CHAPTER 1: AN OVERVIEW OF OPERATIONS AND PRODUCTION

MANAGEMENT

1.1 INTRODUCTION

Efficient and effective management of production resources (human resource, raw materia ls,
etc) is a critical success factor in this global economy. It is a source of strategic growth and
competitiveness in the market. One of the responsible functions to this end is Operation and
production management which involves the design and control of a system responsible for the
productive use of resources in the development of products or services.
Operations management is the managing of these productive resources. It entails the design and
control of systems responsible for the productive use of human resource, raw materials,
equipment and facilities in the development of a product or service. The way how we manage
productive resources is critical to strategic growth and competitiveness.
For too many people, the term production creates an image of factories, machines and assembly
lines because the field of production management in the past focused almost exclusively on
manufacturing sector. Heavy emphasis was placed on methods and techniques that dealt with
operating a factory. In recent years, the scope of production management has broadened
considerably. Currently production concepts and techniques are being applied to a wide range
of activities and situations outside of manufacturing, that is in services as well as in
manufacturing. In other words, production management is applicable in all types of
organization be it public or private, manufactory or services. Among the service organizatio ns
that apply production management are health care, food service recreation, banking, hotel
management, retail sales, education, transportation and government. Because of this broadened
scope, the field has taken on the name production /operations management (POM) or more
simply Operations Management (OM), a term that more closely reflects the diverse nature of
activities to which its concepts and techniques are applied.
In this unit, you will learn the meaning of operations management, operations system, the
environment of OM, operations decision making and productivity measurement.

1.2. DEFINITIONS

There is no one single definition given to the term operations and production management. The
following are few of the definitions given by different writers.
 Operation management deals with the production of goods and services that people
buy and use every day. It is a function that enables organization to achieve their
goals through efficient acquisitions and utilization of resources.
 OM refers to the interaction and control of the process that transform input into
finished goods and services.
 OM may be defined as the design, operation and improvement of the production
systems that create the firm’s primary products or services.
 OM may be defined as the management of the direct resources required to produce
the goods and services provided by an organization. It is the derivative of the
organization strategy and mission. The following model summarize the field of
OM in a broad business context.

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 Market Place

Corporate Strategy

Operations Strategy Finance HRM

Marketing
strategy strategy
strategy

Operations Management

People Plants Parts Process

Planning and control system

Fig.1.1 production system

Market place includes the firm’s customers for its products or services which drives the
corporate strategy of the firm. This strategy is based on the corporate mission and in essence
reflects how the firm plans to use all its resources and functions to gain competitive advantage.
As it is shown in figure 1.1, production management is involved with the selection,
organization, and control of resources to produce the desired product or services. Its most
fundamental characteristics are the processes that convert resources such as raw materia ls,
labor, buildings, managerial skills, knowledge and machines into outputs that can be exchanged
for money through the marketing process.
The process used in operation system to transform inputs is to some desired outputs consists
the five P’s of operation management, that is,
 People (the direct and indirect workforces)
 Plants (factories or service branches)
 Parts (materials or in case of services, the supplies)
 Processes (equipment and steps by which production is accomplished)
 Planning and control (procedures and information management uses to operate the
system.
In a net shell, operations management is concerned with the activities, concepts and techniques
employed in producing goods and services. When emphasis was on the production of goods
alone, the term production management was used to describe these managerial responsibilities.
The term “Operations Management” is more applicable today because of the equal emphasis
on producing both goods and services.

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 1.3. OPERATIONS SYSTEM

Operation management is the core of most business organization. It is responsible for the
creation of an organizations goods or services. Inputs are used to obtain finished goods or
services using one or more transformation process. To ensure that the desired outputs are
obtained, measurements /assessment/evaluation/are taken at various points in the
transformation process (feedback) and then compared to previously established standards to
determine if corrective action is needed (control). Figure 1.2 given on page 4, shows the input-
output relationship clearly.

Fig. 1.2 The conversion process

Environment Value added Environment

Transformation or
Input Output
conversion process
Feedback
Feedback
Control
The essence of the operations function is to add value during the transformation process. Value
added is the term used to describe the difference between the costs of inputs and the value or
price of out puts. Typical examples are given in the table 1 below.
Table 1. Input transformation output relationship for typical systems
System Primary Resources Primary Desired output
input transformation
Hospital Patient MDS, nurses, medical Healthcare Healthy
supplies, equipment, (physiological) individuals
food, bed etc
Restaurant Hungry Food, chief waiters Well prepared well Satisfied
customer served food customers
Automobile Sheet steel Tools, equipment, Fabrication and High quality
factory engine parts workers assembly of car cars
College High school Teachers, books, class Imparting Educated
University graduate rooms knowledge and individuals
skills, information
Department Shoppers Displays, stocks of Attract shoppers Sales to satisfied
Store goods, sales, clerks promote products customers

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1.4. OPERATION FUNCTION AND ITS ENVIRONMENT

operations function is responsible for producing products and/or delivering

services, it needs the support and input from other areas of the organization, (as
such three basic functional areas of a business organization include operations,
finance and marketing).
Today’s competitive and economic realities demand companies upgrade their skill
in production. Because, no matter how other functions are effective, if it is
difficult to think of success without having a product that can fit the requirements
of customers. Doing so requires knowledge and application of operations
management techniques.

In most organizations, operations are an internal function that is buffered form the
external environment by other organizational functions such as marketing,
finance, human resource management, purchasing, R and D departments etc. The
following figure depicts this relationship

Supplies Environment Product or service

Other function =R&D, purchasing, distribution etc.

Operations
Physical Human resource
Marketing

Sales transformatio
Order labor
n Activities
Force

Technical Core

Finance

Capital

Fig. 1.3 The environment of operation management

As it is shown in figure 1.3 operations function interact/interface and exchange informa tio n
from the environment indirectly through other functions of the business.
Capital

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These interfaces with other functions buffer the production function (or technical core) from
the direct environmental influence. This situation has been traditionally seen as desirable for
the following reasons:
1. Interaction with the environment could have a distributing manner on the operation or
production process.
2. In certain situations, maximum efficiency can be achieved by making production
continuous.
3. The management skill that could be required to carry out successful operation of the
production processes are often different from those required for successful operation of
the boundary system of marketing, personnel and other functions.

1.5. OPERATIONS DECISION MAKING

Hundreds of decisions are made every day in the operation activity. Even minor decisions
determine the company’s success or failure. It ranges from simple judgmental to complex
analysis which can also involve judgment (past experience & common sense). They involve a
way of blending objective and subjective data to arrive at a choice. The use of quantitative
methods of analysis adds to the objectivity of such decisions.
The major areas in which operations managers make decisions are:
1. Strategic decision
 Product and service plan
 Competitive priorities (TQM, statistical process)
 Location, capacity and layout decision
2. Design decisions
 Deals with actual production system
 Process design technology
 Job design
3. Operating Decision–deals with operating the factory system once it is in place. It includes
forecasting, materials management, and inventory management, aggregate planning,
scheduling.

1.5.1. Quantitative Approaches

Quantitative approaches to problem solving often embody an attempt to obtain mathematica lly
optimum solutions to managerial problems. The functions are commonly used quantitative
approaches like, linear programming, Queuing techniques, Inventory models, Forecasting
techniques & Statistical models.
Operation decision become more complex when: it involves many variables, the variables are
highly interdependent or related, and the data describing the variables are incomplete or
uncertain. The necessity of working with incomplete and uncertain data has always been a
problem for decision maker. The following figures depict the information environme nt
decisions.

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Fig. 1.4 Quantitative methods available to operations managers

How much certainty exists?

Completely certain Extremely uncertain

Risk Situation

Objective information Subjective Information

.

(All information) (Some information) (No information)

The following are quantitative tools used under the three situations.
Certainty Risk uncertainty
Algebra, Breakeven analysis, Statistical analysis - Game theory
Cost benefit analysis, Queuing theory - Decision theory
Calculus, mathematical Simulation
Programming, linear and Net Work analysis;
Nonlinear, integer, dynamic PERT/CPM
Programming etc. Decision tree, Utility theory etc
Framework for Decisions (process)
An analytical and scientific framework for decisions implies several systematic steps for
decision makers. They are:
Step 1. Define the problem and its parameters
Step 2. Establish the decision criteria and set the objective
Step 3. Formulating a relationship (model) between the parameters and the criteria
Step4. Generate alternatives by varying the values of the parameters
Step 5. Choose the course of action, which most closely satisfies the organization.
Step 6. Implement the decision and monitor the result
In the following section of this unit you will learn how to apply the quantitative tools in solving
operations related problems. Since it is difficult to illustrate the entire models only one model,
which can be used under the three situations of decision-making are discussed.
A. Decision Making under Certainty
As it is shown in the figure 1.4 above different approaches to decision making are available to
decision makers. The most widely used decision rule under the certainty situation is break-even
analysis (cost-profit-volume analysis), cost-benefit analysis and mathematical programming. In
the next section break-even analysis in illustrated.

1. Breakeven Analysis (BEA)

BEA is a widely used decision making tool. It helps to make a decision whether to produce or
not a certain level of output. Breakeven point is a level of output at which, profit is zero or no
loss or no gain. Production or operation level below this point results in a loss, whereas level

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of output above this point helps the company to enjoy some level of profit. Therefore, knowing
this point helps the company to take appropriate action.
Example 1. The cost and revenue information of ABC Company are as follows:
Fixed Cost = Br 120,000
Unit Price = Br. 50
Variable Cost/unit (Vc/unit) = Br. 30
Find the break-even point in terms of unit and sales in Birr.
Solution:
Fixed Cost
Break Even Point-BEP (quantity) =
Price/unit  VC/unit
120,000 120,000
BEP = =
50  30 20
= 6,000 units

BEP (In Birr) = 6,000 X Br. 50 = Br. 300,000.

This can be depicted graphically as follows:

TR
A
TC
Br. 300,000
BEP
B

6,000 Quantity

Where: TR= total revenue A= represents the profit region

TC= total cost B= represents the loss region
BEP= breakeven point Vc/unit = Variable cost per unit
Interpretation
The company, if it wants to be profitable, should produce and sale more than 6, 000 units of
output. For example, If the external and internal environment force it to produce only 3,000
units of the product the company will incur a loss. So it has to take some short-term as well as
long term measures to correct the situation.

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B. Decision making under Risk
Decision Tree
Decision tree is a schematic diagram used to determine expected value. It shows the alternative
outcomes and independence of choice. It is used in risk situation where there is only
probabilistic information stated in probabilistic value.
Example. ABC manufacturing firms wants to meet the excess demand to its products. The
firm’s management is concerning three alternative courses of action.
A. Arrange for subcontracting
B. Begin overtime production
C. Construct new facilities
The correct choice depends largely on future demand, which may be low, medium or high.
Management ranks the respective probabilities as 10%, 50% and 40% to low, medium and high
product demand in the future respectively. A cost analysis reveals the effect on profit of each
alternative under a given state. This is given in the payoff table below.
Pay off table
Alternatives Profit if Demand is (Birr)
Low (0.1) Medium (0.5) High (0.4)
Arrange for sub contract (A1 ) 10,000 50,000 50,000
Over time (A2) -20,000 60,000 100,000
New facilities (A3 ) -150,000 20,000 200,000

Required: Which alternative is the viable choice?

We can use expected monetary value approach and decision tree to answer this question.
1. 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.
You can also use decision tree two depict this information to make a decision as shown below.

Br.
10,000

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 Br.
Low demand (0.1) 50,000
Medium demand (0.5)
Br.
High demand (0.4) 50,000
sub contract Br. -
Br. 48,000 Low demand (0.1) 20,000
Medium demand (0.5) Br.
60,000
New High demand (0.4)
facilities
Overtime Br.10,000
Br. 75,000 Br. 68,000 Low demand (0.1)
Br.-
Medium demand (0.5) 15,000
Br.20,000
High demand (0.4)

Br. 75,000

Br.200,00
Decision: Construct new facility because it have a better return than other two alternatives 00

C. 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 condition, four possible decision criteria are:
A. Maximin- determine the worst possible pay off for each alternative, and then choose
the alternative that has the “best worst”
B. Maximax – determine the best possible payoff and choose the alternative with that
payoff.
C. Laplace – determine the average payoff, and choose the alternative with the best
average.
D. Minimax regret – determine the best regret for each alternative, and choose the worst
alternative.
We obtain the regret vale by subtract actual value from best value i.e best value for
each alternative-actual value for each alternative.
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.
a. Maximin
b. Maximax
c. Laplace
d. Minimax
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. 200,000. The decision is to construct new facility which is
an alternative with the best payoff value i.e., Br. 200,000.

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 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
d) Minimax criteria

Alternatives profit if Demand is (Birr)

Low (0.1) Medium (0.5) High (0.4) Minima
criteria
Arrange for subcontract (A1 ) 50,0000- 50,000-50,000=0 50,000- 40,000
10,000=40,000 50,000=0
Over time (A2) 100,000-(- 100,000- 100,000-
20,000)=120,000 60,000=40,000 100,000=0 120,000
New facilities (A3 ) 200,000-(- 200,000- 200,000-
150,000)=350,000 20,000=180,0000 200,000=0 350,000
The decision is to choose the best alternative (arrange for subcontract=40,000) using minima x
criteria.

1.6 DIFFERENCE BETWEEN MANUFACTURING AND SERVICE

OPERATIONS

Operations management may be defined as the design, operations and improvement of the
production systems that creates the firm’s primary products or services. The essential differe nce
between the two is that service is an intangible process, while a goods is the physical output of
a process. To put it another way a service is something that “If you drop it on your food it won’t
hurt you” Other differences are that in service, location of the service facility and direct
customer involvement in creating the output are often essential factors; in goods production,
they usually are not.

Manufacturing and service are often similar in terms of what is done but differ in terms of how
it is done. For example, both involve design and operating decision. Most of the differe nce
between manufacturing and service operations is that manufacturing is product-oriented and
service is act oriented. The difference involves following.
1. Customer Contact: By its very nature, service involves a much higher degree of
customer contact than manufacturing does. The performance of service typically occurs
at the point of consumption; that is the two often occur simultaneously. For example,
surgery requires the presence of the surgeon and the patient. Repairing a leaky roof must
take place where the roof is on the other hand manufacturing, allows a separation
between production and consumption so that manufacturing often occurs in an isolated
environment away from the customer.
2. Uniformity of inputs: Service operations are subject to more variability of inputs than
manufacturing operations are. Each patient, each TV repair presents a specific problem

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 that often must be diagnosed before it can be remedied. Low variability of inputs
requirements for manufacturing are generally more uniform than for service.
3. Labor content of Jobs: Service by its nature is labor intensive whereas manufactur ing
is capital intensive
4. Uniformity of output: Service is variable but manufacturing is low variable or highly
(uniform).
5. Measurement of productivity: Productivity measurement in manufacturing is
straightforward and easy but Service productivity measurement is more diffic ult
because, there are certain intangible variables in service that are difficult to measure
objectively.
Table 2. Difference between manufacturing and service operations (Summary)
Characteristic Manufacturing Service
Out put Tangible Intangible
Contact with customer Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Measurement of productivity Easy Difficult
Storage Output can be inventoried Not
Delivery time Long lead times Short lead time
Quality Objectively determined Subjectively determined

In reality most firms are not selling purely services or goods rather manufacturers provide many
services as part of their product and many services often manufacture the physical product that
they deliver to their customers or consumer goods is creating the services. In essence goods are
considered as vehicles for services. To put in an another way:
 In services outputs cannot be inventoried while for goods products can be invigorated
 There is extensive customer contact for service white for goods production customer
contact is little
 The lead-time is short for services (delivered immediately on spot e.g. doctor) while for
goods it is long.
 Service quality determined with difficulty (customer service and customer satisfactio n
are difficult to measure.) while product quality can easily be determined.

1.7. THE ROLE OF OPERATION MANAGEMENT

The issues facing OM executives are many and interrelated. From operations strategies view,
the roles can be summarized as cost (Economy), quantity, speed of delivery, and flexibility.
The production phase of the overall management system begins at the point at which capital is
to be converted into physical or operational resources and ends at the point at which those
resources have been converted into goods or services.
In this process the major concern of operation personnel includes:
1. To produce a good or service in quantities and at times which will satisfy the demand item
(Quantity), concerned personnel will have to engage in production planning and control. This

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requires forecasting the future demand for a product, translate the future demand for various
operation resources, procure the required operation resources, and utilize those resources to
produce the product.
The above step includes techniques of sales forecasting, learning curve, MRP, inventor y,
control, purchasing, facility lay out, material handling, work Scheduling, plant location,
operation control and the like.
2. To produce a good or service at the lowest possible cost (economy), concerned personnel
will have to carry out:
 Ascertain the most economical work methods
 Established work standards
 Motivate employees to adhere to efficient work methods and to satisfy to
existing work standard.
The techniques to be employed include method analysis, process charts, safety, maintena nce,
time study, work sampling, standard date, job enrichment, non-financial and wage incentives,
(such as profit sharing).
3. To produce a good or service of satisfactory quality (Quality) concerned personnel have to
work the following:
 Develop appropriate product specification
 Maintain conditions, which are conducive to satisfactory quality.
 Introduce inspection procedures, which will reveal the quality of past out, put.
 Apply methods which are designed to control the quality of future output
Techniques involved here include:
 Product design
 Inspection methods, types of inspections
 Acceptance sampling
 Sampling by attributes and by variables
 Control charts for attributes and variables.

4. Speed of delivery. The ability of a firm and provide dependable and fast delivery. This
allows the firm to charge a premium price for its product.
5. Flexibility. The ability of a company to offer a wide variety of products to its customers.
It’s a measure of how fast a company can convert its processes from making an old line
of products to producing a new product line.

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1.8. PRODUCTIVITY MEASUREMENT

Productivity is a common measure of how well a country, industry or business unit is using its
resources (or factors of production). In its broadest sense, productivity is defined as:
Outputs
Productivity =
Input
To increase productivity, we want to make this ratio of output to inputs as large as practical.
Productivity is what we call a relative measure. In other words, to be meaningful, it needs to be
compared with something else. Comparison can be made with similar operations within its
industry, or it can measure productivity over time within the same operation.
Productivity may be expressed as partial measures, multifactor measures, or total measures.
If we are concerned with the ratio of output to a single input; we have a partial productivity
measure. If we want to look at the ratio of output to a group of inputs (but not all inputs), we
have a manufacture productivity measure. If we want to express the ratio of all outputs to all
inputs, we have a total factory measure of productivity that might be used to describe the
productivity of an entire organization or even a nation.
Output Output Output Output
Partial Measure = or or or
Labor Capital Material energy
Output Output
Multifactor Measure = or
LKE L  K  Rm
Output Goods and service produced
Total Measure = or
Inputs All resource used
Where: L = Labor
K = Capital
E = Energy
Rm = Raw materials
Example 1 ABC Co. produces apple pies sold to supermarkets has been able to work with his
current equipment, to produce 24 pies per bushel of apples. He currently purchases 100 bushel
per day and each gallon requires 3 labor –hours to process. He believes that he can hire a
professional food broker, who can buy better – quality apple at the same cost. If this is the case,
he can increase his production to 26 pies per bushel. This labor hour will have the impact on
productivity (pies labor hours) if the food broker is hired. The professional food broker works
8 hours per day. Calculate:
1. The current labor productivity
2. Labor productivity with food broker
Solution:
24 pies  100 bushel
Current Labor productivity =
100 bushel  3 hour
= 8 pies /labor hour
26 pies  100 bushel
Labor productivity with food broker =
(100 bushel  3 hrs)  8 hours

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 2600
=
308

= 8.44 pies /labor hours

Using last year (i.e. 8 as a base, the increase is 5.5%= 8.44/8 =1.055 or 5.5% increase over last
year.
Example 2 A) Determine the productivity of four workers who installed 640 square yards of
carpeting in 8 hours per day.
B) Calculate the productivity of a machine that produces 60 units in two hours
Solution:
Yards of carpet installed
Productivity =
Labor hours worked

640 yards
=
4 workers  8 hours
640
=
32

= 20 yards/hour
Outputs (in units)
Productivity =
Production time
60 units
=
2 hours
= 30 pieces /hour
Example 3 A company that produces fruits and vegetable is able to produce 400 cases of canned
peaches in one half hour with two workers. What is labor productivity?
Solution
Labor productivity = Quantity produced
Labor hours
=400 cases
2workers X1/2 hour /workers
= 400 cases per hour

Examples 4 A wrapping paper Company produced 2000 rolls of paper one day at a standard
price of Br. 1 per roll. Labor cost was Br. 160, material cost was Br. 50, and overhead was Br.
320. Determine the (multifactor and total) productivity.
Solution
Multifactor productivity = quantity produced @standard price

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 Labor cost + material cost + overheads
= 2,000 rolls X Br. 1 /roll
Br. 160 + Br 50 + 320
= 2000
530
= 3.77

Improving Productivity
Factors Affecting Productivity and Improving
 Numerous factors affect productivity. Among them are methods, capital,
quality, technology, and management.
There are a number of key steps that a company or a department can take toward improving
productivity:
1. Develop productivity measures for all operations
2. Look at the system as a whole in deciding which operations to concentrate on; it is
overall productivity that is important.
3. Develop methods for achieving productivity improvements
4. Establish reasonable goals for improvement.
5. Make it clear that management supports and encourage productivity improvement.
6. Measure improvements, and publicize them

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CHAPTER 2: OPERATIONS STRATEGY FOR COMPETITIVENESS

2.1. Introduction to operations strategy

Today’s successful operations managers need to have a global view of
operations strategy. Sellers and consumers, directly or indirectly, are
all players on the global economic stage. Technology, reliable shipping,
and inexpensive communication relax barriers of global transactions
and promote competitions. These advancements mean that,
increasingly, firms find their customers and suppliers are integrated
globally. The result of such advancements is the growth of world trade,
global capital markets, the international movement of people, and most
importantly, competition. This means increasing economic integration
and interdependence of countries and firms—globalization. In
response, organizations are hastily expanding their distribution
channels and supply chains globally. The result is innovative strategies
where firms compete not just with their own expertise but with the talent
in the global supply chain.

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