How will resources be allocated?
• Who
Who will do the work?
 Competitive Priorities
The critical dimensions that a
process or supply chain must
possess to satisfy its internal or
Competitive external customers, both now
Priorities and and in the future.
Capabilities
Competitive Capabilities
The cost, quality, time, and
flexibility dimensions that a
process or supply chain actually
possesses and is able to deliver.

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 Competitive Capabilities
and Priorities

Definitions, process considerations, and examples of competitive priorities

COST Definition Process Considerations Example

1. Low-cost Delivering a service or a product at the Processes must be designed and Costco
operations lowest possible cost operated to make them efficient
QUALITY
2. Top quality Delivering an outstanding service or May require a high level of customer Ferrari
product contact and may require superior
product features
3. Consistent quality Producing services or products that Processes designed and monitored to McDonald’s
meet design specifications on a reduce errors and prevent defects
consistent basis
TIME
4. Delivery speed Quickly filling a customer’s order Design processes to reduce lead time Dell
5. On-time delivery Meeting delivery-time promises Planning processes to increase United Parcel
percent of customer orders shipped Service (UPS)
when promised
6. Development Quickly introducing a new science or a Cross-functional integration and Li & Fung
speed product involvement of critical external
suppliers
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 Competitive…contd.

Definitions, process considerations, and examples of competitive priorities

FLEXIBILITY Definition Process Considerations Example

7. Customization Satisfying the unique needs of each Low volume, close customer Ritz Carlton
customer by changing service or contact, and easily reconfigured
products designs

8. Variety Handling a wide assortment of Capable of larger volumes than Amazon.com

services or products efficiently processes supporting
customization

9. Volume flexibility Accelerating or decelerating the rate Processes must be designed for The United States
of production of service or products excess capacity Postal Service
quickly to handle large fluctuations in (USPS)
demand

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Order Winners and Qualifiers

Order Qualifiers : The

competitive
criteria that a firm must
characteristics that a
meet for a customer to
firm must exhibit to be a
consider firm’s products
viable competitor in the
as possible candidates
marketplace
for purchase.
competitive
Order Winners : criteria
characteristics that
that differentiate the
cause a firm's customers
product or service from
to choose that firm's
one firm to another and
goods and services over
win the orders.
those of its competitors.
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Goods vs Service

Characteristic Goods Service

Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Output Tangible Intangible
Measurement of productivity Easy Difficult
Opportunity to correct problems High Low
Inventory Much Little
Evaluation Easier Difficult
Patentable Usually Not usual
MOST OPERATIONS PRODUCE PRODUCTS AND SERVICES

Crude oil production Pure products –Outputs

that are exclusively
Aluminium smelting tangible

Specialist machine tool

production Mixture of products and
services – Outputs that
Restaurant are a mixture of the
tangible and intangible
Information systems
provider
Pure services – Outputs
Management consultancy that are exclusively
intangible
Psychotherapy clinic

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 EFFICIENCY ,
EFFECTIVENESS
AND PRODUCTIVITY

• Doing things right - Efficiency

• Efficiency = Actual Output / Standard Output
• Doing the right things - Effectiveness
• Effectiveness = Standard Output / Resources
Required
• Productivity = Efficiency x Effectiveness
• = Actual Output / Resources Used
Productivity

𝑂𝑢𝑡𝑝𝑢𝑡
• 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝐼𝑛𝑝𝑢𝑡

𝑂𝑢𝑡𝑝𝑢𝑡
• 𝑆𝑖𝑛𝑔𝑙𝑒 𝑓𝑎𝑐𝑡𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝐼𝑛𝑙𝑎𝑏𝑜𝑟 𝑜𝑟 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑜𝑟 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

𝑂𝑢𝑡𝑝𝑢𝑡
• 𝑀𝑢𝑙𝑡𝑖 𝑓𝑎𝑐𝑡𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝐼𝑛𝑙𝑎𝑏𝑜𝑟+ 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠+ 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

𝐺𝑜𝑜𝑑𝑠 𝑎𝑛𝑑 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

• 𝑇𝑜𝑡𝑎𝑙 𝑓𝑎𝑐𝑡𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝐴𝑙𝑙 𝑖𝑛𝑝𝑢𝑡𝑠 𝑢𝑠𝑒𝑑 𝑡𝑜 𝑝𝑟𝑜𝑑𝑢𝑐𝑒 𝑡ℎ𝑒𝑚
Example 01
One plus Manufacturing Co. specializes in the production of smartphones.
Over the course of a month(equivalent to four weeks), they successfully
manufactured 10,000 smartphones with a dedicated workforce of 10
employees working 40 hours per week. The total labor cost for this
productive month was $15,000. Simultaneously, they employed 2,000
pounds of materials, incurring a cost of $8,000. Furthermore, the company
invested $5,000 in machine operation and maintenance, utilizing a total of
300 machine hours.
Calculate the

a. labor productivity (in hrs),

b. material productivity (in lbs),
c. multifactor productivity for each week
Example 02

ASB 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.

a. Compute the labor productivity.

b. Compute the multifactor productivity, using loans per dollar cost as the
measure.
Cont.
The bank is considering the purchase of new computer software for the loan
operation. The software will enable each loan officer to process eight loans
per day, although the overhead expense will increase to $550.

c. Compute the new labor productivity.

d. Compute the new multifactor productivity.
e. Should the bank proceed with the purchase of the new software? Explain.
Example 03

Elite furniture company produces wooden chairs, which it sells to customers.

With the current equipment, Elite furniture produces 240 wooden chairs per
100 timber logs. It currently purchases 100 timber logs per day, and each log
requires 03 labor hours to process. Elite furniture is considering the hire of a
professional buyer who can buy better quality timber logs at the same cost.
If this is the case, Elite furniture can increase production to 260 wooden
chairs per 100 timber logs, and the labor hours required will increase by
eight hours per day (for the buyer).
Cont….
• a. Compute the labor productivity for the current method (i.e., no buyer).

b. What will the labor productivity be if Elite furniture hires the professional buyer?

c. Suppose that Elite furniture spends $12 per hour for each worker who constructs the
wooden chairs. The buyer, however, is paid $24 per hour. The material cost is $10 per log
(regardless of who purchases them).

d. Compute the multifactor productivity for the current method, using wooden chairs per
dollar cost (labor + materials) as the measure.

e. How does the multifactor productivity change if the professional buyer is hired?
Example 04 Week 1 2 3 4
Units of output 2000 4000 5000 7000
Posey Ceramics makes # workers 4 4 5 6
ceramic vases for a
chain of department Hours per week 40 48 56 70
stores. The output
per worker
and cost figures over
the past four weeks
are shown here. Labor Material (lbs.) 286 570 720 1000
costs $10 an hour, and
materials are $4 a
pound.
Calculate the
a. labor productivity (in hrs),
b. material productivity (in lbs),
c. multifactor productivity for each week.
Example 05

Barry’s Tire Service completed 100 tire changes, 06 brake jobs,

and 16 alignments in an eight-hour day with his standard crew of
six mechanics. A brake specialist costs $16 per hour, a tire
changer costs $8 per hour, and an alignment mechanic costs $14
per hour. The materials cost for a day was $2000, and overhead
cost was $500.
a. What is the shop’s labor productivity if the retail price for each
respective service is $60, $150, and $40?
b. What is the multifactor productivity, if the crew consisted of
two of each type mechanic?
Example 06

Student tuition at Newcastle University is Rs: 150 per semester

credit hour. The state supplements school revenue by Rs: 100 per
semester credit hour. Average class size for a typical 3-credit
course is 50 students. Labor costs are Rs: 4,000 per class,
material costs are Rs: 20 per student per class, and overhead
costs are Rs: 25,000 per class.
a. What is the multifactor productivity ratio for this course
process?
b. If instructors work an average of 14 hours per week for 16
weeks for each 3-credit class of 50 students, what is the labor
productivity ratio?
Example 07

• Tried and True Store A B C D

Clothing has opened Sales 40,000 12,000 60,000 25,000
four new stores in volume
college towns across
the state. Data on Labour 250 60 500 200
monthly sales volume hours
and labor hours are
given below.
• Which store location
has the highest labor
productivity?
Ex. Cont.

• Tried and True’s accountant suggests that monthly rent and hourly wage
rate also be factored into the productivity calculations. Annandale (A)
pays the highest average wage at $6.75 an hour. Blacksburg (B) pays $6.50
an hour, Charlottesville (C) $6, and Danville (D) $5.50. The cost to rent
store space is $1800 a month in Annandale, $2000 a month in Blacksburg,
$1200 a month in Charlottesville, and $800 a month in Danville.

• Which store is most productive?

• Tried and True is not sure it can keep all four stores open. Based on
multifactor productivity, which store would you close? What other factors
should be considered?
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THANK YOU!