Operations M anagement – An Overview 1

2 Production and Operations M anagement

PRODUCTION AND
OPE RATIONS
MANAGE ME NT

Prof. K. SHRIDHARA BHAT

B.E. (Mech), PG DIM, M.B.A. F.I.I.M.M.
Managing Director
Akshaya Management Consultancy Services
Bangalore - 560 085
Karnataka, India

MUMBAI  NEW DELHI  NAGPUR  BENGALURU  HYDERABAD  CHENNAI  PUNE  LUCKNOW  AHMEDABAD
 ERNAKULAM  BHUBANESWAR  INDORE  KOLKATA  GUWAHATI
Operations M anagement – An Overview 3

© Author
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4 Production and Operations M anagement

Preface
Production and Operation Management (POM) is about the transformation of
production and operational inputs into outputs, that when distributed, meet the needs of customers.
POM incorporates many interdependent tasks which can be grouped under five main headings
viz., Product, Plant, Processes, Programmes and People. Production and Operations Managers
ensure that quality products are produced and delivered as quickly and cost effectively as
possible. Therefore, a basic knowledge of this subject is essential for students of MBA
programmes.
This book comprises 11 chapters covering various important topics such as Operations
Strategy, Production Planning and Control, Design of Production Systems, Design of Work
Systems, Aggregate Production Planning, Project Management, Scheduling of Operations,
Maintenance Management, Quality Management and Facility Location and Layout.
This book is specifically designed to cover the syllabus of MBA programme offered by
Biju Patnaik University of Technology. However, it may be found useful to students of MBA
programme of any other Indian university as well. The book has special features such as
illustrations, solved problems, review questions, problems to be solved and case illustrations
and case exercises.
I have great pleasure to express my sincere thanks to Sri Niraj Pandey and Sri Anuj Pandey
of Himalaya Publishing House for their keen interest and effort to publish this book. I am also
thankful to Sri Vijay Pandey for his effort in printing and promoting this book in a very short time.
I thank Sri B.S. Madhu and Smt. Divya of M/s Page Designers for their excellent D.T.P.
work. I am also thankful to Smt. Nimisha, Sri Rajesh, Sri Yogesh of HPH production unit
for their effort in designing the cover page and printing this book.
I also thank my family members, friends and well-wishers for their constant support and
encouragement for this endeavour. I also thank one and all who have directly or indirectly helped
or supported me in my work. I invite readers, both students and teachers to offer their valuable
suggestions as a feedback to me so as to improve the book in its future editions.

K. SHRIDHARA BHAT
No.680, ‘Akshaya’, 1 ‘C’ Main,
Kempegowda Layout, 3rd Block,
3rd Phase, Banashankari III Stage
Bangalore - 560 085.
Phone : (080) 26694761
Email : [email protected]
Operations M anagement – An Overview 5

Contents
CHAPTER 1. OPERATIONS MANAGEMENT - AN OVERVIEW 1 - 30
Meaning of "Production" – Meaning of “Operations” – Nature of Production/Operations
– Production Functions – Managing a Production/Operating System – Distinction
between Production Management and Operations Management – Objectives of
Production/Operations Management –Decision Making in Production/Operations
Management – Organising to Produce Goods and Services – Functions of Production/
Operations Managers – Problems of Production/Operations Management – The Historical
Evolution of Production/Operations Management – The Scope of Operations
Management – Recent Trends in Production/Operations management – Systems Design
and Systems Operation – A Production System Model – Production System Diversity –
Types of Production Systems – Differentiating Features of Production Systems – Factors
Affecting Production and Operations Management Today – Review Questions

CHAPTER 2 : OPERATIONS STRATEGY 31 - 46

Productivity – Competitiveness – Production/Operations Strategy – Competitive Priorities
– Building Production/Operations Strategy on Competitive Priorities – Elements of
Productions/Operations Strategy – Solved Problems – Review Questions – Poblems

CHAPTER 3 : OPERATIONS PLANNING AND CONTROL 47 - 70

Classification of Production Planning and Control Functions – Production Planning (or
Operations Planning) – Factors Determining Production Planning Procedures – Production
Planning System – Production Control – Production Control System – Factors
Determining Production Control Procedures – Production Planning/Operations Planning
and Control – Role of Production Planning and Control in Operations Management –
Scope of Production Planning and Control – Principles of Production Planning and
Control – Phases in Production Planning and Control Function – Main Functions of
Production Planning and Control Department – Levels of Production Planning –
Production Planning Functions – Production Control Functions – Benefits of Production
Planning and Control Function – Limitations of PPC – Measuring Effectiveness of PPC
Function – Production Planning and Control in Different Production Systems –
Organisation of PPC Department – Routing – Scheduling and Loading – Objectives of
Scheduling – Elements of Scheduling – Types of Scheduling – Dispatching – Centralised
and Decentralised Dispatching – Progressing (or Expediting or Follow-up) – Review
Questions

CHAPTER 4. DESIGN OF PRODUCTION/OPERATIONS SYSTEMS 71 - 111

[A] Product Planning and Development: What is a Product? – Need for Product Planning
and Development – Objectives of Product Planning and Development – Characteristics
of Successful Product Development – Role of Production Management in Product
Development – The Challenges of Product Development – New Product
6 Production and Operations M anagement

Development Strategy – New Product Development Process – Approaches to Speed up

New-Product Development – The Product-life Cycle Concept – Factors to be Considered
in Product Development. [B] Product Design: Product Design, Process Design and
Production Design – Importance of Product Design – What does Product Design Do? –
Reasons for Product Design or Redesign – Objectives of Product Design – Factors
Influencing Product Design – The Product Design Process as a part of Product
Development Process – Sources of Ideas for Designing New Products or Redesigning
the Products – Stages in Product Design – Design Documents for Production – Effect
of Product Design on Product Cost. [C] Process Management: What is a Process? –
Process Planning – Process Management – Major Process Decisions – Make-or-buy
Decisions – Make-or-buy Analysis – Procedure for Process Planning and Design –
Process Design – Scope of Process Design – Basic Factors Affecting Process Design –
Major Factors Affecting Process Design Decisions – Interrelationship Among Product
D e s i g n ,
Process Design and Inventory Policy – Arithmetic Analysis – Logarithmic Analysis –
Selecting a Learning Rate – Uses and Limitations of Learning Curves – Solved Problems
– Review Questions – Problems

CHAPTER 5 : DESIGN OF WORK SYSTEMS 112 - 156

(A) Productivity: Productivity Measurement – Productivity Improvement – Factors
Affecting Productivity – Productivity Improvement Techniques. (B) Job Design: Job
Design Decisions – Factors Affecting Job Design – Behavioural Considerations in Job
Design – Physical Considerations in Job Design – Machine-Worker Interaction –
Ergonomics – The Work Environment. (C) Work Study: Objectives of Work Study –
Scope of Work Study – Relationship between Method Study and Work Measurement –
Basic Work Study Procedure – Method Study – Method Study Procedure – Recording
Techniques Used in Method Study – Motion Study – Principles of Motion Economy –
Memomotion Study – Work Measurement – Objectives of Work Measurement –
Techniques of Work-measurement – Time Study – Synthesis Method – Analytical
Estimating – Predetermined Motion Time System (PMTS) – Work Sampling or Activity
Sampling or Ratio-Delay Method – Solved Problems – Review Questions – Problems

CHAPTER 6 : AGGREGATE PRODUCTION PLANNING 157 - 185

Aggregate Planning – Objectives of Aggregate Planning – Operations Planning and
Scheduling Systems – Aggregate Production (Output) Planning – Aggregate Planning
or Aggregate Capacity Planning – Approaches to Aggregate Planning – Aggregate Plans
for Services – Capacity Requirement Planning – Capacity Requirement Planning (CRP)
Process – Aggregate Capacity Planning Strategies – Level Capacity Plan – Matching
Capacity with Aggregate Demand Plan – Strategies for Aggregate Capacity Planning –
Master Production Scheduling – Procedure for Developing MPS – Guidelines for Master
Scheduling – Updating of MPS – MPS in Produce-to-Stock and Produce-to-Order Firms
– Length of Planning Horizon of MPS – Symptoms of a Poorly Designed MPS – Solved
Problems – Review Questions – Problems

CHAPTER 7 : CAPACITY PLANNING 186 - 209

Types of Capacity – Measurement of Capacity – Capacity Decisions – Factors Affecting
Determination of Plant Capacity – Capacity Planning – Capacity Changes – Types of
Capacity Planning – Capacity Requirement Planning Strategies – Economic Batch
Operations M anagement – An Overview 7

Quantity for Production – Long-Range Capacity Planning – Forecasting Long-term

Future Capacity Demand – Economies and Diseconomies of Scale – Developing Capacity
Alternatives – Selecting from Among the Alternative Sources of Capacity (or Capacity
Alternatives) – Solved Problems – Review Questions – Problems

CHAPTER 8 : PROJECT MANAGEMENT 210-237

Project Management – Project Life Cycle –Project Organisation –The Role of a Project
Manager – Problems in Managing a Project – Project Planning and Control Techniques
– Network Fundamentals – Commonly Used Network Symbols – Terms used in Network
Based Scheduling Techniques – Networking Conventions – Project Scheduling
Techniques – Scheduling Chart (Gantt Chart or Horizontal Bar Chart) – Programme
Evaluation and Review Technique (PERT) and Critical Path Method (CPM) – Critical Path
Method (CPM) – Purpose of CPM – Procedure for Drawing up a CPM Network – CPM
- Time Analysis – Programme Evaluation and Review Technique (PERT) – Determining
Probability of Meeting Scheduled Date in PERT Analysis – Crashing CPM Networks –
Steps in Network Crashing – Solved Problems – Review Questions

CHAPTER 9 : SCHEDULING OF OPERATIONS 238 - 270

The Production Environment – Production Activity Control or Shop Floor Activity
Control – Operations Planning and Scheduling – Scheduling – Scheduling Process -
Focused Production Systems – Scheduling Techniques for Job Shop – Stages in
Scheduling – Loading, Dispatching – Finite Loading and Infinite Loading – Load Charts
and Machine Loading Charts – Priority Sequencing – Single-Criterion Priority Sequencing
Rules – Dynamic Sequencing Rules – Johnson’s Rule or Algorithm – Scheduling Product
Focused Systems – Batch Scheduling – Economic Batch Quantity (EBQ) or Economic
Run Length (ERL) – Solved Problems – Review Questions – Problems

CHAPTER 10 : MAINTENANCE MANAGEMENT 271 - 300

What is Maintenance? – Areas of Maintenance – Types of Maintenance – Planning and
Scheduling of Maintenance – Control of Maintenance – Total Productive Maintenance
– Reliability and Maintenance – Basic Concepts and Definitions – Evolution of the Field
of Reliability – Reliability measurement – The Strategic Importance of Maintenance and
Reliability – Solved Problems – Review Questions – Problems

CHAPTER 11 : FACILITY LOCATION AND LAYOUT 301 - 363

(A) Facility Location: The Need for Location Decisions – The Nature of Location
Decisions – General Procedure for Making Location Decisions – Factors affecting
Location Decisions – Methods of Evaluating Location Alternatives – Single Facility
Location versus Multi-facility Location – Centre of Gravity Method. (B) Facility Layout:
Significance of Layout Choices – Factors Influencing Layout Choices – Principles of
Plant Layout – Types of Layout – Layout Planning – Layout Tools and Techniques –
Analysing Layouts with Computers – Layout or Building? – Criteria for Selection and
Design of Layouts – Computerised Layout Techniques – Design of Group Technology
Layout – Line Balancing – Line Balancing Methods – Solved Problems – Review
Questions – Problems
8 Production and Operations M anagement

CHAPTER 12 : INVENTORY MANAGEMENT 364 - 395

Nature and Importance of Inventory – Classification of Inventories – Functions of
Inventory – Inventory Costs – Inventory Decisions – Inventory Models – Quantity
Discounts for the EOQ Model – Importance of Inventory Management – Inventory
Control Systems – Inventory Control Systems for Independent-Demand Items –
Continuous Review System (“Q” System) – Selective Inventory Control – Measurement
of the Effectiveness of Inventory Management – Simulation Technique for Decision
Making in Inventory Management – Solved Problems – Review Questions – Problems

CHAPTER 13 : RESOURCE REQUIREMENTS PLANNING 396 - 426

Resource Requirements Planning – Material Requirements Planning (MRP or MRP-I or
mrp) – Objectives of MRP – Manufacturing Resource Planning or MRP-II – General
Overview of MRP (Material Requirements Planning) – Operation of the MRP System –
Definitions of Terms used in MRP System – The MRP Computational Procedure – Issues
in MRP – Potential Benefits from MRP – Implementation of MRP – Problems in using
MRP – Problems in Designing the MRP System – Problems in Managing the MRP System
– Evaluation of MRP – Manufacturing Resource Planning (MRP II) – Evolution of MRP
II – Enterprise Resource Planning – Just-In-Time Systems (JIT) – Solved Problems –
Review Questions – Problems

CHAPTER 14 : QUALITY MANAGEMENT 427 - 483

Nature of Inspection – Inspection and Quality Control – Scope of Inspection – Quality
Control – Organisation for Quality Control – Ensuring Quality – Statistical Quality Control
(SQC) – Types of Control Charts – Test for Homogeneity – Control Charts for Attributes
– Acceptance Sampling Technique – Operating Characteristic (OC) Curves – Types of
Acceptance Sampling Plans – Total Quality Management – What is quality management?
– Modern Quality Management – Process Management – Bench Marking – Business
Process Reengineering (BPR) – Quality Movement in India – Quality Circles (QC) –
Quality Certification – Solved Problems – Review Questions – Problems
ANNEXURE 484 - 486
CASE ILLUSTRATIONS 487 - 501
CASE EXERCISES 502 - 510
INDEX 511 - 522
Operations M anagement – An Overview 9

CHAPTER ONE

Overview of Production and

Operations M anagement

The managing of any organisation that produces products demanded by customers presents a greater
challenge today than ever before. While all other functional managers are involved in planning, organising
and controlling in their own field of work, production/operations managers who are in charge of manufacturing
the products have the direct responsibility of getting the job done. They must be the leaders in the task of
producing products demanded by the customers most efficiently and effectively. The production/operations
managers are involved in planning, organising, co-ordinating, executing and controlling of all activities that
create goods and/or services to satisfy the needs of their customers. Of all the functional areas of management,
production management (which is also referred to as operations management) is considered to be crucial
in any manufacturing organisation because it is responsible for converting raw materials into finished goods
ensuring that the objectives regarding volume of production (quantity), quality of outputs (i.e., products),
cost of production (i.e., productivity), the timeliness of production (i.e., delivery schedules to meet customer
demand), customer service and ultimately maximum possible customer satisfaction are met.

M eaning of "Production"
Production implies the creation of goods and services to satisfy human needs. It involves conversion
of inputs (resources) into outputs (products). It is a process by which, raw materials and other inputs are
converted into finished products. Earlier the word "manufacturing" was used synonymously with the word
"production", but nowadays, we use the term "manufacturing" to refer to the process of producing only
tangible goods whereas the word "production" (or operation) is used to refer to the process of creating both
goods (which are tangibles) as well as services (which are intangibles).
Any process which involves the conversion of raw materials and bought-out components into finished
products for sale is known as production. Such conversion of inputs adds to the value or utility of the
products produced by the conversion or transformation process. The utility or added value is the difference
between the value of outputs and the value of inputs. The value addition to inputs is brought about by
alteration, transportation, storage or preservation and quality assurance.
M eaning of “Operations”
The term “operations” refers to a function or system that transforms inputs into outputs of greater value.
Operations are often defined as a transformation or conversion process wherein inputs such as materials,
machines, labour and capital are transformed into outputs (goods and services). In a productive system, if the
outputs are strictly tangible goods, such a system is referred to as a “production system” and the
transformation process is referred to as “production”. Nowadays, the service system in which the output
is predominantly a service or even a pure service, is also treated as a productive system and often referred
to as an “operating system” instead of a “production system”

9
10 Production and Operations M anagement

Difference betw een Goods and Services

(i) Services are usually intangible whereas goods are tangible (i.e., can be touched and seen)
(ii) Services are often produced and consumed simultaneously, services cannot be stored whereas
goods can be produced and inventoried before consumption or use.
(iii) Services are often unique, for example insurance policies, medical treatment procedures, haircut
styles, etc.
(iv) Services have high customer interaction, services are often difficult to standardize and automate
because customer interaction demands uniqueness. The service product may have to be customized
in most of the service offerings.
(v) Services are often knowledge based, for example educational, health-care, legal and consultancy
services and, therefore, difficult to standardize and automate.
(vi) Services are frequently dispersed because services may have to delivered to the client/customer at
his/her place or office, a retail outlet or even at the residence of the customer/client.
(vii) Goods can be inventoried and can be resold whereas reselling of services is unusual and services
cannot be inventoried.
(viii) Some aspects of quality of goods are measurable whereas many aspects of quantity of services are
difficult to measure.
(ix) Selling and production are distinct in case of goods whereas in case of services selling is often a part
of the service.
(x) Goods can be transported whereas service cannot be transported but the service provider can be
transported.
(xi) Location of facility to manufacture goods, affects costs whereas location of service facility affects
customer contact.
(xii) Manufacturing of goods can be easily automated whereas service is often difficult to automate.

NATURE OF PRODUCTION/OPERATIONS
The nature of production or operations can be better understood by viewing the manufacturing function
as :
(i) Production/operations as a system,
(ii) Production/operations as an organisational function,
(iii) Production/operations as a conversion or transformation process and
(iv) Production/operations as a means of creating utility.
These four distinct views are discussed in the following section.
Production/Operations as a System
This view is also known as "systems concept of production". A system is defined as the collection of
interrelated entities. The systems approach views any organisation or entity as an arrangement of interrelated
parts that interact in ways that can be specified and to some extent predicted. Production is viewed
as a system which converts a set of inputs into a set of desired outputs. A production system has the
following elements or parts : (i) Inputs, (ii) Conversion process or transformation process, (iii) Outputs
(iv) Transportation subsystem, (v) Communication subsystem and (vi) Control or decision making
subsystem.
Operations M anagement – An Overview 11

Exhibit 1.1 illustrates the systems view of production/operations function.

Ex h ibit 1 .1 : Sy st e m s V ie w of Produ ct ion / Ope ra t ion s Fu n ct ion

Ext er nal Envir onm ent

I nput s
Cust om er/ Clien t Par ticipation
• Mat er ials
• Labour
• Equipm ent
• Capit al Conver sion/ Output
• Energy Tr ansform ation
Pr ocess • Goods an d/ or
• Money
• Serv ices of
• Managem ent Ut ility
• I nfor m at ion

Control Subsyst em
.
Feedback Decision Maker Feedback
( Product ion
Managem ent)
Ext er nal Env ir onm ent

Production/Operations as an Organisational Function

To create goods and services, all organisations whether manufacturing goods or providing services
perform four basic functions. They are (i) Marketing function (ii) Production or Operations function. (iii)
Finance function and (iv) Human Resources function. Production is considered as a crucial function which
creates goods and services whereas marketing function generates demand for products or obtains customers’
orders, finance function keeps track of how well the organisation performs and takes care of all cash inflows
and cash outflows, and human resources function looks into the people aspect of the organisation and the best
utilisation of people in the organisation. Production function plays a central role in achieving the objectives
of any business organisation.

Production/Operations as a Conversion/Transformation Process

The conversion or transformation sub-system is the core of a production system because it consists of
processes or activities wherein workers, materials, machines and equipment are used to convert inputs into
outputs, i.e.,

Conversion Process
I n pu t s Out p ut s
( A sim ple product ion syst em )

The conversion process may include manufacturing processes such as cutting, drilling, machining,
welding, painting, etc., and other processes such as packing, selling, etc.
Any conversion process consists of several small activities referred to as "operations" which are some
steps in the overall process of producing a product or service that leads to the final output.
12 Production and Operations M anagement

Table 1.1 illustrates some examples of conversion processes used in the production systems.

Ta ble 1 .1 : Ex a m ple s of Con v e rsion Proce sse s u se d in Produ ct ion Sy st e m s

Pr od u ct ion Co n v e r sion
I nput s Ou t pu t s
Sy st e m Pr oce ss

St eel Plant I ron ore, coal/ coke lim est one, Sm elt ing, rolling St eel sect ions,
labour, m achinery sh eet s
Rest au rant Hungry cust om ers, chefs, Cooking and Sat isfied
services, equipm ent serving food cu st om ers

Au t om obile Raw m at erials and Fabricat ion of Au t om obile

Plan t com ponent s, m achinery, part s and assem bly
labour of aut om obiles
Oil Refinery Crude oil, equipm ent , labour Chem ical processes Pet roleum
( Fract ional dist illat ion) Pr od uct s
Sup erm ar ket Cust om ers w it h needs, Selling / ret ailing Sat isfied cust om ers
salespersons
College or High school st udent s, t eachers Teaching ( I m part ing Graduat es ( Educat ed
Universit y know ledge and skills) person s)
Airlin e Aeroplanes, pilot s, engineers, Air t ransport at ion Sat isfied cust om ers
flight at t endant s t o t heir dest inat ions

Production/Operations as a M eans of Creating Utility

Production is defined as the process of adding to the value of outputs or the process of creating utility
in outputs. "Utility" is the power of satisfying human needs. During the process of converting the raw
materials into finished goods, various types of utilities are created while adding value to the outputs. These
types of utilities are :
(i) Form utility: which is created by changing the size, shape, form, weight, colour, smell of inputs
in order to make the outputs more useful to the customers. For example, iron ore is changed to
steel, wood is changed to furniture, etc.
(ii) Place utility: which is created by changing the places of inputs or transporting the inputs from the
source of their availability to the place of their use to be converted into outputs. For example the
iron ore and coal are transported from the mines to the steel plant to be used in the conversion
process.
(iii) Time utility: which is created by storage or preservation of raw materials or finished goods which
are in abundance sometime, so that the same can be used at a later time when they become scarce
due to higher demand exceeding the quantity available.
(iv) Possession utility: which is created by transferring the possession or ownership of an item from
one person to another person. For example, when a firm purchases materials from a supplier, the
possession utility of the materials will increase when they are delivered to the buying firm.
(v) Service utility: which is the utility created by rendering some service to the customer. For example,
a doctor or a lawyer or an engineer creates service utility to a client/customer by rendering service
directly to the client/customer.
(vi) Knowledge utility: which is created by imparting knowledge to a person. For example, a sales
presentation or an advertisement about some product communicates some information about the
product to the customer, thereby imparting knowledge.
Operations M anagement – An Overview 13

The activities carried out while creating the utilities discussed above are referred to as production
functions.
Production Function
Production function may be defined as the creation of useful products for sale with the help of inputs
such as materials, machines, labour, land, capital and management. The production function represents
basically a physical relationship between inputs and outputs. It may be represented as
Q = (a, b, c, d...)
where ‘Q’ is the quantity of output and a, b, c, d, etc., represent the quantities of various inputs such as
material, machine hours, labour hours, energy, etc., The production function specifies the amount of outputs
resulting from the amount of inputs used during a specified period of time. The productive use of the
resources is described by the term productivity. Productivity is an index that measures outputs (goods and
services) relative to the inputs (materials, energy and other resources).
Output
It is usually expressed as, Productivity =
Input
Productivity is also known as productive efficiency or the efficiency of the production process. It
indicates how well a productive process is carried out to convert a set of inputs into a set of outputs of value
to the customer which also provides reasonable profits to the manufacturer or seller.
Importance of Production Function
The production is the core function of any business organisation. Production function creates goods
and services and organisations exist primarily to create goods and/or to provide services. Without production
function, there would be no need for any other function such as marketing, finance or human resource
function. Also, more than 50 per cent of employees in a business organisation have jobs in the area of
production. Moreover the production function is responsible for a major portion of assets in most organisations.
Consumption of goods and services is an integral part of any society and production function facilitates
creation of goods and services for the benefit of people in the society.
Box 1.1 lists some of the areas in which production/operations management can offer competitive
advantage to a firm.
Box 1 .1 : Are a s in w h ich Produ ct ion / Ope ra t ion s M a n a ge m e n t ca n offe r Com pe t it iv e
Adv a n t a g e

( i) Short er new product lead t im e ( i.e., speed t o m arket )

( ii) Higher invent ory t urnover ( i.e., low invent ory)
( iii) Short er m anufact uring cycle t im e
( iv) Higher product qualit y ( i.e., reduced defect s)
( v) Great er flexibilit y
( vi) Bet t er cust om er service
( vii) Reduced w ast ages
( viii) Higher product ivit y ( i.e., reduced cost s)

M anaging a Production/Operating System

Production management refers to the application of management principles to the production function
in a production system. It consists of application of planning, organising, staffing, directing and controlling
functions in the process of converting the inputs to the desired outputs, efficiently and effectively.
14 Production and Operations M anagement

Production management is the process which combines and transforms various resources (inputs) used
in a production system into value added outputs (products/services) in a controlled manner. The term production
management is usually used for a production system which produces tangible goods whereas, the term
operations management is more frequently used where the inputs are converted into intangible services.
However, many authors use the common term "production and operations management" to represent either
a manufacturing system or a service system.
Distinction betw een Production M anagement and Operations M anagement
Production Management refers to the application of management principles to the production
function in a productive system such as a factory or a manufacturing plant. (e.g., steel plant, cement plant,
etc.). It involves application of planning, organising, directing and controlling the production processes
employed for the conversion of inputs into outputs in a productive system.
Operations Management refers to a set of activities that creates value in the form of goods and/
or services by transforming inputs into outputs. Operations management designs and operates productive
systems or operating systems such as banks, hospitals, hotels, government agencies and manufacturing
plants. Operations management includes activities such as organising work, selecting processes, arranging
layouts, locating facilities, designing jobs, measuring performance, controlling quality, scheduling work,
managing inventory and planning production.
From the above definition of production management and operations management, it becomes clear
that there is hardly any difference between the two terms. But the two apparent differences between
production management and operations management are:
(i) The term “production management” is mainly used for a productive system where tangible goods
are produced; whereas the term “operations management” is more frequently used where various
inputs are transformed into intangible services.
(ii) Operations management is the more recent term used to activities involved in the process of
transforming inputs into outputs (goods and/or services) in a productive system, whereas the term
“production management” (or manufacturing management) was used earlier to refer to activities
related to the process of transforming inputs into outputs (mainly tangible goods).
Because of the narrow difference between the two terms, we use these two – Production Management
and Operations Management terms interchangeably in this book.
Objectives of Production/Operations M anagement
Some of the important objectives of production/operations management are :
(i) Maximum customer satisfaction through quality, reliability, cost and delivery time.
(ii) Minimum scrap/rework resulting in better product quality.
(iii) Minimum possible inventory levels (i.e.,optimum inventory levels).
(iv) Maximum utilisation of all kinds of resources needed.
(v) Minimum cash outflow.
(vi) Maximum employee satisfaction.
(vii) Maximum possible production (i.e., outputs).
(viii) Higher operating efficiency.
(ix) Minimum production cycle time.
(x) Maximum possible profit or return on investment.
(xi) Concern for protection of environment.
(xii) Maximum possible productivity.
Operations M anagement – An Overview 15

Responsibilities of Production/Operations M anagers

The following are the major responsibilities of production/operations managers :
(i) Meeting requirements of quality demanded by customers.
(ii) Establishing realistic delivery or completion dates.
(iii) Producing the required volume of products to meet the demand.
(iv) Selection and application of most economic methods or processes.
(v) Controlling the cost of inputs and conversion process and thereby keeping the cost of outputs
within the desired limits.
Production managers are responsible for the amalgamation of five Ps namely Product, Plant, Processes,
Programs and People. The product is the most obvious interface between production and marketing. It
includes characteristics such as performance, aesthetics, quality, reliability, selling price, delivery dates and/
or lead times. The plant includes buildings, equipment and machinery required to produce the product.
The plant should have the capacities to meet the present needs as well as that of the future. The
considerations are : (i) design and layout of buildings, (ii) performance and reliability of machines and
equipment, (iii) maintenance of machines and equipment, (iv) safety of installation and operation of machinery
and equipment and (v) environment protection.
The processes include the transformation or conversion processes which convert the inputs into outputs.
The factors to be examined in deciding upon a process are : (i) available capacity, (ii) available labour skills,
(iii) type of production, (iv) layout of plant and equipment, (v) safety requirements in operations and
(vi) costs to be achieved.
The programs consist of schedules or timetables which set times for delivery of products or services
to customers. These delivery schedules in turn decide the time schedules for various activities such as design,
purchase, manufacture, assembly, packing and despatch etc.
The people aspect of production management includes the skills, knowledge, intelligence, etc., of
labour and managerial personnel which is crucial for the efficient and effective utilisation of resources for the
production of outputs.

DECISION M AKING IN PRODUCTION/OPERATIONS M ANAGEM ENT

W hat Production/Operations M anagers Do?
The production/operations managers manage all activities of the production/operations systems which
convert inputs into the desired outputs (goods and services). The production/operations managers have the
ultimate responsibility for the creation of goods or provision of services. Even though the kind of jobs that
production/operations managers oversee vary from organisation to organisation, (because of the different
products or services involved) their job is essentially managerial. They must co-ordinate the use of resources
through the managerial process of planning, organising, staffing, directing (or influencing) and controlling.
Box 1.2 shows some of the responsibilities of productions/operations managers.
Box : 1 .2 : Re spon sibilit ie s of Produ ct ion / Ope ra t ion s M a n a ge rs

( i) Planning : Capacit y, locat ion, product s and serv ices, m ak e or buy, lay out s, projects and scheduling.
( ii) Org anising : Degree of cent ralisat ion, subcont ract ing.
( iii) St affing : Hiring/ lay ing off of em ploy ees.
( iv ) Dir ect ing : I ncent iv e plans, issue of work orders, j ob assignm ent s.
( v ) Con t rolling : I nv ent ory cont rol, Qualit y cont rol, Cost cont rol.
16 Production and Operations M anagement

A better insight to how production/operations managers manage can be had by examining the decisions
in production and operations management, since all managerial functions such as planning, organising,
staffing, directing and controlling involve decision making.
The decisions which production/operations managers make may be classified into three general categories:
(i) Strategic Decisions: Decisions about products, processes and facilities. These decisions are strategically
important and have long-term significance for the organisation.
(ii) Operating Decisions: Decisions about planning production to meet demand.
(iii) Control Decisions: Decisions about controlling operations concerned with day-to-day activities of the
workers, quality of products and services, production costs, overhead costs and maintenance of plant
and equipment.
Some examples of strategic, operating and controlling decisions are discussed below :
Strategic Decisions: These are decisions concerning long range production/operations strategies. Some
of the examples of strategic production/operations management (POM) decisions are :
(i) Deciding about launching of a new-product development project.
(ii) Deciding on the design for a production process for a new product.
(iii) Deciding on how to allocate scarce resources such as materials, machine and labour capacities and
utilities.
(iv) Deciding about what new facilities are needed and where to locate them.
Operating Decisions: These decisions must help to resolve the issues concerned with planning production
to meet customers’ demands for products and services and to achieve customer satisfaction at reasonable
costs. Examples of operating decisions are :
(i) Deciding how much finished goods inventory to be carried for each product.
(ii) Deciding the next month’s production schedule for producing the products.
(iii) Deciding about hiring of casual (temporary) workers for the next month.
(iv) Deciding about the volume of purchase from each vendor for the next month.
Control Decisions: These decisions are concerned with problems in production such as variations in
labour output (productivity), variations in product quality, breakdown of production equipment, etc. Production/
operations managers need to control poor worker performance, inferior product quality and excessive equipment
breakdowns so that the profitable operation of the productive system is not affected. Examples of control
decisions are :
(i) Deciding the course of action about a department’s failure to meet the planned labour cost target.
(ii) Developing labour cost standards for a new or modified product design which is about to be taken
up for production.
(iii) Deciding about the new quality control acceptance criteria for a product for which the design has
been changed.
(iv) Deciding about the frequency of preventive maintenance for key machinery or equipment.
Operations M anagement – An Overview 17

Table 1.2 lists the types of production management decisions and their applications.
Ta ble 1 .2 : Produ ct ion m a n a ge m e n t de cision s a n d t h e ir a pplica t ion s

Ty pe of Are a of N a t u re of
D e cisio n s I n v o lv e m e n t Act iv it ie s

1. St rat eg ic ( i) Manufact uring processes ( i) Product design, process

decision s and t echnology design design
( Plann in g ( ii) Plant locat ion and plant ( ii) Choice of product ion
product s, lay out t echn ology
pr ocesses ( iii) Long range capacit y ( iii) Choosing t he best
and facilit ies) planning ( Equipm ent and locat ion
labour capacit y) ( iv) Deciding about t he t ype of plant
layout and shop layout .
( v) Deciding t he inst alled capacit y
of t he plant
2. Operat ing ( i) Product ion planning ( i) Preparing t he m ast er product ion
decision s schedu le
( Mat ching ( ii) I nvent ory planning ( ii) Planning invent ory levels for raw
pr odu ct ion m at erials, w ork- in- process and
w it h dem and) finished goods
( iii) Resource requirem ent ( iii) Planning for requirem ent s of m at erials
plan ning & capacit ies ( Labour and equipm ent )
( iv) Product ion sched uling ( iv) Det ailed scheduling and m achine
loading chart s
( v) Procurem en t planning ( v) Vendor select ion
3. Cont rol ( i) Labour product ivit y ( i) Cont rolling labour out put t hrough
decision s est ablishm ent of perform ance
st and ar ds
( ii) Qu alit y ( ii) Cont rolling qualit y of incom ing
m at erials, sem ifinished goods and
finished goods.
( iii) Pr oj ect s ( iii) Cont rolling proj ect s ( Cost s and
com plet ion dat es) using PERT/ CPM
t echniques.
( iv) Main t en an ce ( iv) Cont rolling m achine dow n- t im e and
repair t im e by good m aint enance
pract ices.

Box 1.3 shows ten important decision areas of production and operations management.

Box 1 .3 : Te n de cision a re a s of produ ct ion / ope ra t ion s m a n a ge m e n t

( i) Managing qualit y ( ii) Design of goods and services ( product design)

( iii) Process st rat egy ( process design) ( iv) Locat ion st rat egies
( v) Layout st rat egies ( vi) Hum an resources st rat egies
( vii) Supply - chain m anagem ent ( viii) I nvent ory m anagem ent
( ix) Schedu ling ( x) Main t en an ce

The ten decision areas in production/operations management shown in Box 1.3 are illustrated in detail
in Table 1.3 below :
18 Production and Operations M anagement

Ta ble 1 .3 : Te n crit ica l de cision a re a s of POM a n d t h e ir re la t e d issu e s

D e cision Are a Re la t e d I ssu e s

1. Qu alit y ( a) Who is responsible for qualit y?

m anag em ent ( b) How do w e define t he qualit y w e w ant in our product or service?
2. Product and ( a) What product or service should w e offer?
service design ( b) How should w e design t hese product s and services?
3. Process st rat egy ( a) What process w ill t hese product s or capacit y design services require
( Process design) and in w hat sequence?
( b) What t echnology and equipm ent is necessary for t hese processes?
4. Locat ion select ion ( a) Where should t he facilit y be locat ed?
( b) On w hat crit eria should w e base t he locat ion select ion decision?
5. Layout design ( a) How should w e arrange t he facilit y?
( b) How large should t he facilit y be t o m eet our product ion plan?
6. Hum an resources ( a) How do w e provide a reasonable w ork and j ob design environm ent ?
( b) How m uch can w e expect our em ployees t o produce?
7. Su pp ly - chain ( a) Should w e m ake or buy a part icular m anagem ent com ponent ?
( b) Who are our preferred suppliers and how m any suppliers should
w e have?
8. I nven t ory ( a) How m uch invent ory of each it em should m anagem ent hold?
( b) When do w e re- order?
9. Schedu ling ( a) Should w e subcont ract product ion t o out side sources?
( b) Should w e ret ain our em ployees on t he pay roll during slow dow ns.
10 . Main t en an ce ( a) Who is responsible for m aint enance?
( b) What should be our m aint enance policy?

ORGANISING TO PRODUCE GOODS AND SERVICES

To create goods and services, all organisations, whether manufacturing goods or providing services,
perform three basic functions. They are :
(i) Marketing: which generates the demand or takes customers’ orders for a product or service.
(ii) Production/Operations: which creates the product (goods or services).
(iii) Finance/Accounting: which keeps track of how well the organisation is performing, and takes
care of cash inflow and cash outflow.
Production/operations managers need to build and maintain strong relationships both intra-
organisationally and inter-organisationally. Inter-organisational relationship exists between production/
operations department and suppliers, whereas intra-organisational relationship calls for cross-functional
coordination.
Cross functional coordination is essential for effective production/operations management. For example,
marketing function determines the need for new products and services and the demand for existing ones and
operations managers must bring together human and capital resources to meet these demands effectively.
Also, operations managers must consider facility location and relocations to serve new markets and the
design of layouts for service organisations must match the image that marketing seeks to project to the
customers. Operations managers must plan output rates and capacities to match the demand forecasts and
delivery promises made to the customers.
Exhibit 1.2 illustrates organisation charts for a manufacturing and a service organisation.
Operations M anagement – An Overview 19

Ex h ibit 1 .2 : Orga n isa t ion ch a rt s for a m a n u fa ct u rin g a n d a se rv ice orga n isa t ion

( a ) Orga n isa t ion ch a rt for a m a n u fa ct u rin g orga n isa t ion

Au t o m o bile
M a n u fa ct u rin g Firm

Pro du ct ion / Op e ra t io n s Fin a n ce / Accou n t in g M a rk e t in g

( a) Facilit ies- const ruct ion and ( a) Disbur sem ent s/ cred it ( a) Personal selling
m aint enance ( i) Account s receivable ( b) Adv ert ising
( b) Product ion and inv ent ory ( ii) Account s payable ( c) Sales prom ot ion
cont rol, scheduling, ( b) Funds m anagem ent ( d) Mark et research
m at erials cont rol ( i) Money m ark et ( e) Dist ribut ion
( c) Qualit y cont rol and assurance ( ii) I nt ernat ional ex change
( d) Supply - chain m anagem ent ( c) Capit al requirem ent s
( e) Manufact uring – ( Tooling, ( i) St ock issue
fabricat ion and assem bly ) . ( ii) Bond issue and recall
( f) Product design and
dev elopm ent
( g) I ndust rial engineering
( Efficient use of resources)
( h) Process analy sis and process
design.

( b) Orga n isa t ion ch a rt for a se rvice orga n isa t ion .

Com m e rcia l Ba n k

Op e ra t io n s Fin a n ce M a rk e t in g
( i) Teller scheduling ( i) I nv est m ent s ( i) Loans ( Com m ercial,
( ii) Check clearing ( Securit ies, Real Est at e) I ndust rial, Financial,
( iii) Collect ion ( ii) Accou nt ing Personal, Mort gage)
( iv ) Transact ion processing ( iii) Audit ing ( ii) Trust depart m ent
(v) Facilit ies design/ lay out
( v i) Lock er operat ions
( v ii) Maint enance
( v iii) Secu rit y

Operations managers need feedback from the accounting function to understand their current performance.
Financial measures help the operations managers to assess labour costs, the long-term benefits of new
technologies and quality improvement projects. Accounting helps in computing the production costs and in
bills payment to suppliers.

FUNCTIONS OF PRODUCTION/OPERATIONS M ANAGERS

The major functions of production managers may be categorised as shown below :
(i) Production Techniques: Equipment Design, Process Design, Plant Layout and Shop Layout, Design
of Materials Handling System.
(ii) Capacity Management: Forecasting Demand, Delivery Commitment, Facility Location and Resource
Allocation.
20 Production and Operations M anagement

(iii) Industrial Engineering (or Work Study): Method Study, Work Measurement.
(iv) Production Planning and Control: Estimating, Forecasting, Routing, Scheduling, Dispatching and
Progressing.
(v) Inventory Control: Purchasing, Storing and Controlling Inventory Levels and Material Issues.
(vi) Quality Control: Inspection, Quality Control, Quality Assurance and Reliability, Statistical Quality
Control and Total Quality Control.
(vii) Maintenance: Servicing, Repairing, Breakdown/Preventive Maintenance, Spare Parts Inventory Control
and Equipment Replacement.
Skills Neded for Production/Operations M anagers
The production managers need the following skills or competencies :
(i) Technical Competence: (a) Basic understanding of technology with which the production system
works. (b) Adequate knowledge of the work they are to manage.
(ii) Behavioural Competence: Interpersonal relationships, the ability to work with other people.

PROBLEM S OF PRODUCTION/OPERATIONS M ANAGEM ENT

The problems involved in production management require two major types of decisions relating to :
(i) Design of the production system and
(ii) Operation and control of the production system.
Decisions related to the design of production system are long-run decisions whereas, decisions related
to operations and control of the production system are short-run decisions.
The problems involve the relative balance of the emphasis on such factors as cost, service and reliability
of both functional and time performance, which depends on the basic purposes of the total enterprise and
on the general nature of goods and services produced. In general, manufacturing organisations emphasise
more on cost, consistent with quality and delivery commitments whereas, service organisations may emphasise
reliability and service, consistent with cost objectives (for example, hospitals).
Long-Run Decisions
Long-run decisions related to the design of the production system are:
(i) Selection and Design of Products: Product selections and designs with productive capability (i.e.,
producibility of products) are interdependent.
(ii) Selection of Equipment and Processes: Selection of the most economic equipment and processes
among the various alternatives considered, the firm's capability to invest in capital assets and its basic
approach to production (i.e., job, batch, mass or continuous production) must be considered.
(iii) Production Design of Parts Processed: Production design aims at selection of equipment, processes,
and tools for economic production which set limits on the cost of outputs.
(iv) Job Design: It involves basic organisation of work as well as matching workers to their jobs in order
to reduce fatigue and improve productivity.
(v) Location of the System: It is a trade-off decision since there is no one best location for a productive
system to be located. The balance of cost factors determined by various considerations is critical.
(vi) Facility Layout: This involves decisions related to design capacity, basic modes of production, shifts
of working, use of overtime and subcontracting. In addition, operations and equipment must be located
in relation to each other such that the overall material handling cost is minimised. Other factors involved
are heating, lighting and other utility requirements, the allocation of storage space, washing space and
the design of the building to house the layout.
Operations M anagement – An Overview 21

Short-Run Decisions
Short-run decisions related to the operations and control of the system are :
(i) Inventory and Production Control: Decisions made are concerned with allocation of productive
capacity consistent with demand and inventory policy. Feasible schedules must be worked out and the
load on machines and labour and the flow of production must be controlled.
(ii) Maintenance and Reliability of the System: Decisions must be made regarding the maintenance
effort, maintenance policy and practice recognising the fact that machine down time may lead to idling
of labour and production stoppage resulting in lost sales.
(iii) Quality Control: Decisions must be made to set permissible levels of risk that bad parts are produced
and shipped or the risk that good parts are scrapped due to sampling inspection. Inspection costs must
be balanced with the probable losses due to passing defective materials or products. Decisions regarding
controlling the quality of on-going processes must be taken.
(iv) Labour Control: Labour is the major cost element in most products and services. Hence, work
measurement and wage incentive systems must be developed to control labour costs and to increase
labour productivity.
(v) Cost Control and Improvement: Day-to-day decisions which involve the balance of labour, material
and overhead costs must be made by production supervisors.
The relative importance of these problems of production management varies considerably depending
on the nature of the production system. The production manager must be able to sense the relative importance
of these various problems in a given situation and take appropriate decisions to solve these problems.

THE HISTORICAL EVOLUTION OF PRODUCTION/OPERATIONS M ANAGEM ENT

Eventhough systems of production have existed since ancient times (for example, the great wall of
China and Egyptian pyramids were built long time ago) the production of goods for sale and the modern
factory system had their roots in the Industrial Revolution (which began in the 1770's in England and spread
to other countries in Europe and later to the US in 19th century).
However, the substitution of machine power to human power started with the most significant invention
of steam engine by James Watt in 1764. followed by invention of spinning jenny (1770) and powerloom
(1785). Adam Smith advocated the concept of "division of labour" in his book "The Wealth of Nations" in
1776 and in 1832, Charles Babbage recommended the use of scientific methods for analysing production
problems.
However, the era of scientific management started with the work of F.W. Taylor in 1878 who studied
work methods in great detail to identify the best methods for doing each job. Taylor's book "The Principles
of Scientific Management" published in 1911, laid the foundation for the field of production management.
A number of other pioneers also contributed to this movement including the following :
Frank Gilbreth and his wife Lillian Gilbreth were recognised for their contribution to the development
of the "Principles of motion economy" and the concept of "Therbligs" in 1911.
Henry Gantt recognised the value of non-monetary rewards to motivate workers and developed widely
used system of scheduling (machine loading) called "Gantt chart" in 1912, Harrington Emerson applied
Taylor's ideas to develop organisational structure and encouraged the use of experts to improve organisational
efficiency.
Henry Ford developed the concept of mass production and assembly lines with conveyors in 1913, in
his automobile plant. Ford also used the concepts of "interchangeable parts" and division of labour (of
Adam Smith) which enabled him to tremendously increase the production rate in his factories.
22 Production and Operations M anagement

F.W. Harris developed the concept of "Economic Order Quantity" in 1915 which is still recognised as
a classical work in inventory control systems. In 1931, Dodge and Romig and W. Shewhart developed the
concept of sampling inspection and use of statistical tables for acceptance sampling plans. Earlier in 1924,
Shewhart developed the concept of statistical quality control and use of control charts to control the quality
of on-going processes.
The "human relations movement" was started by Elton Mayo in 1930’s, through his famous experiments
at Western Electric's Hawthorne plant and his findings came to be known as "Hawthorne effect". His studies
revealed that in addition to physical and technical aspects of work, worker motivation is critical for improving
productivity.
During the 1940's, Abraham Maslow developed motivational theory known as "Hierarchy of Needs
Theory" which was later refined by Frederick Herzberg as "Motivation-Hygiene" theory in 1950s. Douglas
McGregor added "Theory X" and "Theory Y" in 1960. In 1970, William Ouchi added "Theory Z" which
combined the Japanese approach and the traditional Western approach to management.
After World War II, operations research and quantitative techniques were applied to production
management resulting in decision models for forecasting, inventory management, project management and
other areas of production management. Widespread use of personal computers and user-friendly softwares
have popularised application of these quantitative techniques in production management since the 1980's.
Development in Management Information Systems (MIS) and Decision Support Systems (DSS) provided a
further boost to the developments in production management.
Advanced manufacturing technology enabled production managers to use Computer-Aided-Design
(CAD), Computer-Aided-Manufacturing (CAM), Computer Numerically Controlled (CNC) machines, Robots,
Computer Integrated Manufacturing (CIM), Flexible Manufacturing System (FMS), etc., in the field of
production management.
Moreover, a number of Japanese manufacturers have developed modern management practices that
have increased the productivity of their operations and the quality of their products. The new approaches in
production management emphasise quality (Total Quality Management) and continuous improvement (Kaizen),
worker teams and empowerment to achieve customer satisfaction. The Japanese have spawned the "quality
revolution" and adopted Just-In-Time (JIT) production system to put themselves in the forefront of time-
based competition. [Table 1.4 provides a chronological summary of some of the key developments in the
evolution of production/operations management.]

THE SCOPE OF OPERATIONS M ANAGEM ENT

Operations management has been gaining increased recognition in recent years because of the
following reasons:
(i) The application of operations management concepts in service operations.
(ii) The growing importance of quality.
(iii) The introduction of operation management concepts to other areas such as marketing and human
resources and
(iv) The realization that the operations management function can add value to the end product.
The above reasons are briefly discussed in the following paragraphs:
(i) Application of operations management concepts in service operations: Initially, operations
management concepts focused mostly on manufacturing. But as countries become more developed,
services grow and represent a larger percentage of the economies of developed countries. This led to
the expansion of application of operations management from manufacturing/production systems to
service systems also in order to improve the productivity of service organisations. This is quite obvious
because majority of the production systems have outputs consisting of both tangible goods and intangible
services.
Operations M anagement – An Overview 23

Ta ble 1 .4 : H ist orica l Su m m a ry of D e v e lopm e n t s in Produ ct ion / Ope ra t ion s M a n a ge m e n t

App ro x im a t e
Co n t rib u t io n / Co n ce p t Or ig in a t or
Year

1 77 6 Division of labour Adam Sm it h

1 79 0 I nt erchangeable part s Eli Whit ney
1 91 1 Principles of m anagem ent F.W. Taylor
1 91 1 Mot ion st udy and I ndust rial Psychology Frank and Lillian Gilbret h
1 91 2 Scheduling chart s ( Machine loading) Henry Gant t
1 91 3 Mass product ion and m oving Henry Ford
assem bly lines
1 91 5 Mat hem at ical m odel for I nvent ory F.W. Harris
m anagem ent ( EOQ m odel)
1 93 0 Haw t horne st udies on w orker m ot ivat ion Elt on Mayo
1 93 5 St at ist ical t echniques for F.W. Dodge,
qualit y cont rol H.G. Rom ig, W. Shew hart
1 94 0 Quant it at ive t echniques approach Operat ions Research Groups
1 94 7 Linear pr ogram m ing George Dant zig
1 95 1 Com m ercial digit al com put ers Sperry Univac
1 95 0 s Au t om at ion Nu m erous
1 96 0 s Ext ensive developm ent of quant it at ive t ools Nu m erous
1 97 5 Em phasis on m anufact uring t echnology W. Skinner
1 98 0 s Em phasis on qualit y, flexibilit y, t im e- based Japanese
com p et it ion m anu fact u rers
1 99 0 s I nt ernet Nu m erous

(ii) Growing importance of quality: Quality is a key component of operations management. Quality
is no longer limited to manufacturing function but important in all functional areas throughout the
organisation. With the integration of manufacturing and services operations, quality is no longer
limited to technical requirement of tangible goods but also equally important for service. Improvement
in quality in all areas of the business improves customer satisfaction and increases customer loyalty.
(iii) Expansion of operations management concepts to other functions: In addition to quality, concepts
of operations functions such as product design and process analysis are applied in other functional
areas such as marketing, software development, finance and accounting, human resources, etc.
(iv) A new paradigm for operations management: In the post World Wide II period, upto 1970s, with
demand significantly exceeding supply, operations managers emphasized on utilization of available
production capacity — a reactive approach rather than planning pro-active for the future. In the
early 1970s, competition world-wide became intensive and forced operations managers to assume a
proactive role in developing the overall strategy for an organisation. They realized the role of
operations function in adding value to the products manufactured (that is affecting how much a
customer is willing to pay for the products). In this paradigm shift, operations strategies included
other dimensions such as quality, speed of delivery and process flexibility for adding value to
products, other than cost to increase profit margins. This approach to operations strategy resulted in
a new paradigm for the operations functions.
Today, the scope of operations management ranges across the organisation. Operations management
people are involved in product and service design, process selection, technology choice, design of work
24 Production and Operations M anagement

systems, location planning, facilities planning and quality planning and control. The operations function
includes many inter-related activities such as forecasting, capacity planning, scheduling, inventory
management, quality assurance, employee motivation, facilities location and layout, etc. There are other
areas which are interrelated with operations function, for example, purchasing, industrial engineering,
maintenance and physical distribution operations managers apply ideas and knowledge to:
(i) Cut production time to improve speed of launching new products to market.
(ii) Improve flexibility to meet rapidly changing customer needs.
(iii) Enhance product quality.
(iv) Improve customer service and
(v) Increase productivity and reduce costs and thereby improve profitability of the company.
Operations management is the management of productive resources that are used to create saleable
products or services. It is that sale of products and services that provide an opportunity for profitability
for an organisation. Profitability results from the creation of value and a strategy for maintaining a link
to the customers who define value for the goods or services offered. The creation of value at a level that
exceeds the cost of creating it provides the potential for profitability. Operations management has responded
well to four dominant environmental forces affecting the business: (i) competition resulting from
globalisation of business (ii) increasing levels of communication and competition brought about by the
Internet and other disruptive technologies (iii) the impact of natural environment and (iv) regional pressures
having impact on business decisions.

RECENT TRENDS IN PRODUCTION/OPERATIONS M ANAGEM ENT

Many recent trends in production/operations management relate to global competition and the impact
it has on manufacturing firms. Some of the recent trends are :
1. Global Market Place: Globalisation of business has compelled many manufacturing firms to have
operations in many countries where they have certain economic advantage. This has resulted in a steep
increase in the level of competition among manufacturing firms throughout the world.
2. Production/Operations Strategy: More and more firms are recognising the importance of production/
operations strategy for the overall success of their business and the necessity for relating it to their
overall business strategy.
3. Total Quality Management (TQM): TQM approach has been adopted by many firms to achieve
customer satisfaction by a never-ending quest for improving the quality of goods and services.
4. Flexibility: The ability to adapt quickly to changes in volume of demand, in the product mix demanded,
and in product design or in delivery schedules, has become a major competitive strategy and a competitive
advantage to the firms. This is sometimes called as agile manufacturing.
5. Time Reduction: Reduction of manufacturing cycle time and speed to market for a new product provide
competitive edge to a firm over other firms. When companies can provide products at the same price
and quality, quicker delivery (short lead times) provides one firm with competitive edge over the other.
6. Technology: Advances in technology have led to a vast array of new products, new processes and new
materials and components. Automation, computerisation, information and communication technologies
have revolutionised the way companies operate. Technological changes in products and processes can
have great impact on competitiveness and quality, if the advanced technology is carefully integrated
into the existing system.
7. Worker Involvement: The recent trend is to assign responsibility for decision making and problem
solving to the lower levels in the organisation. This is known as employee involvement and empowerment.
Examples of worker involvement are quality circles and use of work teams or quality improvement
teams.
Operations M anagement – An Overview 25

8. Re-engineering: This involves drastic measures or break-through improvements to improve the

performance of a firm. It involves the concept of clean-slate approach or starting from scratch in
redesigning the business processes.
9. Environmental Issues: Today’s production managers are concerned more and more with pollution
control and waste disposal which are key issues in protection of environment and social responsibility.
There is increasing emphasis on reducing waste, recycling waste, using less-toxic chemicals and using
biodegradable materials for packaging.
10. Corporate Downsizing (or Right Sizing): Downsizing or right sizing has been forced on firms to
shed their obesity. This has become necessary due to competition, lowering productivity, need for
improved profit and for higher dividend payment to shareholders.
11. Supply-Chain Management: Management of supply-chain, from suppliers to final customers reduces
the cost of transportation, warehousing and distribution throughout the supply chain.
12. Lean Production: Production systems have become lean production systems which use minimal amounts
of resources to produce a high volume of high quality goods with some variety. These systems use
flexible manufacturing systems and multi-skilled workforce to have advantages of both mass production
and job production (or craft production).
In the previous section, we discussed production as a system which is also called as "systems
concept of production". We also discussed simple production model having elements such as inputs,
conversion process, outputs, transportation subsystem, communication subsystem and control subsystem.
In the following section, we will discuss production system in greater detail and also the various
types of production, the types of production systems and the differentiating features of production systems.

DESIGNING AND OPERATING PRODUCTION SYSTEM S

As already mentioned earlier, the production manager is responsible for the creation of goods and
services. This involves acquisition of resources and the conversion of these inputs into outputs using one
or more suitable transformation processes. The transformation process involves managerial functions
such as planning, coordinating and controlling the elements of the process including workers, equipment,
facilities, allocation of resources and work methods. One of the major decisions that are made by production
managers is the product design and/or service design which is taken in conjunction with marketing.
Marketing people can be a source of ideas for new products and services and also for improvements to
existing ones. Production people can also be a source of new ideas for improvements in the processes and
product designs. Product and process designs are crucial for any organisation that wants to remain
competitive in the market place. Production managers make decisions to guide the production system.
Some decisions affect the design of the system and others affect the operation of the system.

SYSTEM DESIGN AND SYSTEM S OPERATION

System design involves decisions relating to the capacity of the production system, the geographic
location of facilities, arrangement of departments (plant layout) and placement of machines and equipment
(shop layout) within the physical structures (buildings), product planning and acquisition of equipment
and machinery.
Systems operation involves management of people, inventory planning and control, production
scheduling, project planning and control and quality assurance. Production managers are also involved in
day-to-day operating decisions. However, production managers have greater concern for system design
because system design essentially determines many parameters of systems operation such as costs,
space, capacities, and quality that are affected by design decisions.
26 Production and Operations M anagement

A Production System M odel

A production system receives inputs in the form of materials, personnel, capital, utilities and
information, which are then changed in a conversion subsystem into desired product/services, (called as
outputs), A control subsystem monitors the quantity, cost and quality of outputs. The control subsystem
ensures system performance by providing feedback to enable managers to take appropriate corrective
action if and when necessary Exhibit 1.3 illustrate a production system model and Box 1.4 shows how
production systems are classified.
Ex h ibit 1 .3 : A Produ ct ion Sy st e m M ode l

Conversion
I npu ts Out put s
subsyst em

Ext ernal Physical Dir ect

Legal/ Political, Manufact ur ing, Output s
Social, t echno- Mining, Pr oduct,
logical and Locat ional ser v ices Ser vices
econom ical ( Transport at ion)
I ndirect
Exchange ser vices Output s
Market ( Wholesaling/
Com p et it ion, Taxes, Wages,
Retailing) Salar ies,
Pr odu ct infor m a- Stor age serv ices
t ion , cust om er Technological
( War ehousing) developm ent s,
desir es
Other Services Envir onm ent al
Prim ary I nsurance, Finance, im pact ,
Resour ces Banking, Real Em ployee
Mat er ials and Est ate, Health and im pact ,
Per sonal Ser vices, Societal
Supplies,
Personnel, Cap it al Gover nm ent im pact
assets, Utilit ies, services
Money

Feedback
Cont r ol infor m at ion
Subsy st em

Box 1 .4 : Cla ssifica t ion of Produ ct ion Sy st e m s

Job shop product ion

( i) I nt erm it t ent product ion syst em
Bat ch product ion

Mass Product ion

( ii) Cont inuous or An alyt ical
flow shop Process product ion
pr odu ct ion Sy nt h et ic
Assem bly line product ion
Operations M anagement – An Overview 27

Inputs: Three general categories of inputs are :

(i) External Inputs: Usually informational in character and tend to provide production managers
knowledge about conditions of the external environment of the system. Examples of external inputs
are legal or political inputs, social, economic and technological inputs. The production managers
must operate within the constraints imposed by the legal/political inputs (rules and regulations of
government and business laws). Social and economic inputs indicate the trends (customers’ likes
and dislikes, changes in lifestyle and buying power) that may affect the system. Technological inputs
enable production managers to improve the physical facilities, materials, methods, tools, processes
etc.
(ii) Market Inputs: Market inputs also tend to be informational. It provides information about competition,
product design, customer needs and desires, and other aspects of the market which are essential for the
production managers to operate the system so as to respond to the market needs.
(iii) Primary Resources: These are inputs which directly support the production and delivery of outputs.
For example, materials and supplies, personnel, capital and capital assets and utilities such as water, gas,
coal, electricity, steam, compressed air, etc.
Outputs: Outputs are categorised as : (i) direct outputs and (ii) indirect outputs.
The direct outputs are usually either tangible or intangible. The tangible goods are outputs of
production systems whereas, the intangible services are outputs of service systems. However, there are
some indirect outputs in both production and service systems. They are taxes, wages and salaries,
technological advancements, waste, effluents, pollution, and impact on employees (health and safety) and
on society/community.
Conversion Subsystem: It is the core of the production system. It consists of workers, materials, and
machines used to convert inputs into outputs. All organisations have the conversion or transformation in
some form or the other and it varies greatly among organisations.
Control Subsystem: This consists of the decision making group which is known as Production
Management. The Production managers manage all activities of the production system. They obtain
feedback information from the conversion subsystem and outputs to identify variations in performance if
any and take decisions to carry out appropriate corrective actions as and when necessary.

PRODUCTION SYSTEM DIVERSITY

All organisations have at least one production system. A wide variety of these systems exist, several
examples of which are given in Table 1.5.

Ta ble 1 .5 : Som e Ty pica l Produ ct ion Sy st e m s

Pr od u ct ion Pr im a ry Co n v e r sion Ou t pu t s
Sy st e m I nput s Su bsy st e m
Au t om obile Purchased part s, raw m at erials, Transform s raw m at erials Au t om ob iles
fact ory supplies, paint s, t ools, int o aut om obiles t hrough
equipm ent , personnel, fabricat ion and assem bly
buildings and ut ilit ies op erat ions
Dep art m ent Buildings, displays, shopping At t ract s cust om ers, Market ed goods
st ore cart s, m achines, st ock st ores goods, sells goods and sat isfied
goods, personnel, supplies, ( ex chan ge) cu st om ers
ut ilit ies, and cust om ers.
College or St udent s, books, supplies, Transm it s inform at ion Ed ucat ed
Universit y personnel, buildings, ut ilit ies and develops skills and persons
know led ge
28 Production and Operations M anagement

Having discussed the concepts of the production system, it is necessary to know about the types of
production systems and their features.

TYPES OF PRODUCTION SYSTEM S

Broadly production systems can be classified as :
(a) Manufacturing systems and service systems.
(b) Series and parallel production systems.
(c) Continuous flow and intermittent production systems.
These production systems are discussed in detail in the following paragraphs.

1. M anufacturing Systems and Service Systems

Production systems that produce goods are often referred to as manufacturing systems and the
production of tangible goods is called manufacturing. Some common examples of manufactured goods
are chemicals, steel, cement, automobiles, aeroplanes, beverages, packaged food and furniture.
Production systems that produce services are referred to as service systems. Services are intangible
products that satisfy some need of a consumer including the enhancement of tangible goods. Examples of
services systems are: healthcare services, legal assistance, financial services, accounting services,
educational services, transportation services and warehousing services.
Products can also be combination of goods and services. Restaurants produce the tangible products
along with the intangible services of delivery, cleaning of dishes and providing pleasant environment to the
customers. (More about manufacturing systems and service systems will be discussed later in this chapter.)
2. Series and Parallel Production Systems
Production systems may exist in series; for example, when completed products are shipped from the
factory to a warehouse, they are leaving the factory system only to arrive at a second production system,
called a warehouse. The factory and the warehouse are two production systems which are in series.
Production system may also exist in parallel, such as when a number of factories produce similar
products and supply several market areas. These factories may be considered as one large production
system (i.e., an industry). For example, several factories producing automobile spare parts are treated as
part of larger system known as automobile spare parts industry.

3. Continuous Flow and Intermittent Production Systems

Continuous Flow Production Systems are those where the facilities are standardised as to routings
and flow. A standard set of processes and sequence of processes can be adopted. Continuous flow production
systems are represented by production and assembly lines, large scale office operations and chemical
processes.
Intermittent Production Systems are those where facilities must be flexible enough to handle a
wide variety of products and sizes. In situations such as this no single sequence of operations is appropriate.
Transportation facilities between operations must be flexible to accommodate a wide variety of routes
that the inputs may require. Considerable storage between operations is required so that individual operations
can be carried on some-what independently, resulting in ease of scheduling and better utilisation of men
and machines. Intermittent production is represented by custom or job-order machine shops, hospitals and
batch chemical processes.
The production system model shown in Exhibit 1.3 can be made to fit both the intermittent and
continuous-flow situations by the specification of some of the detailed characteristics. Exhibit 1.4 represents
the intermittent production system.
Operations M anagement – An Overview 29

Ex h ibit 1 .4 : An I n t e rm it t e n t Produ ct ion Sy st e m

In the intermittent production system, inputs may be processed in any specified sequence of operations
and are transported between operations. The number of operations may vary from one to any finite number.
Storage occurs between all operations and the time in storage may vary from essentially negligible to any finite
amount. It should be noted that in Exhibit 1.4, there are interconnections between all operations b through f,
although only those originating at b are shown. The information and control system interconnects all activities
and provides the basis for management decisions. Exhibit 1.5 represents a continuous flow production system.
Ex h ibit 1 .5 : A Con t in u ou s Produ ct ion Sy st e m
30 Production and Operations M anagement

In the continuous flow production system the input-output characteristics are standardised, allowing
standardisation of operations and their sequence. Minor storage of input occurs after receipt. Once on the
transportation system, any storage between operations is combined with transportation (for example,
conveyorised assembly line operations). In the ideal situation the operations are also combined with
transportation so that inputs are processed while they are being moved (for example, painting of jobs
which are being moved by means of a conveyor).
Having understood the meaning of production as a function of a production system it is necessary
to understand the nature of various types of production.
The process by which goods and services are produced can be categorised on the basis of the
following classifications.
(a) Job Shop Production: In this type of production a wide variety of customised products are made
by a highly skilled workforce using general purpose equipment. It is also known as unit-production,
one-off production, custom-built or taylor-made production. Ship building, furnace manufacture,
tool making and printing orders are some of the examples of jobshop production.
(b) Intermittent Flow or Batch Production: In this type of production, a mixture of general purpose
and special purpose equipment is used to produce small to large batch of products. Batch production
is one form of intermittent flow production. It is used to produce moderate volumes of similar
products. For example, ready-made garments and book manufacturers adopt batch production. Ice
cream manufacturers produce a batch of ice creams of different flavour such as vanilla and strawberry.
(c) Repetitive Flow or Mass Production: In this type of production several standardised products
follow a predetermined flow through sequentially dependent workcentres. Workers typically are
assigned to a narrow range of tasks and work with highly specialised equipment. Examples are
automobile and computer assembly lines.
(d) Continuous Flow or Flow Shop Production: Continuous processing or continuous production is
employed when a highly standardised product or service is produced or rendered. Processing of
chemicals, oil refineries, sugar and cement production are some of the examples of continuous flow
production. Industries that use continuous processing involving chemical or metallurgical processes
are sometimes referred to as process industries and the type of production adopted is known as
process production. Production processes are usually performed round the clock in process
industries to avoid costly shut-downs and start-ups.
Table 1.6 provides a summary of the characteristics of these four major types of production.

DIFFERENTIATING FEATURES OF PRODUCTION SYSTEM S

There are a number of features that differentiate production systems. The three important features
are: (i) Degree of standardisation, (ii) Type of operation and (iii) Manufacturing operations versus
service operations. These are discussed in detail in the following paragraphs.
(i) Degree of Standardisation
The output of production systems can range from highly standardised products to highly customised
products. Standardised output means goods and services having high degree of uniformity. Standardised
goods include radios, televisions, computers, newspapers, pens, pencils, canned foods, soft drinks,
automobile tyres and the like.
Standardised services include automatic car washes, televised newscasts, taped lectures and
commercial airline services. Customised output means that the product or service is designed for a specific
customer (either a business customer or an individual). Customised goods includes eyeglasses, custom-
fitted clothing, window glasses (cut to order) and customised draperies. Customised services include
tailoring, taxi rides and surgery.
Operations M anagement – An Overview 31

Ta ble 1 .6 : Ch a ra ct e rist ics of V a riou s Ty pe s of Produ ct ion .

Type s of Produ ct ion

Dat a
Re pe t it ive
Job Sh op Ba t ch or Asse m bly Con t in u ou s

Descript ion of Cust om ised Sem i st andardised St andardised Highly standardised

out p ut s goods or serv ices goods or serv ices goods or serv ices goods or serv ices
Ex am ples of Specialit y t ools Cook ies Aut om obiles St eel, paper, flour,
goods sug ar
Ex am ples of Hair St y ling Educat ion Car wash Heat ing,
serv ices air- condit ioning
Ex am ples of Machine Bak ery Assem bly line St eel m ill,
m anu fact ur ing sh op paper m ill
facilit ies
Ex am ples of Beaut y shop Classroom Cafet eria lines Cent ral heat ing
serv ice facilit ies Barber shop sy st em
Volum e Low Low t o m oderat e High Vary high
Out put variet y Very high Moderat e Low Very low
Equip m ent Very high Moderat e Low Very low
flex ibilit y
Advan t age Able t o handle a Flex ibilit y Low unit cost , high Very efficient
wide variet y of work v olum e, efficient v ery high v olum e
Disadvant ag es Slow, high cost Moderat e cost Low flex ibilit y, Very rigid, lack of
per unit , com plex per unit , m oderat e high cost variet y, cost ly t o
planning and sched uling of downt im e change, v ery high
sched uling com plex it y cost of downt im e

System with standardised output can generally use standardised methods, materials and
mechanisations, all of which contribute to higher volumes and lower unit costs. In systems producing
customised output, each job is sufficiently different so that workers must be more skilled, the work moves
slower and the work is less susceptible to mechanisation.

(ii) Types of Operations

The degree of standardisation and the volume of output of a product influence the way a firm
organises production. The type of operations vary widely dependent on the nature of the output of the
system. For example, on one end of the scale, we have a single large scale service such as launching of
a space shuttle or the construction of a product such as a sky scraper. On the other end of the scale, we
have a continuous process such as oil refining. In between the extremes we have customised outputs such
as custom-made furniture, special-purpose machines and customised auto-repair service. We also have
batch production of paints and food products and mass production of goods such as television sets, soaps
and detergents, personal computers, bicycles, two wheelers and automobiles.
Earlier we have discussed about continuous flow production system and intermittent (batch) production
system. The continuous flow production system employs a type of operation known as continuous
processing. Intermittent (batch) production system employs a type of operation known as intermittent
processing.
Batch processing and job shop processing are two types of operations under intermittent processing.
Continuous processing includes operations or activities usually performed round the clock to avoid
costly shut downs and start-ups. The systems using continuous processing produce highly standardised or
32 Production and Operations M anagement

highly uniform products or services. Sometimes the system may use a semi-continuous processing known
as repetitive processing to produce one or a few highly standardised products or services.
Processing of chemicals, photographic film, newsprint and oil products are examples of continuous
processing whereas examples for semiprocessing includes automobiles, television, computers, cameras
and video equipment.
Batch processing is used to produce moderate volumes of similar products. For example, food
products, ice creams and pharmaceutical products produced in batches.
Job-shop processing is used to produce a single unit or a small lot of products or service with
varying specifications according to customer needs.
(iii) M anufacturing Operations Versus Service Operations
Manufacturing and service are often similar in terms of what is done but different in terms of how
it is done. For example, both involve design and operating decisions. Decisions on size of the building
needed, location, schedule, control of operations and allocation of scarce resources are applicable to both
manufacturing and service organisations. However, the major difference between manufacturing and service
organisations is that the first is goods-oriented while the latter is act-oriented.
The differences involve the following :
1. Customer contact, 2. Uniformity of input,
3. Labour content of jobs, 4. Uniformity of output,
5. Measurement of productivity, and 6. Quality assurance.
These are explained in the following paragraphs :
Customer Contact: Service involves a much higher degree of customer contact than manufacturing.
The performance of service often occurs at the point of consumption whereas manufacturing allows a
separation between production and consumption. This permits a fair degree of latitude in selecting work
methods, assigning jobs, scheduling work and exercising control over operations. Service operations,
because of their contact with customers, can be much more limited in their range of options.
Manufacturing operations can build up inventories of finished goods whereas service operations
cannot build up inventories of time and are much more sensitive to demand variability.
Uniformity of Input: Service operations are subject to greater variability of inputs than manufacturing
operations. Manufacturing operations can control the amount of variability of inputs.
Labour Content of Jobs: Because of the on-site consumption of services and the high degree of
variation of inputs, services require a higher labour content than manufacturing which is more capital-
intensive.
Uniformity of Output: Manufacturing tends to produce products with low variability because of
high mechanisation whereas service activities sometimes appear to be slow and awkward and output is
more variable or non-uniform.
Measurement of Productivity: Productivity can be measured more directly in manufacturing due to the
high degree of uniformity of most manufactured items. In service operations, variations in demand intensity
and in requirements from job to job make productivity measurement more difficult.
Quality Assurance: Is more challenging in services when production and consumption occur at the
same time. In manufacturing operations, errors can be corrected before the customer receives the output.
The differences between production of goods and service operations can be summarised as
below: (Refer Table 1.7)
Operations M anagement – An Overview 33

Ta ble 1 .7 : D iffe re n ce s Be t w e e n Goods a n d Se rv ice

Ch a ra ct e r ist ics Goo d s Se rv ice s

Out put Tangib le I n t an gib le

Cust om er cont act Low Hig h
Uniform it y of input Hig h Low
Labour cont ent Low Hig h
Uniform it y of out put Hig h Low
Measurem ent of product ivit y Easy Difficult
Opport unit y t o correct qualit y problem s Hig h Low
before delivery t o cust om er

FLEXIBLE M ANUFACTURING SYSTEM (FM S)

A flexible manufacturing system (FMS) is a configuration of a group of production machines (or
work stations) connected by automated material handling and transferring machines and integrated by
computer system which can give instructions to produce hundreds of different parts in whatever order
specified.
Exhibit 1.6 illustrates a flexible manufacturing system.
Ex h ibit 1 .6 : A Fle x ible M a n u fa ct u rin g Sy st e m
34 Production and Operations M anagement

An FMS is a type of flexible automation system which builds on the programmable automation of
NC and CNC machines. Materials are automatically handled and loaded and unloaded for machining
operations. Programs and tooling setups can be quickly changed and production can be quickly switched
over from one job to another with no loss of change over time.
Key components of an FMS are:
(i) Several computer controlled machining centres or workstations having CNC machines and
robots for loading and unloading.
(ii) Computer Controlled transport system (AGVs) for moving materials and parts from one machine
to another and in and out of the system.
(iii) Computer controlled robots for loading and unloading stations.
(iv) An automated storing and retrieval system.
All the above subsystems of FMS are controlled by a control computer with the needed software.
Raw materials are loaded on the AGVs which bring them to the work centres as per the sequence of
operations unique to each part. The route is determined by the control computer. The robots lift the
materials from the AGV and places on the work station where the required operations are carried out.
After the completion of operations, the robots unload the job and place it on the AGV to move the job to
the next workstation as per the sequence of operations.
The FMS is suitable for intermediate flow strategy with medium level of product varieties and
volumes (40 to 2000 units per part). Also FMs can produce low variety high volume products in the same
way as fixed automation systems.
Advantages
(i) Improved capital utilisation
(ii) Lower direct labour cost
(iii) Reduced inventory
(iv) Consistent quality
(v) Improved productivity
Disadvantages
(i) High initial capital investment
(ii) Limited ability to adopt to product changes
(iii) Substantial preplanning, tooling and fixture requirements
(iv) Standardisation of part designs needed to reduce numbers of tools required
(v) Requires long planning and development cycle to install the FMs.

VERTICAL INTEGRATION
Vertical integration is the amount of the production and distribution chain, from suppliers of
components to the delivery of products/services to customers, which is brought under the ownership of a
firm. The management decides the level or degree of integration by considering all the activities performed
from the acquisition of raw materials to the delivery of finished products to customers. The degree to
which a firm decides to be vertically integrated determines how many production processes need to be
planned and designed to be carried out in-house and how many by outsourcing. When managers decide to
have more vertical integration, there is less outsourcing. The vertical integration is based on “make-or-
buy” decisions, with make decisions meaning more integration and a buy decision meaning less integration
Operations M anagement – An Overview 35

and more outsourcing. Two directions of vertical integration are (a) Backward integration which represents
moving upstream toward the sources of raw materials and parts, for example a steel mill going for backward
integration by owning iron ore and coal mines and a large fleet of transport vehicles to move these raw
materials to the steel plant. (b) Forward integration in which the firm acquires the channel of distribution
(such as having its own warehouses, and retail outlets).
The advantages of more vertical integration are disadvantages of more outsourcing and similarly,
advantages of more outsourcing are disadvantages of more vertical integration.
Advantages of vertical integration are:
(i) Can sometimes increase market share and allow the firm enter foreign markets more easily.
(ii) Can achieve savings in production cost and produce higher quality goods.
(iii) Can achieve more timely delivery.
(iv) Better utilisation of all types of resources.
Disadvantages of vertical integration are:
(i) Not attractive for low volumes.
(ii) High capital investment and operating costs.
(iii) Less ability to react more quickly to changes in customer demands, competitive actions and new
techniques.

FACTORS AFFECTING PRODUCTION AND OPERATIONS M ANAGEM ENT TODAY

Having understood the nature and types of production systems and also various kinds of decisions
made by operations managers, it is necessary to know the factors affecting POM today. Of the many
factors affecting POM today, six factors are significant. They are :
1. Reality of global competition,
2. Quality, customer service and cost challenges,
3. Rapid expansion of advanced production technology,
4. Continued growth of service sector,
5. Scarcity of production resources, and
6. Social responsibility issues.
The impact of these factors on production and operations management today is discussed in greater
detail in the following paragraphs.

1. Reality of Global Competition

The world is rapidly transforming itself into a single global economy which is also referred to as
a global village or global landscape. Markets once dominated by local or domestic firms are now
vulnerable to competition from firms in all corners of the world. A country's borders no longer provides
protection from intense competition from foreign firms. To succeed in global competition, companies
must offer quality products at reasonable costs. Also, as companies expand their business to include
foreign markets, so too must the operations management function take a broader, more global perspective
in order for companies to remain competitive. The trend towards globalisation has placed increased
emphasis on the logistics of where to locate facilities and the issues associated with moving materials over
long distances.

2. Quality, Customer Service and Cost Challenges

Another key factor affecting POM today is quality. Successful firms now recognise that quality is
no longer limited to the POM function, but is important in all functional areas throughout the entire
36 Production and Operations M anagement

organisation, a new concept known as total quality management (or TQM in short). However, POM is
primarily responsible to ensure that the firm is able to produce the products in the required quantities, in
the required quality level, delivering the products to the customers at the desired time schedule and at the
minimum possible cost.
Quality is no longer limited to the technical requirements of the goods being produced on the
manufacturing shop floor. Service quality (i.e., how we deal with our customers on a wide variety of
issues affecting customer satisfaction) is equally important.
How companies integrate product quality and service quality, to properly meet the needs of the
customers is a major challenge to today's managers. Improving quality in all respects of the business
improves customer satisfaction and increases customer loyalty. Today's customers are demanding better
quality, more variety and increased responsiveness to their needs — all at lower prices.
3. Rapid Expansion of Advanced Production Technology
Advances in technology in recent years have also had a significant impact on the POM function.
Computer-numerical control (CNC) technology, increased automation and robotics have enabled the
companies to improve the quality of products that are being manufactured. Information technology facilitates
collection of data on individual customers so that the products can be mass customised to meet the needs
of individual customers.
However, advances in technology place new requirements on the workforce and even on customers
especially in service operations. For example, skilled workers are replacing unskilled workers in all types
of operations. Employees must now have computer skills to use internet and carryout e-business. An
organisation's workforce is nowadays becoming more and more educated and should be considered as its
most valuable asset.
4. Continued Grow th of Service Sector
The service sector is now growing far more rapidly than the manufacturing sector and more and
more workforce is now employed in the service sector. For example, the motion picture industry employs
more people in the United States than does the auto parts industry. Computer software service is the
fastest growing service in the service sector.
Eventhough the majority of issues and concerns faced by managers in both the service sector and the
manufacturing sector are the same, the special nature of services imposes additional constraints which
vary with the kind of service provided.
5. Scarcity of Production Resources
Operations managers are faced with the problem of scarce production resources and matching the
production resources with anticipated product demand. They are constrained to obtain the scarce resources
such as materials and labour at the minimum possible cost and utilise the same with maximum efficiency.
Operations managers nowadays devote much of their energy to inventory and materials management,
scheduling operations and personnel, reduce wastage of materials and labour, cut costs and improve
productivity in order to improve the competitive positions of their companies. They are responsible to
prepare intermediate plans to consider what to buy, from whom to buy, when to buy and how much
to buy to manage the scarce material resources and also to co-ordinate personnel decisions such as hiring,
lay-offs overtime and subcontracting to make best use of the human and equipment resources.
6. Social Responsibility Issues
A new challenge facing operations managers is to make production systems environmentally
compatible, yet efficient. This can be achieved by reducing production of harmful by-products, recycling
Operations M anagement – An Overview 37

waste materials and energy, reducing packaging, using closed water systems for cooling and waste discharge
and even scheduling employee work hours to reduce traffic and air pollution. Using environmentally
sound production methods is not only the social responsibility but also a means of achieving economic
benefits. The other ethical issues arising in many aspects of operations management are :
(a) Worker Safety: Providing adequate training, maintaining equipment in good working conditions
and maintaining a safe working environment.
(b) Product Safety: Providing products that minimise risk of injury to user or damage to property
or the environment
(c) Quality: Honouring warranties, avoiding hidden defects.
(d) Obeying government regulations, regarding regulation of environment.
(e) The Community: Being a good neighbour, providing employment opportunities to the local
people and improving the standard of living of the community surrounding the company.
(f) Closing Facilities: Taking into account the impact on the community and honouring commitments
that have been made.
To conclude, we can summarise the current issues facing operations managers are as below.
1. Speeding up the time it takes to get new products into production.
2. Developing flexible production systems to enable mass customisation of products and services.
3. Managing global production networks and managing the supply chain (i.e., managing the flow of
information, materials and services from material suppliers through factories and warehouses to the
end customer).
4. Developing and integrating new process technologies into existing production systems.
5. Achieving high quality quickly and keeping it up in the face of restructuring (i.e., achieving quality
parity with the competition through total quality management).
6. Managing a diverse workforce.
7. Conforming to environmental constraints, ethical standards and government regulations.

REVIEW QUESTIONS
1. Define the terms "Production", "Production system" and "Production Management".
2. Discuss the following views of the nature of production :
(i) Production as a system.
(ii) Production/operations as an organisational function.
(iii) Production/operations as a conversion process.
(iv) Production/operations as a means of creating utility.
3. What is a "Production function"? State its importance.
4. Discuss the statement "Production is a means of creating utility."
5. State the objectives of production/operations management.
6. Mention the areas in which production management can offer competitive advantage to a firm.
7. Mention the responsibilities of a production manager. Explain how a production manager amalgamates
the five ‘Ps’ namely product, plant, processes, programs and people.
38 Production and Operations M anagement

8. Describe the various decisions made by production managers under three categories, viz., strategic,
operational and control decision areas of production management.
10. Explain what is meant by "organising to produce goods and services". Draw a typical organisational
chart for a manufacturing and a service organisation.
11. Explain the major functions of a production manager.
12. Discuss the problems that may arise in production management and the decisions production managers
have to take to solve these problems.
13. Give a brief account of the historical evolution of production management.
14. Discuss the recent trends in production/operations management and explain how these trends have
helped to improve the efficiency of production management.
15. Distinguish between “system design” and “system operation”.
16. Mention various types of production.
17. Discuss a “production system model” with a diagram. Describe its elements such as inputs,
conversion and control subsystems and outputs.
18. What do you understand by “production system diversity”?
19. Distinguish between
(a) Manufacturing system and service systems.
(b) Series and parallel systems.
(c) Continuous and Intermittent production systems.
20. Discuss the characteristics of job shop production, batch production, mass production, continuous
or flow production.
21. Explain the differentiating features of production systems.
22. Describe the factors affecting production and operations management today.
23. Discuss the scope of operations management.
24. Distinguish between production management and operations management.
25. Discuss the differences between goods and services.
26. Write short notes on: (a) Flexible manufacturing system, (b) Vertical integration.