Department of Management
Unit One
Nature of Operations Management
Chapter Outline
1.1. Introduction
1.2. Definition of production and Operations Management
1.3. Objectives of Operations Management
1.4. Scope of Operations Management
1.5. Cross Functional Decision Making
1.6. Operations as a function
1.7. Operations as a system
1.8. Efficiency and Effectiveness
1.1. Introduction
Today companies are competing in a very different environment than they were only a few years
ago. To survive they must focus on quality, time-based competition, efficiency, international
perspectives, and customer relationships. The purpose of this course is to help prepare you to be
successful in this new business environment.
1.2. Definition of operations Management
Every business is managed through three major functions: finance, marketing, and operations
management. Other business functions – such as accounting, purchasing, human resources, and
engineering etc. support these three major functions. Finance is the function responsible for
managing cash flow, current assets, and capital investments. Marketing is responsible for sales,
generating, customer demand, and understanding customer wants and needs. Most of us have
some idea of what finance and marketing are about, but what does operations management do?
• Operation is that part of as organization, which is concerned with the transformation of a
range of inputs into the required output (services) having the requisite quality level.
Management is the process, which combines and transforms various resources used in
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the operations subsystem of the organization into value added services in a controlled
manner as per the policies of the organization.
• Joseph G .Monks defines Operations Management as the process whereby resources,
flowing within a defined system, are combined and transformed by a controlled manner
to add value in accordance with policies communicated by management.
• Operations management is the activity of managing the resources which are devoted to
the production and delivery of products and services.
• Operations management is concerned with managing the resources that directly produce
the organization’s service or product. The resources will usually consist of people,
materials, technology and information but may go wider than this.
• Production/operations management is the process, which combines and transforms
various resources used in the production/operations subsystem of the organization into
value added product/services in a controlled manner as per the policies of the
organization.
• Operations Management (OM) is the business function that plans, organizes, coordinates,
and controls the resources needed to produce a company’s goods and services.
• Operations management is a management function.
• It involves managing people, equipment, technology, information, and many other
resources.
• Operations management is the central core function of every company.
This is true whether the company is large or small, provides a physical good or a service, and is
for profit or not for profit. Every company has an operations management function. Actually, all
the other organizational functions are there primarily to support the operations functions.
Without operations, there would be no goods or services to sell. Consider a retailer such as Gap
that sells casual apparel. The marketing function provides promotions for the merchandise, and
the finance function provides the needed capital. It is the operations function, however, that plans
and coordinates all the resources needed to design, produce, and deliver the merchandise to the
various retail locations. Without operations, there would be no goods or services to sell to
customers.
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For operations management to be successful, it must add value during the transformation
process. We use the term value added to describe the net increase between the final value of a
product and the value of all the inputs. The greater the value added, the more productive a
business is. An obvious way to add value is to reduce the cost of activities in the transformation
process. Activities that do not add value are considered a waste; these include certain jobs,
equipment, and processes. In addition to value added, operations must be efficient. Efficiency
means being able to perform activities well, and at the lowest possible cost. An important role of
operations is to analyze all activities, eliminate those that do not add value, and restructure
processes and jobs to achieve greater efficiency. Today’s business environment is more
competitive than ever, and the role of operations management has become the focal point of
efforts to increase completeness, by improving value added and efficiency.
• An operation is that part of a business organization that is responsible for producing
goods and/or services.
• Goods are physical items that include raw materials, parts, subassemblies such as
motherboards that go into computers, and final products such as cell phones and
automobiles.
• Services are activities that provide some combination of time, location, form, or
psychological value.
• Operations management is the management of systems or processes that create goods
and/or provide services
• Operations function is responsible for producing products and/or delivering services, it
needs the support and input from other areas of the organization. Business organizations
have three basic functional areas of finance, marketing, and operations. It doesn’t
matter whether the business is a retail store, a hospital, a manufacturing firm, a car wash,
or some other type of business; all business organizations have these three basic
functions.
1.3. Objectives of Operations Management
• Customer Service: The primary objective of operations management, is to utilize the
resources of the organization, to create such products or services that satisfy the needs of
the consumers, by providing “right thing at the right price, place and time”.
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• Resource Utilization: To make the best possible use of the organization’s resources to
satisfy the wants of the consumers, is another important objective of the operations
management.
1.4. Scope of Production and Operations Management
Production and operations management concern with the conversion of inputs into outputs, using
physical resources, so as to provide the desired utilities to the customer while meeting the other
organizational objectives of effectiveness, efficiency and adoptability. It distinguishes itself from
other functions such as personnel, marketing, finance, etc., by its primary concern for
‘conversion by using physical resources.’ Following are the activities which are listed under
production and operations management functions:
1. Location of facilities
2. Plant layouts and material handling
3. Product design
4. Process design
5. Production and planning control
6. Quality control
7. Materials management
8. Maintenance management.
1.5. Operations Management and Decision Making
Operations management professionals make a number of key decisions that affect the entire
organization. These include the following:
Strategic (Long Term) Level Decisions about T/H/UML
• What to make (product development)?
• How to make it (process and layout decisions) or should we buy it?
• Where to make it (site location)?
• How much capacity is needed (high level capacity decisions)?
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Tactical (Intermediate Term) Level (MML)
Addresses the material and labor resources within the constraints, for example:
✓ How many workers are needed and when (labor planning)?
✓ What level of stock is required and when should it be delivered (inventory and
replenishment planning)?
✓ How many shifts needed for work? Whether overtime or subcontractors are required
(detailed capacity planning)
Operational (Short Term (daily/weekly/monthly) Level) (L/OML)
Planning, carrying out and control decisions, such as, for example:
• What to process and when (scheduling)?
• What is the order to process requirements (sequencing)?
• How does the work utilize the resources (loading)?
• Who does the work (assignments)?
Framework for Decision-Making
An analytical and scientific framework for decision implies the following systematic steps
• Defining the problem.
• Establish the decision criteria.
• Formulation of a model.
• Generating alternatives.
• Evaluation of the alternatives.
• Implementation and monitoring.
Defining the Problem
Defining the problem enables to identify the relevant variables and the cause of the problem.
Careful definition of the problem is crucial. Finding the root cause of a problem needs some
questioning and detective work. If a problem defined is too narrow, relevant variable may be
omitted. If it is broader, many tangible aspects may be included which leads to the complex
relationships.
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Establish the Decision Criteria
Establish the decision criterion is important because the criterion reflects the goals and purpose
of the work efforts. For many years profits served as a convenient and accepted goal for many
organizations based on economic theory. Nowadays organization will have multiple goals such
as employee welfare, high productivity, stability, market share, growth, industrial leadership and
other social objectives.
Formulation of a Model
Formulation of a model lies at the heart of the scientific decision-making process. Model
describes the essence of a problem or relationship by abstracting relevant variables from the real-
world situation. Models are used to simplify or approximate reality, so the relationships can be
expressed in tangible form and studied in isolation. Modeling a decision situation usually
requires both formulating a model and collecting the relevant data to use in the model.
Mathematical and statistical models are most useful models for understanding the complex
business of the problem. Mathematical models can incorporate factor that cannot readily be
visualized. With the aid of computers and simulation techniques, these quantitative models
flexible.
Generating Alternatives
Alternatives are generated by varying the values of the parameters. Mathematical and statistical
models are particularly suitable for generating alternatives because they can be easily modified.
The model builder can experiment with a model by substituting different values for controllable
and uncontrollable variable.
Evaluation of the Alternatives
Evaluation of the alternatives is relatively objective in an analytical decision process because the
criteria for evaluating the alternatives have been precisely defined. The best alternative is the one
that most closely satisfies the criteria. In problems various experimental and statically techniques
can be used to suggest the best course of action.
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Implementation and Monitoring
Implementation and monitoring are essential for completing the managerial action. The best
course of action or the solution to a problem determined through a model is implemented in the
business world. Other managers have to be convinced of the merit of the solution. Then the
follow-up procedures are required to ensure about appropriate action taken. This includes an
analysis and evaluation of the solution along with the recommendations for changes or
adjustments.
1.6. Operations as a System (Manufacturing Operations and Service Operations)
Organizations can be divided into two broad categories: manufacturing operations and service
operations, each posing unique challenges for the operations function. There are two primary
distinctions between these categories. First, manufacturing operations produce physical /tangible/
goods that can be stored in inventory before they are needed. By contrast, service operations
produce intangible products that cannot be produced ahead of time. Second, in manufacturing
operations most customers have no direct contact with the operation. Customer contact is made
through distributors and retailers. For example, a customer buying a car at a car dealership never
comes into contact with the automobile factory. However, in service operations the customers
are typically present during the creation of the service. Hospitals, colleges, theaters, and barber
shops are examples of service operations in which the customer is present during the creation of
the service.
Figure: Characteristics of manufacturing and service operations
Low DEGREE OF CUSTOMER CONTACT High
Manufacturing
Operations • Physical product
• Product can be inventoried
• Low customer contact
• Capital intensive
• Long response time
• Intangible product
• Product connect be inventoried
• High customer contact Service
• Labor intensive Operations
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• Short response time
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Even in pure service companies some segments of the operation may have low customer contact
while others have high customer contact. The former can be thought of as “back room” or
“behind the scenes” segments. Think of a fast-food operation such as Wendy’s, for which
customer service and customer contact are important parts of the business. However, the kitchen
segment of Wendy’s operation has no direct customer contact and can be managed like a
manufacturing operation. Similarly, a hospital is a high-contact service operation, but the patient
is not present in certain segments, such as the lab where specimen analysis is done. In addition to
pure manufacturing and pure service, there are companies that have some characteristics of each
type of organization. For these companies it is difficult to tell whether they are actually
manufacturing or service organizations. Think of a post office, an automated warehouse, or a
mail-order catalog business.
These companies have low customer contact and are capital intensive, yet they provide a service.
We call these companies quasi-manufacturing organizations.
Manufacturing vs Service
Characteristic Manufacturing Service
• Out put 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
High Low
• Opportunity to correct quality
problems
It is important to understand how to manage both service and manufacturing operations.
However, managing service operations is of especially high importance. The reason is that the
service sector constitutes a dominant segment of the world economy.
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1.7. Productivity
What is Productivity?
Productivity is the value of outputs (goods and services) produced divided by the values of the
input resources (wages cost of equipment and the like) used or the ratio of outputs (goods and
services) to inputs (e.g., labor and materials). In other words, productivity is a measure of how
efficiently inputs are being converted into outputs. It measures how well resources are used. The
more efficiently a company uses its resources, the more productive it is:
𝑜𝑢𝑡𝑝𝑢𝑡
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝑖𝑛𝑝𝑢𝑡
Capacity is the output of a process within a specified time, typically expressed in units of output
per time period. Design capacity is the ideal output rate under normal conditions, the rate for
which the process was designed. Maximum capacity is the top output rate that the process could
achieve; this capacity is possible only for short durations, because of the greater need for labor
and energy and the impossibility of performing scheduled preventive maintenance.
Capacity = Output in units per time period
Capacity utilization = Actual output/Design capacity
Throughput time is the average amount of time it takes a product to move through a system, both
processing time (value-added time) and any waiting time. The lower the throughput time, the
better the process.
Process velocity is the amount of time wasted in a process. It is calculated by dividing
throughput time by value-added time (time spent processing the product):
Process velocity = Throughput time/Value-added time
The closer this ratio is to 1.00, the less time is being wasted in the process.
Productivity: -
➢ Productivity is the efficiency of transforming inputs into outputs. It is calculated by
dividing output (e.g., total $ value, products, customers served) by input (e.g., total $
value, per employee, per labor hour).
➢ Productivity can be calculated for each category of input:
❖ Labor Productivity (e.g., hours worked, number of employees, cost of labor),
❖ Capital Productivity (e.g., money invested, machine hours),
❖ Materials Productivity (e.g., units of materials used, money spent), and
❖ Energy Productivity (e.g., units of energy
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❖ Utilization is the time that a resource (e.g., equipment or labor) is actually being used
relative to the time that it is available for use. Utilization = Time in use/Time available
❖ Efficiency is the actual output relative to some standard of output, theoretical capacity, or
benchmark. Efficiency = Actual output (in units)/standard output
❖ Capacity = Output in units per time period
❖ Capacity utilization = Actual output/Design capacity
We can use this equation to measure the productivity of one worker or many, as well as the
productivity of a machine, a department, the whole firm, or even a nation. The possibilities are
shown in the following table.
Table: Productivity measures
Productivity measures
𝑜𝑢𝑡𝑝𝑢𝑡𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
Total productivity measure = 𝑎𝑙𝑙𝑖𝑛𝑝𝑢𝑡𝑠𝑢𝑠𝑒𝑑
𝑜𝑢𝑡𝑝𝑢𝑡 𝑜𝑢𝑡𝑝𝑢𝑡 𝑜𝑢𝑡𝑝𝑢𝑡 𝑜𝑢𝑡𝑝𝑢𝑡
partial productivity measure = 𝑜𝑟 𝑚𝑎𝑐ℎ𝑖𝑛𝑒𝑠 𝑜𝑟 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑜𝑟 𝑐𝑎𝑝𝑡𝑖𝑎𝑙
𝑙𝑎𝑏𝑜𝑟
𝑜𝑢𝑡𝑝𝑢𝑡 𝑜𝑢𝑡𝑝𝑢𝑡 𝑜𝑢𝑡𝑝𝑢𝑡
Multifactor productivity measures = 𝑙𝑎𝑏𝑜𝑟+𝑚𝑎𝑐ℎ𝑖𝑛𝑒𝑠 𝑜𝑟 𝑙𝑎𝑏𝑜𝑟+𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑜𝑟 𝑙𝑎𝑏𝑜𝑟+𝑐𝑎𝑝𝑡𝑖𝑎𝑙+𝑒𝑛𝑒𝑟𝑔𝑦
When we compute productivity for all inputs, such as labor, machines, and capital, we are
measuring total productivity. Total productivity describes the productivity of an entire
organization. For example, let’s say that the weekly dollar value of a company’s outputs, such as
finished goods and work in progress is $10,200 and that the value of its inputs such as labor,
materials, and capital is $8,600. The company’s total productivity would be computed as
follows:
𝑜𝑢𝑡𝑝𝑢𝑡 $10,200
Total productivity = = = 1.186
𝑖𝑛𝑝𝑢𝑡 $8,600
Often it is much more useful to measure the total productivity of one input variable at a time in
order to identify how efficiently each is being used. When we compute productivity as the ratio
of output relative to a single input, we obtain a measure of partial productivity also called single
factor productivity. Following are two examples of the calculation of partial productivity:
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1. A bakery oven produces 346 pastries in 4 hours. What is its productivity?
𝑛𝑢𝑚𝑏𝑒𝑟𝑝𝑎𝑠𝑡𝑖𝑟𝑒𝑠 346 𝑝𝑎𝑠𝑡𝑖𝑟𝑒𝑠
Machine productivity = = = 86.5 𝑝𝑎𝑠𝑡𝑟𝑖𝑒𝑠/ℎ𝑜𝑢𝑟
𝑜𝑣𝑒𝑟𝑡𝑖𝑚𝑒 4 ℎ𝑜𝑢𝑟𝑠
2. Tow workers paint tables in a furniture shop. If the workers paint 22 tables in 8 hours,
what is their productivity?
22 𝑡𝑎𝑏𝑙𝑒𝑠
Labor productivity = 2 𝑤𝑜𝑟𝑘𝑒𝑟𝑠𝑥 8 ℎ𝑜𝑢𝑟𝑠 = 1.375 𝑡𝑎𝑏𝑙𝑒𝑠/ℎ𝑜𝑢𝑟
Sometimes we need to compute productivity as the ratio of output relative to a group of inputs,
such as labor and materials. This is a measure of multifactor productivity. For example, let’s say
that output is worth $382 and labor and materials costs are $168 and $98, respectively.
A multifactor productivity measure of out use of labor and materials would be
𝑜𝑢𝑡𝑝𝑢𝑡 $382
Multifactor productivity = 𝑙𝑎𝑏𝑜𝑟+𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 = = 1.436
$168+$98
Interpreting Productivity Measures
To interpret the meaning of a productivity measure, it must be compared with a similar
productivity measure. For example, if one worker at a pizza shop produces 17 pizzas in 2 hours,
the productivity of that worker is 8.5 pizzas per hour. This number by itself does not tell us very
much. However, if we compare it to the productivity of two other workers, one who produces 7.2
pizzas per hour and another 6.8 pizzas per hour, it is much more meaningful. We can see that the
first worker is much more productive than the second worker. But how do we know whether the
productivity of both two workers is reasonable? Standard needs to be developed in order to go
through such cases.
1.8. Efficiency and Effectiveness
Efficiency in a company or organization is the ability to produce using the least input. The input
may be in the form of energy, money, time and other various raw materials in a company. The
produce is referred to as the output. Therefore, efficiency is fully described as, the ability to
maximize output with less amount of input. With efficiency, a company is expected to use the
limited recourses to maximize their production. Efficiency ensures that the output is achieved in
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the best and cheapest way. Efficiency dictates that an operation in an organization must be done
in a precise manner. The staff in an organization must spend the least time doing their duties
knowing that time is a limited resource. An individual in managerial posts must ensure that
communication in an organization takes the shortest and most direct way to the intended people.
Also, the manner of documentation in an organization must be well chosen to save time in case
someone ones to refer to a particular document.
A company must maximize its output l for efficient operation. A company must be capable of
optimizing the production since efficiency is mainly concerned with the yield. Efficiency focuses
on how to reduce expenses of a company, e.g., wages, to realize maximum yield in a company.
Effectiveness refers to a long-term assessment of how something is successful in providing the
result. The result might not be the exact wanted results, but its closeness to wanted result can be
taken as a success. From the results, the personnel responsible can know whether the means they
used in their production is sufficient enough to be employed in the future.
Effectiveness deals with strategy formulation. In attempts to improve productivity in a company,
the long-term results must be monitored and new methods of production formulated. The
development of new strategies helps in making a company have an advantage over other
competitors. Customers or clients’ preferences changes with time, and therefore, to keep your
first customers plus new customers, a company must satisfy them effectively. Research must be
conducted to know what exactly the customers expect and want.
A company must focus on doing things accurately to be effective. The means of production must
focus on producing desired end products. Since effectiveness depends on formulating a long-
term strategy, if things are not done accurately, in the long run, it may result in the closing of the
company due to excessive losses. The management must ensure things are done well to prove
that the formulations are targeting their intended customers.
Efficiency and effectiveness have a crucial role to play in business management to realize
success in a competing environment. Efficiency has an introspective approach in the company;
it’s for internal operation of the company. Efficiency measures the amount of every resource put
into production in a company against the output. Therefore, expenses can be controlled to realize
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maximum profit. Effectiveness has extroverted approach; it deals with the business environs.
Effectiveness helps a company know how to relate to other firms and compete effectively in the
market. Therefore, effectiveness and efficiency must complement each in the management of a
company or organization.
Key Terms
❖ Capacity: Output of a process within a specified time, typically expressed in units of
output per time period.
❖ Throughput time: Average amount of time it takes a product to move through process or a
system: processing time (value-added time) plus any waiting time.
❖ Process velocity: Amount of time wasted in a process: throughput time divided by value-
added time (time spent processing the product).
❖ Productivity: Efficiency of transforming inputs into outputs: output divided by input.
❖ Utilization: Time a resource is used relative to the time it is available for use: time in use
divided by time available.
❖ Efficiency: Output relative to a standard output: actual output divided by standard output.
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