Course Name: Production & Operations

Management
Module 1: Introduction to Production &
Operations Management

Introduction
Man started engaging in the activity of production soon after its existence. Agriculture was the
first production activity. Since then the range of production and manufacturing activities has
expanded in terms of capacity and efficiency. Today, machines have replaced men in basic
production activities. Men only supervise machines and are supervised by them as well. Thus,
production is a much more complex function. Also, it is one of the most critical functions of
modern management

Definition
Operations Management is the management of an organization’s productive resources or its
production system, which converts inputs into the organization’s products and services.

There are basically three schools of thought:

1. Classical

2. Behavioral

3. Modelling

Classical Management

Classical management emphasizes:

1. Economic efficiency as the overall production effectiveness of the organization: Scientific

management.
2. Management as a continuous process of planning, organizing and controlling: Process
management.

Behavioral Management

Behavioral management emphasizes:

1. Human Relationship: Behavioral scientists recognize that people are complete and have
multiple needs and that the subordinate-supervisor relationship directly affects productivity.

2. Behavioral Science: The science which explored how human behavior is affected by
leadership, motivation, communication, interpersonal relationships and attitude change.

Modelling as Management

Modelling as management emphasizes:

1. Decision-making

2. System Management

3. Mathematical Modelling

Production Functions
Production may be defined as the conversion of inputs – men, machines, materials, money,
methods and management (6 Ms) into output through a transformation process. Output may be
goods produced or services rendered. "Goods produced" is for the manufacturing concerns and
"services rendered" is for the service operation units such as banks, hospitals, hotels/restaurants,
etc. In this sense, production management may be viewed as operations management.
Production is a primary business function along with marketing and finance, other management
areas being HRD (Personnel & Industrial Relations) and Materials Management, etc. Marketing
establishes the demand for goods and services, finance provides the capital and equipment while
production actually makes the goods or services. In this sense, it plays a vital role in achieving a
firm's strategic plans or goals.

Further, as the production function produces the goods and services, it typically involves the
greatest bulk of the companies' employees and is responsible for a large portion of the firm's
assets.

Moreover, production has a major impact on the quality of the goods and cost of production. In
this respect, production is a visible face of the company and is thus the central function of an
organization and hence, we may call production as the heart of any organization.

Functions and Responsibilities of Production Management

Production management is viewed as a continuous process of planning, organizing and
controlling:

1. Planning: It includes all activities that establish a course of action. These activities guide
future decision-making. It involves product planning, facility planning and designing of the
conversion process.

2. Organizing: It includes all activities that establish a structure of tasks (organization structure)
and authority. Thus, it determines the activities required to achieve the operations, sub-systems
goals and assign authority and responsibility for carrying them out.
3. Controlling: It includes all activities that ensure that actual performance is in accordance with
planned performance. This is done by developing standards and communication networks
necessary to ensure that the organizing, staffing and directing functions are pursuing appropriate
plans and achieving objectives.

The major objective of production management is to produce quality goods and services. In
present day position, the objective of any firm is to increase profitability through higher
efficiency, higher productivity, by improving quality, and to give customer more confidence by
providing him products of quality at the right price and at the right time.

This can be achieved through:

1. Optimal use of resources (men, machines and materials).

2. By maximizing use of manpower and machines, or minimizing wastage of materials.

3. Ensuring quality of goods at minimal cost through use of statistical quality control techniques.

4. Contributing towards all round productivity through decision-making and quantitative

techniques or techniques.

Scope of Production Management

Scope of production management includes:

1. Activities relating to designing or formulation of the production system.

2. Activities relating to analyzing and controlling of production operation after the production
system has been activated.

Activities relating to Production System Designing

These activities concern the production engineering which includes problems relating to:

1. Design of tools and drawings;

2. Designing development and installation of equipment;

3. The selection and operation of the size of the firm;

4. The selection of the overall plans;

5. Location plans;
6. Plant layouts;

7. Materials handling systems, etc

Besides, the human factor problems and research and development are also considered.

Activities relating to Analysis and Control of Production

The major ones are:

1. Production Planning: It includes preparation of short term production schedules, plan for
maintaining the records of raw material and finished and semi-finished stock; specifying how the
production resources of the concern are to be employed over some future time in response to the
predicted demand for products and services.

2. Production Control: After planning, the next managerial production function is to control the
production plans because the production plans cannot be activated unless they are properly
guided and controlled. For this purpose, production manager has to regulate work assignment,
service work progress and check and remove discrepancies, if any, in the actual and planned
performances. A production manager has to look after the production control activity through:

(a) Control on inventory such as raw materials, purchased parts, finished goods etc.

(b) Control on work in progress through production control.

(c) Control of quality through process control.

Relating Production Management with other Management Functions

Well-designed manufacturing and service production exploit a company's distinctive

competencies – the strengths unique to that company – to meet these needs. Such strengths might
be a particularly skilled or creative workforce, strong distribution networks, or the ability to
rapidly develop new products or quickly change production-output rates. A good production
manager will interface with other functions in order to exploit the competencies of the
organization.

We can analyze the interface requirements from another angle also – from the point of view of
Production Management's processes. Generally, processes involve combinations of people,
machines, tools, techniques, and materials in a systematic series of steps or actions.

The overall value chain extends from suppliers to customers. Inputs consist of the sources related
to materials like capital, equipment, personnel, information, and energy used to produce the
desired outputs. Inputs typically are selected by the production function in association with other
functions. Outputs are the final product whether of tangible goods or intangible services.

Some of the interfaces with other functional areas in the organization are described below:

1. Production Management – Marketing Interface: Marketing is responsible for

understanding customer needs, generating and maintaining demand for the firm's
products, ensuring customer satisfaction, and developing new markets and product
potential. The firm's strategic positioning and its market segmentation decisions to a large
extent determine the manufacturing and production strategy.

In addition, marketing is the key information gatekeeper between production and the
product markets. Marketing determines the kind of product customer's value. This starts
prior to product development, positioning, pricing, forecasting and promotions both
before and after product launch. Interdisciplinary co-operation involving production and
marketing decisions go back over many decades.

Conflicts between production and marketing in most organizations result from the lack of
broad agreement on critical organizational decisions such as the width of the product line,
the amount of time taken to deliver the product, and service or quality levels. The
interface between these two functions offers wide leverage in most organizations –
increased understanding and trust between production and marketing propels many
organizations to higher levels of effectiveness.

2. Production Management – Finance Interface: Capital equipment, cost-control

policies, price-volume decisions and inventories constitute the interface with financial
decision making. As acquisition and management of assets is an important part of
decision making, finance and production need to work together to understand the nature
of technology used in production and the practice-performance gap in their organization.

Tracking performance requires that the organization develops common, objective

platforms for performance evaluation. Finance provides data on product and service costs
that help managers evaluate operational performance. Production managers should have
knowledge of financial procedures, limits, and capabilities. The effectiveness of
operational planning and budgeting is often driven by the level of co-operation between
these two areas.

3. Production Management – Design Interface: Shrinking product lifecycles have been

adding to the demands on the product development process. This is especially true for
industries that have a high clock-speed. Launching more new products faster requires
tight integration between the design and Production Management functions. Initiatives
such as simultaneous engineering and early supplier involvement in the product design
process not only add to the role of production but also improve the perception of value
provided in the product and service concept design process.
 In addition, process development and engineering is responsible for production methods
necessary to make the products. This function has a great impact on production.

Therefore, co-operation between these three functions, i.e., process engineering, design
and production, leads to improved organizational performance.

4. Production Management – Human Resource Interface: No plant manager anywhere

would ignore the role of good people management in running an efficient operation. The
human resource function includes operation's approaches such as continuous
improvement and total quality that rely mainly on human inputs. Decisions about people
and the organization of the production function interact significantly with both structural
and infrastructural decisions. Such issues are not unique to the production function,
however; they impact other functions and are dealt with more effectively through the
human resource management function.

In services, the human resource focus is vital, as customer's perceptions of an

organization are generally formed by their interaction with customer contact personnel,
such as customer service representatives. As organizations increasingly opt for 'flextime',
the production function has to develop unique process configurations to accommodate
employees with minimum disruption in the flow of work. Production Management and
Human Resource departments have to co-operate for recruiting and training employees,
enhancing employee well-being and development, and fostering motivation that are vital
to the success of management policies in practice.

5. Production Management – Information Systems: Information systems provide,

analyze, and co-ordinate the information needs of production. The distributed processing
environment and the growth and evolution of Enterprise Resource Planning (ERP)
systems for the organization have a direct impact on production. It allows organizations
to generate relevant information and make appropriate information available when
needed. The operational plans become the driver of all business planning including
recruiting, cash flows, and marketing promotions. The Computer Integrated
Manufacturing (CIM) systems in IT play a very important role.

In many organizations, similar activities are performed at different locations or at the same
location by different people. Examples would be a manufacturer with plants spread out all
over the world. However, knowledge is rarely, if ever, shared among employees performing
similar jobs. Information technology provides an option for managing and sharing knowledge.
It dramatically improves the task of managing knowledge. Advances in process automation
allow firms to redefine their core processes and design better systems to accommodate the
needs of product and service variety. E-commerce creates new demands for managing
processes while also providing new opportunities for reconfiguring them. Much progress in
information technologies is wasted if the production function does not respond to the
challenges created by the increased availability of information and knowledge.
This approach emphasizes cross-functional thinking and relates it to the context of overall
activities of the organization. Production Management measures the effectiveness of people,
processes, and technology so that an enterprise can perform better, faster, and with greater
productivity. It provides customers with products and services; and supports corporate
strategies by working with marketing, finance and human resource areas.

Differences between Production and Operation Management

The field of management that deals with the supervision, planning and redesigning business
operations in the manufacture of services as well as goods is called as Operations
Management. This comprises the responsibility of making certain that the operations in a
business are carried out in an efficient as well as effective manner for both parties. The
organizational lifecycle operation inside a firm that deals with the forecasting, planning or
marketing of products or a particular product at all stages of the life cycle of that product is
called as Product management.

Both Operations Management and Production Management have a big impact on our
industries. While Operations Management is about the administration and planning of the
business operations in the production as well as the service of goods, Production Management
is the organizational life cycle procedure inside a company that is concerned with the
prediction, planning and marketing goods at all phases of the life cycle of that particular
product or products.

Production is the part of a business venture that produces, builds or manufactures a product
for use and distribution. Management of the area of a business that deals with clerical issues,
generally including hiring, payroll, acquiring necessary raw materials, bill paying and other
related "office" duties.

Production management is the planning, organizing, staffing, leading, control and

coordinating of human and material resources for execution of the facility in a specific
function to meet predetermined objectives in the constraints of time cost and quality. Tasks
and a completion date. This is further explained as the management of a specific project. A
Project Manager would typically oversee the delivering of projects on time, assigning tasks to
developers and designers and ensuring client satisfaction.

Operations Management refers to the ongoing management of daily works of a company,

such as technical support, network management, etc. With Operations Management, there is
no set end point. An Operations Manager would typically be involved in all operations of a
company, ensuring that everything is running smoothly and that staffs are delivering
correctly. Let's look at an example - A web agency may have many projects running at the
same time and once these projects are deployed, the project is finished, in terms of operations
management, the operations manager is still occupied with the day to day support and
management of the deployed project, ensuring that it is still running correctly, fixing various
problems and so forth.

Automation
Automation is the self-controlling operation of machinery that reduces or dispenses with
human communication or control when used in normal conditions.

Did u know? Automation was first introduced in the late 1940s by the Ford Motor Company.

In other words, it is the act or process of converting the controlling of a machine or device to
a more automatic system, such as computer or electronic controls.

Automation plays an increasingly important role in the global economy and in daily
experience. It increases the operational efficiency of the organizations. Engineers strive to
combine automated devices with mathematical and organizational tools to create complex
systems for a rapidly expanding range of applications and human activities.

Advantages of Automation

1. Replacing human operators in tedious tasks.

2. Replacing humans in tasks that should be done in dangerous environments (i.e. fire, space,
volcanoes, nuclear facilities, under the water, etc.)
 3. Making tasks that are beyond the human capabilities such as handling too heavy loads, too
large objects, too hot or too cold substances or the requirement to make things too fast or too
slow.

4. Economy improvement. Sometimes and some kinds of automation implies improves in

economy of enterprises, society or most of humankind.

Disadvantages of Automation

1. It faces technology limits. Technology is not able to automate all the desired tasks.

2. The cost of automation is difficult to predict. The research and development cost of
automating a process is difficult to predict accurately beforehand. Since this cost can have a
large impact on profitability, it's possible to finish automating a process only to discover that
there's no economic advantage in doing so.

3. The initial costs involved are relatively high. The automation of a new product requires a
huge initial investment in comparison with the unit cost of the product, although the cost of
automation is spread in many product batches. The automation of a plant required a great
initial investment too, although this cost is spread in the products to be produced.

Case Study: Toyota Kirloskar Looking at Higher Level of Automation

Toyota-Kirloskar may increase the automation in its second plant because of its higher capacity
and hence may need fewer workers to run the operations.

The existing plant at Bidadi, 40 km from Bangalore, has the capacity to manufacture 60,000
vehicles and is one of the least automated plants of the world's largest car maker, Toyota Motor
Corporation. The new plant, which will also come up near the existing plant, will manufacture
the mass market compact cars and will have a capacity of one lakh units.

Higher Automation

Toyota Kirloskar Motor's Deputy Managing Director (Commercial), Mr Shekar Viswanathan,

told Business Line that with the company looking to turn out more cars from the second plant,
the auto major was studying the feasibility of automating the plant to a level higher than at the
existing plant. "Given the higher volume that the new factory will have, plans to have a higher
level of automation in the new factory is under study," Mr Viswanathan said. However, if the
cost of automating the new plant is much higher, the company might look at a slightly lower
level of automation and hire more workers.

Mr Viswanathan said the company is using the downturn in the auto sector to multi-skill its
workers. It is reducing the assembly line speed so that the same number of workers carries out
multiple tasks and learns more about taking advantage of the reduction in production because of
the slowdown in the automobile market.

Toyota has slowed down production at its plant considerably and expects the plant will return to
full capacity in a couple of months. Mr Viswanathan said kaizen (continuous improvement) was
an effective process - both during the downturn as well as when the plant is running at full
capacity. He said during the downturn, workers will have the opportunity to increase their skill
sets and will hence be armed to carry out a variety of tasks.

Revival in H2

Toyota Kirloskar Motor (TKM) has said the automobile sector in India is expected to revive by
the second half of this calendar year.

The TKM Managing Director, Mr Hiroshi Nakagawa, said the recession had not affected India as
it has in other parts of the world. He said the compact car project is on schedule, though it was
too early to talk about its pricing.

Mr Nakagawa, speaking on the sidelines of the 18th International Engineering and Technology
Fair here, said that Toyota had taken into consideration the fact that when the compact car is
launched during 2010, several other car makers too have lined up similar car launches around
then. "There will be enough competition by the time we launch our own car. But we expect to
have our own niche in the segment," he said.

He said once Toyota starts selling more of these compact cars, it will start work on exporting
these cars, though the countries to which these cars will be exported have not been shortlisted.
The company's Vice-Chairman, Mr Vikram Kirloskar, said one of the reasons for taking the 'top-
down' approach in launching mid-sized and multi-purpose vehicles in India was to understand
the market better before launching volume-driven small cars. TKM's Deputy Managing Director
(Marketing & Sales), Mr Sandeep Singh, said that by the time the new car is launched, the
company will have 150 dealers across 100-odd cities. He said the marketing and sales division of
TKM was also being strengthened in the run-up to the car launch.

Comparison between Services and Manufacturing

Operations Management is fundamental to an organization's achievement of its mission and
competitive goals. It is involved in creating value in the products. Products can be tangible or
intangible. Tangible products are called 'goods' or 'manufacturing', while intangible products
include 'services'. These are collectively referred to as products.

Effective Operations Management is critical for organizations that provide goods as well as to
organizations that provide services and contracts. A firm's success or failure can depend on how
it manages operations on a daily basis.
Goods are tangible items that are usually produced in one location and purchased in another.
They can be transferred from one place to another and stored for purchase by a consumer at a
later time.

Example: Goods are products such as cars, washing machines, televisions, packaged foods, etc.

Services are intangible products that are consumed as they are created. Services now dominate
the economies of most industrialized nations. Service organizations include hotels, hospitals, law
offices, educational institutions, and public utilities.

Example: They provide such services as a restful and satisfying vacation, responsive health care,
legal defense, knowledge enrichment, and safe drinking water.

Services also include 'back-office' support for internal customers of an organization, such as IT
support, training, and legal services. Services take place in direct contact between a customer and
representatives of the service function.

Customer contact is a key characteristic of services. A high quality of customer contact is

characteristic of a good service organization. This is vital to retain current customers as well as
for attracting new ones. Most service organizations, though they seldom carry finished inventory,
do have supporting inventory. Hospitals keep drugs, surgical supplies, emergency supplies and
equipment spares; banks have forms, cheque books, and other supplies.

Services require more attention and better planning than manufacturing. A manufacturing defect
can always be reworked before dispatch. Service, however, occurs in the presence of the service
provider, making it difficult to manage capacity and control quality since inventory cannot be
stored and inspected prior to the service encounter.
Many recent thinkers have suggested that most manufacturing firms are better off thinking of
their output in terms of the service bundle they provide to the customer.

Example: Mercedes has announced that it is developing a system that will connect the car's
software via the Internet to a customer assistance center. This system will be able to detect,
diagnose and repair the problem.

Today, organizations are increasingly trying to grow their presence in the market and earn a
competitive edge over competition by mixing goods, and services. This brings in a number of
permutations and combination, significantly changing the landscape of operations.

Xerox has 'redefined' its product as facilitating communications rather than just selling copy
machines. In its strategy to be the 'Document Company', Xerox now offers products that can copy
handwritten documents, convert them to electronic form, and email them. Such products have
allowed Xerox to increase the services related to document management in its output bundle. This
type of transition creates significant challenges for Operations Management.
Competitiveness Strategy and Productivity
"Productivity" relates output to the quantity of resources or inputs used to produce them. It is
basically concerned with how efficiently a certain output of goods and services is produced, and
the value created by the production process. At the corporate level, productivity makes it
possible to produce superior quality and high-value goods and services at the lowest possible
cost. If a product could be made at the lowest possible cost with a high quality, and could be sold
competitively in the marketplace at a good price, then its productivity would be considered very
good. Productivity is expressed with this simple equation:

Productivity = Output/ Input

The concept of productivity, however, has evolved over the years to represent more than an
efficiency ratio. From cost and quality issues, its scope has expanded to embrace social concerns,
such as job creation and security, poverty alleviation, improvement in the quality of life, resource
conservation and environmental protection. The role of Green Productivity (GP) has a special
significance. "Green Productivity" signifies a new paradigm of socio-economic development
aimed at the pursuit of economic and productivity growth while protecting the environment.

The Asian Productivity Organization (APO), Tokyo, Japan launched the GP program in Asia &
the Pacific in 1994, in response to Rio Earth Summit of 1992 as a strategy to create a paradigm
shift among the stakeholders for productivity enhancement in harmony with environment
protection for overall socio-economic development. This comprehensive approach to
productivity means that when a corporation implements a productivity improvement program, its
effects will extend beyond the company.

There are several concepts of productivity. In addition to the single factor measure of
productivity there are also multifactor productivity measures (relating a measure of output to a
bundle of inputs). Another distinction, of particular relevance at the industry or firm level, is
between productivity measures that relate some measure of gross output to one or several inputs
and those which use a value-added concept to capture measurements of output.
Productivity is also used at the national level. Productivity typically is measured as the rupee
value of output per unit of labour. This measure depends on the quality of the products and
services generated in a nation and on the efficiency with which they are produced. Productivity
data is available from different sources for national productivity, for sector-wise as well as
industry-wise performance. In improving the standard of living of a nation, productivity is more
important than money because productivity determines the output while money just measures the
value of the output.

However, the measures that are of relevance here from the point of view of the operations
manager are labour productivity, multiple factor productivity and total factor productivity.

Productivity is linked to the competitive strategy of the organisation. Corporate strategy and
objectives have a major impact in determining the different operational parameters at the
corporate level. There are many other factors and the list may differ from one organization to the
next and between different time periods for an organization as well. The principle impact on
these parameters comes from competitive strategies.

Corporate strategies and competitive strategies form a hierarchy of strategies. Corporate

strategies are concerned with the type of business the organization is in, its overall competitive
position and how the resources of the organization have to be deployed. The business strategies
are basically competitive strategies. The objectives of these strategies are about how to compete
successfully in particular markets, and how can the business units acquire competitive advantage.

Sun-Tzu, a Chinese strategist and general, made an observation in Art of War: "The more
opportunities that I seize, the more opportunities that multiply before me." This phenomenon is
at the heart of strategy. Organizations compete successfully by seizing opportunities. At the
business unit level, the strategic decision that the organization needs to take is 'how will it place
its products in the marketplace'? What will be the basis for it to gain competitive advantage?
Organizations achieve competitive advantage by providing their customers with what they want,
or need, better or more effectively than competitors and in ways the competitors find difficult to
imitate. The strategy for each organization is unique reflecting the particular circumstances it
faces.

There are two schools of thought on developing competitive strategies. On the one hand, the
concept of Generic Strategies is promoted by strategic thinkers like Michael Porter. On the other
hand, Prahalad and Hamel promote the "Resource based Approach". However, we will lay
greater emphasis on Generic Strategies as these are industry focused and reflect more closely the
requirements of the OM Strategy. In order to succeed in this, organizations have found many
offensive and defensive actions to defend their position in the industry and cope with competitive
forces.

There are two basic types of competitive advantage a firm can possess: low cost or
differentiation. The two basic types of competitive advantage combined with the scope of
activities for which a firm seeks to achieve them, lead to three internally consistent generic
competitive strategies. These strategies are:

1. Cost Leadership: A firm pursuing a cost-leadership strategy attempts to gain a competitive

advantage primarily by reducing its economic costs below that of its competitors. This policy,
once achieved, provides high margins and a superior return on investments.

2. Differentiation: In a differentiation strategy, a firm seeks to be unique in its industry along

some dimensions that are widely valued by buyers. It selects one or more attributes that many
buyers in an industry perceive as important, and uniquely positions them to meet those needs.
Differentiation will cause buyers to prefer the company's product/ service over brands of rivals.
An organization pursuing such a strategy can expect higher revenues/margins and enhanced
economic performance.

3. Focus Strategies: The generic strategy of focus rests on the choice of a narrow competitive
scope within an industry. The focuser selects a segment or group of segments in the industry, or
buyer groups, or a geographical market and tailors its strategy to serving them to the exclusion of
others. The attention of the organization is concentrated on a narrow section of the total market
with an objective of catering to service buyers in the target niche market. The idea is that they
will do a better job than the rivals, who service the entire market. Each functional policy of the
organization is built with this in mind.

Caution: The third type of competitive strategy, focus strategy, has two variants-cost focus and
differentiation focus. These strategies can be used by the organization to outperform competition
and defend its position in the industry.

Factor Productivity

Labour Productivity
Labour productivity is a single factor productivity measure (relating a measure of output to a
single measure of input). Labour productivity is the quantity of output produced by one unit of
production input in a unit of time. Average economic productivity is computed by dividing
output value by (time/physical) units of input. If the production process uses only one factor
(e.g., labour) this procedure gives the productivity of that factor, in this case, labour productivity.

Multiple Factor Productivity

Labour Productivity is only based on observations of volume product outputs and inputs for
labour. While the example illustrates the method for calculating productivity, it did not consider
that most operations have more than one input and more than one output. In an economic sense,
the inputs are:

1. Labour as managers, workers, and externally purchased services,

2. Capital for land, facilities, and equipment, and

3. Materials, including energy requirements.

The importance of these factors may vary widely for companies producing different products.
Multiple factor productivity accommodates more than one input factor and more than one output
factor when calculating overall productivity. With multiple factor productivity, the outputs can
be measured either in money terms or the number of units produced, provided the units can be
measured in the same units.

Multiple Factor Productivity = Output (units or value of units)/[Labor + Capital + Materials +

Energy + Other]

When more than one input is used for each factor, it is called 'partial'. For example, the Partial
Productivity Index of labour is measured by dividing the market value of goods and services
produced during the year in the economy as a whole or a particular industry or a firm and
dividing it by the number of man-hours taken to produce the goods and services.

Outputs are sometimes difficult to define and measure.

Example: The productivity of a fast-food restaurant could be measured in terms of customers

served per hour or by the number of items sold. Both the measures can be misleading because
customers may order more than one item and restaurants sell various items (such as drinks,
sandwiches, and ice cream) that have different values.

Another issue is that even within the firm, customers of many processes are internal customers,
making it difficult to assign a rupee value to the value of process output.

Total Factor Productivity

Total Factor productivity is the year-by-year change in the output where a number of factors are
taken into consideration. It is the attempt to construct a productivity measure for an aggregation
of factors. Such an aggregation requires additional hypothesis to make it meaningful. These other
factors consist not only of investment for education, training, research and development, but also
of non quantifiable factors such as the labour relations, climate and worker and management
attitudes towards productive efficiency and competitiveness.

Total factor productivity is a more accurate indicator of the economic efficiency of a firm,
industry or nation than labour productivity. There are some other limitations to the definition of
"Total factor productivity".

Example: It might be the investment made in human beings to raise the quality of labour, or that
made to improve productive knowledge through research and development or by the introduction
of organizational, managerial and social innovations.

Economic productivity will depend also on pricing and demand. If consumers require fewer
products than can be produced, plants will not work at full productive capacity. Thus, economic
productivity can well fall with decreasing demand and prices.

Another limitation of this definition is that 'productivity' defined in this manner does not identify
whether the change is due to new machinery or more skilled labour force. Both technological and
market elements interact to determine economic productivity.

Enhancing Productivity to Gain Competitiveness

Although labor and multifactor productivity measures can be informative, they also can be
deceptive when applied to a firm at process levels.

Example: If a firm decides to transfer some of its work to outside suppliers and lay off some of
its own workforce, the labour productivity will increase. This is because the value of the firm's
total sales (the numerator) remains unchanged while the number of employees (the denominator)
drops.

What is measured and the way in which the processes are managed play a key role in
determining productivity improvements. We have to increase the value of output relative to the
cost of input. If processes can generate more output of better quality using the same amount of
input, productivity increases. If they can maintain the same level of output while reducing the
use of resources, productivity also increases. Some of the objectives of improvements in
productivity are:

1. Efficiency

2. Maximum output
3. Economy

4. Quality

5. Elimination of waste

6. Satisfaction of human beings through increased employment, income and better standard of
living.

From a broader perspective, an increase of productivity is due to a squeeze in waste of resources.

The resources may be productive resources, governance, markets or social needs. The real issue
is how to achieve them.

Some issues can be simple improvements in the working conditions.

Example: Attention to the details of the production process, like placement of the work piece at
the work centre such that it simplifies the job loading of the machine.

This adjustment can be an important contribution in reducing movements and eliminating

physical stress, therefore leading to greater output. This type of improvement is important,
however, it does not provide the whole picture. The larger picture includes:

1. Issues related to the structure of operations, such as the number size, location, and capacity of
the facilities providing the service or producing the products.

2. The equipment and methods used in the activities.

3. The detailed analysis of the individual jobs and activities.

The structure of operations is not as simple as saying that fewer, bigger facilities will result in
higher productivity and lower costs. According to conventional economic theory, this tends to be
true up to a certain limit. Economies of scale allow firms to increase productivity by making
operations larger. Service and manufacturing operations can take advantage of this to improve
productivity and lower costs.

Consolidation in the many industries is being driven by the need to spread Fixed Costs, such as
information systems, infrastructure, and management, over a broader base of operations. But this
action assumes that demand is infinite. Therefore, matching the characteristics of the market to
the needs of the customer is crucial. Very often, adding facilities is not the right answer.

Example: When Indian Airlines purchased Boeing aircraft, it arranged for the maintenance of the
aircraft to be undertaken by Air India, which already had an established infrastructure. In this
way, Indian Airlines avoided duplicating expensive equipment, highly trained staff, and
administrative overhead. Similarly, many hospitals are forming alliances with super specialty
services to avoid duplication of expensive facilities.

In both these cases, the cost of the service declines and the quality improves.

However, it must be remembered that developments in technology often drive productivity

improvements. As organizations invest in technology, they can optimize time, expand options,
and reduce costs.

Technology is in many cases revolutionizing business and Operations Management by changing

everything from the way products are designed to how inventory is managed and controlled. It is
helping in decision making by gathering, organizing, analyzing, and presenting data to managers
faster and cheaper each day. This has an impact not only on how effectively and efficiently the
equipment is used but also on designing activities that help enhance productivity.

The productivity tree is shown in three parts, the roots (inputs), the trunk (the conversion
process) and the fruit (the outputs). As will be recognized in the figure, long-term productivity
improvements can be achieved by the human factor through skills, systems, management and
positive and innovative attitudes. In this sense, productivity is an attitude of mind which is
intolerant of waste of every kind and in any form. It not only refers to work systems but also to
the development of right attitudes and a strong concern for efficiency. Waste can be eliminated
through:

1. Technology, Innovation and Automation: Technology, Innovation and automation brings

new ideas, methods, and/or equipment to the process of making a product. Technology
determines both the maximal physical quantity of output that can be reached as well as the
number and the quality of inputs required. This presents an opportunity to cut costs and to
do more value-added work. The technology that is adopted is an economic choice, taken
upon both economic and technological reasons. However, reversibility of the choice is often
low because of high switching costs. Business process redesign is another aspect of
technology. Technology to improve physical productivity focuses on understanding the
diffusion of technology in use and redesigning of processes that exist within and between
companies. The rate of technological change varies between industries and the need
increases as the clock-speed of the industry increases. Innovative changes in business
processes that allow the customer to obtain better value, increases productivity of the
organization. Using numerically controlled machine tools can increase productivity and
reduce manpower. Similar technologies have been available for decades, but are constantly
finding new applications. These reflect exercises in automation as the focus is to substitute
capital for labour. It is different from technological innovation because existing automation
is merely applied to a new situation.

2. Learning and Experience: The learning and experience curve concepts have been discussed
earlier in detail. This was first observed in the aircraft industry and was found to enhance
productivity and reduce costs substantially. The productivity is greatly improved by a
distinct form of specialization. As workers learn, they get better trained in the techniques
required to do the job. Learning and experience enable firms to achieve productivity
improvements because the workforce gains knowledge about the product and work
processes. From this knowledge workers find better ways to organize work.

3. Job Design, Work Analysis and Motivation: All these techniques enable firms to examine
work at the level of the individual worker, the interface between a worker and a machine, or
the interface between a worker and the firm. The job design and work analysis approach
investigates and improves individual movement to improve productivity. It makes possible
productivity improvements through scientific redesign of the work content. Job design and
work measurements also provide benchmarks that can be powerful motivators. Motivation
is a powerful tool that can be used to increase productivity in any job that is labour
intensive.
Firms can also provide incentives to increase workers' productivity through a stimulating
environment and the removal of obstacles to their effective work. The classical Hawthorne
Studies by Elton Mayo showed that if labour is motivated to do more work, productivity can
increase without additional investments or cost increases.

Example: When the lighting levels in the Hawthorne works were improved, there was
increased productivity with no additional costs.

1.7.3 Productivity in Manufacturing versus Service Firms

Productivity applies equally to the blue-collar workforce as to people doing intellectual

work. In many developed countries, blue-collar workers represent a small and declining
portion of the workforce and the dominant workforce is represented by intellectual work in
service organizations. This change is explained by a change from a manufacturing to
service-based economy in these countries. The problem presented by this shift is that
productivity gains in the service sector have lagged behind gains in the manufacturing
sector.

Nobel Prize-winning economist Robert Solow has said that we see computers everywhere
except in the productivity statistics. That productivity measures do not seem to show any
impact from new computer and information technologies has been labelled the "productivity
paradox". Several explanations have been advanced to explain this lag, including ineffective
measures for services sector productivity and macroeconomic factors, such as the low
savings rate while on the other hand fear of job loss by manufacturing workers, which
motivates them to work harder and smarter.

However, there are many examples from leading-edge service companies that have achieved
dramatic improvements in productivity while other firms within the same industry have
lagged. In many cases, these competing companies use the same basic technology, pay the
same wage rates, and operate under the same basic labour agreement. This contradiction is
often explained by lack of intelligent focus in the use of new technologies.

The animating force for productivity and wage growth in the new economy will be the
pervasive use of digital electronic technologies. This is expected to increase efficiency and
productivity, particularly in the low-technology service sector.

It is forecasted that with increased learning, the digitization of the economy in the 21st
century will bring in the kind of economic benefits that mechanization brought in the 20th.
And this will be spurred by the "network effect" – the more we use these technologies (e.g.,
Internet, smart cards, broadband and telecommunications), the more applications will be
developed, and the more value they will provide for users. Once this occurs, the productivity
paradox could very likely give way to a productivity and wage boom.
Computing Productivity
Effectiveness of production management is measured by the efficiency through which the
inputs are converted into outputs, i.e., effectiveness of outputs and inputs. This efficiency is
called productivity of the system. The higher the productivity, the more efficient is the
production system.

Conceptually, productivity is defined as an attitude of mind and prevention of all kinds of

waste. Mathematically,

Productivity = Output/Input = Goods or Services Produced/All Factors of Production

1.8.1 Productivity Indices

When both output and input are expressed in the same unit, productivity reduces to a mere
number. Quite often it is expressed as a % of output to input. It is also expressed as:

OMS : Output per man-shift

Example: A coalminer produces coal @ 2 tonnes per day, we say that his OMS is 2t/day.
Production per month:

1. For better understanding in an industry, e.g., in a steel plant, it is expressed as 10,000

tonnes (of steel produced) per month.

2. GNP (Gross National Product): National productivity is given as per capita income.

3. In agriculture sector: Output per hectare, etc. For industries having incentive Schemes:
Productivity = SMH/AMH

= Standard Man-Hours Earned/Actual Man-Hours Worked

1.8.2 Wastivity

Wastivity = 1/Productivity

Another way of looking at the concept of productivity is to look at the amount of wastage
generated in the system. The wastage could be an unnecessary input, a defective output,
idling of the resources, etc. If we could measure these wastages and have a measure of the
wastage, then it becomes a tool for measuring the efficiency of the inputs called "Wastivity".

Example: The typical examples of wastes are:

 1. Idling of resources, e.g., materials waiting in the form of inventory in the stores, machines
waiting to be loaded, job orders waiting to be processed, patients waiting for service at a
doctor's clinic customers waiting for reserving a berth/seat at a reservation counter.

2. Production of defective goods and services, e.g., components/parts not conforming to

specifications, higher conversion costs resulting from inefficient/poor methods of working
or process not set correctly, poor quality of materials used, excessive maintenance delays,
etc.

For an effective and efficient production system, wastage of all kinds must be eliminated or
at least minimised.

Checklist for above can be prepared through the parameters responsible for wastage
generation and fixing standards from time to time.

Reduction of scrap or rejections, or percentage increase in yield, just by one (1) % can save
an organisation tremendously as compared to an increase in production and sales efforts by
at least 10-15 %.

Productivity can be increased by any of the following three ways:

1. By increase of output, keeping input constant.

2. By decreasing inputs for producing the same output.
3. By increasing outputs proportionately higher than increases affected in inputs.

Various factors contributing to increase of productivity can be summarized as below:

1. Better utilization of resources like men, machines and materials.

2. Using efficient and effective methods of working.

3. Through good and systematic plan-layouts using guidelines and principles of motion
economy.

4. Reducing material handling through better layouts and using appropriate material handling
equipments/facilities.

5. Selection of appropriate technology suiting the product(s) and the production process selected.

6. Selection of proper maintenance policy, keeping in mind the service level, preventive
maintenance and breakdown maintenance.

7. Provision of healthy and safe working conditions to workmen.

8. Through modern HRM methods; management by MBO rather than management by crisis,
counselling rather than threatening workmen – through participation of workmen in management
including quality circles etc. This shall ensure better working environment and keep the
workforce motivated.

9. Provision of fair wages and proper compensation through incentive schemes.

10. Through better quality by use of SQC techniques sampling plans in purchase and statistical
process control in production.

Example: In a manufacturing unit, the standard time allowed for the production of a unit is 5 hrs.
If in a particular month 126 units are produced by employing 4 persons and the allowable delays
are found to be 44 man-hours, find the productivity and wastivity of the concern.

Solution:

ESH = Earned Standard Hours

STD Time/Unit = 5 hrs

Production = 126 units

Earned standard man-hours = 5 × 126 = 630 hrs

AMH = Available Man-hours

Manpower Employed = 4 P

Monthly working hrs = 4 × 25 × 8 = 800 hrs

Allowed delays = 44 hrs

Therefore, AMH = Actual Man-hours available for production = (800 – 44) hrs = 756 hrs.

Therefore, Productivity = (ESH/AMH) × 100 = (630/756) × 100 = 83.33% Ans

Wastivity = 100 – 83.33 = 16.67%

Case Study: The Bicycle Ride

T I Cycles was promoted by the family of Murugappa Chettairs in September 1949. The
company was a collaboration formed with Hercules Cycles & Motor Co. of U.K., to
indigenously produce complete bicycles and bicycle parts, and substitute imports. The bikes that
TI Cycles manufactured were elegant, well-built and based on British designs. They had
immaculate reputations for quality and durability. For almost forty years, the name "BSA" and
"Hercules" were synonymous with value. The future looked bright. Generations of kids learned
how to ride on elegant BSA or Hercules bikes. A good bike enters the life of a child like a good
friend, and many of these kids grew up to be parents—parents who wanted their kids to ride
these bikes.

However, over the 1970s and 1980s, the market for bicycles was changing but TI Cycles
seemingly did not quite understand what was happening. In Ludhiana, Hero Cycles grew from its
origin as a small producer of bicycles to the largest manufacturer of bicycles, right under the
nose of TI Cycles. At the heart of Hero Cycle's success lay a different value creating logic. Hero
Cycles developed their cycles to meet specific Indian needs. They designed a cycle that could
carry two people plus a heavy load at the cheapest price. They were not elegant products like
BSA or Hercules, but they were designed for farmers to carry heavy load of vegetables to the
village market.

In 1944, four Munjal brothers, headed by Shri Brijmohan Lal Munjal, came to Amritsar from a
small town called Kamalia, now in Pakistan. They decided to start a business of bicycle spare
parts in Amritsar. This business evolved into Hero Cycles. The Munjal family created a local
component infrastructure by inducing friends and family members to set up ancillary units. They
developed a policy of supporting these units with both funds and technical assistance. Much
before Just-in-Time production became popular; they adopted the system, leading to extremely
low costs that allowed them to cut TI Cycles prices by 15 to 20 per cent even on the cheapest
models. Over the years, it became active in both standard and specialty bike segments. In 1989, it
launched Hero ‘Ranger’ to satisfy the need that TI had overlooked—cycles for peddling on
rugged terrain. It created a new category of Mountain Terrain Bikes (MTB). Hero had further
built its market position by introducing fitness bikes under the brand name Hero ‘Allegro’.

One executive at TI Cycles remarked, “Since our company had started the industry in India, the
general psychology inside TI was that the leadership position would continue owing to the
technical sophistication of the product. Hero Cycles intuitively learned to make the cycles on its
own and offered value for money. It competed on price and tapped the price conscious segment”.

TI Cycles had failed. Its failure illustrates two facets of the business environment. The first is the
phenomenon called 'customer disconnect'. This company had fallen so deeply in love with what
it had been that it no longer listened to what its customers and the bicycle market wanted. TI
Cycle's greatest failure was that it no longer understood its customers' values.

Secondly, TI Cycles failed to see the disruptive forces that were changing its industry. The
values of its customers were changing. TI Cycles could not fathom the changing values. New
bicycle firms were assembling a wide range of products, often using highly engineered
components made by others. TI Cycles took pride that it made all of its components. It could not
see the merits of buying components from outside suppliers. But the new breed of cyclists started
to buy lower cost bikes through the same marketing channel that heretofore had sold TI Cycles.

In 1994-95, the family dominated board of directors had to wake up to the problem. The total
loss from operations of TI Cycles was 2.98 crores on a sale of 208.28 crores. It had slipped to the
number three position in the industry. Its sales in the domestic market had flattened out. The
management had to admit that they needed to totally rethink their concept of the markets,
customers and competitors. They had to change their supply chain philosophy, and follow a
different path.

This led to the initiation of a series of measures at TI Cycles in product development and
manufacturing. In early 1995, TI Cycles introduced the first bike with front shock absorbers and
in 1995 Rockshok FST with front and rear shock absorbers. In 1998, it created a category of
geared bikes under the Hercules 'Top Gear Brand'.

In the area of manufacturing, the company took steps at shop-floor restructuring, and sourcing.
As a part of an initiative, TQM was introduced in TI Cycles in January 1998. A series of small
group activities and cross-functional teams were introduced in the company. The company
obtained the ISO 9000 certificate in March 2000. In response to these measures, productivity per
man per day increased from 2.45 cycles in 1994-95 to 5.78 in 1999-2000.

In 1998, TI Cycles proposed to AVON Cycles, one of the smaller players in Ludhiana, that they
would provide help in assembling the bike and in ensuring quality and market it under ‘TI
Cycles’ brand. This proposal enabled AVON to utilize its capacity and TI Cycles to obtain
standard cycles at a lower cost. With a view to further improve its cost competitiveness and
delivery, TI Cycles started a unit in Nasik, Maharashtra in 2000, to paint and assemble bicycles
and cater to the needs of the Western and Northern markets. Thus has begun an attempt by one
of the great companies to make a comeback.

Essentially, an organization must address two questions: “Who are we?” and “What do we want
to be?” This is the mission of the organization and it defines its reason for existence. It might
include a definition of products and services it provides, technologies used to provide these
products and services, types of markets, important customer needs, and distinctive
competencies—the expertise that sets the firm apart from others. The mission guides the
development of strategies by different groups within the firm.

1. It determines the value creation logic of the organization;

2. Sets limits on available strategic options;

3. It governs the trade-offs among the various performance measures and between short-and
long-term goals;

4. It establishes the context within which daily operating decisions are made; and
5. It inspires employees to focus their efforts toward the overall purpose of the organization.

TI Cycles provided value to its customers by producing elegant, high quality bicycles. To
implement this strategy of producing high quality, beautifully designed cycles, TI Cycles
adopted a policy of vertical integration. It produced most of the components in-house, all the
way down to the steel tubes required for the bicycle frame. It created organizational values and
people processes that supported the vision of the organization.

Hero Cycles, on the other hand, had a fundamentally different value creation logic. It
manufactured heavy duty, low cost bicycles. Hero Cycles outsourced most of the components. It
focused on creating a highly efficient assembly operation in-house. Both organizations were
good at what they were trying to provide. Where did TI Cycles go wrong?

One executive at TI Cycles analyzed the situation as follows, "We have continued to maintain
our position in our market segment. Hero Cycles tapped the price conscious segment which
turned out to be the largest market segment in the industry and is the leader in that segment. We
did not see that market segment becoming so big, nor did we believe that we could compete on
price with Hero Cycles".

A clear understanding of the implications of strategic choices on operational capability is vital to

success. Without the capability to produce low cost products, no amount of dreaming would have
made Hero Cycles capable to provide a product to replace the BSA and Hercules bicycles. Their
ability to design bicycles that met India specific needs at low cost made it possible for them to
provide the right product at the right time and make them market leaders.

TI Cycles operational strategy of producing elegant, high quality bicycles became the corporate
strategy of the company. This resulted in its inability to compete with Hero Cycles. It did not
develop the capabilities to compete on price, and hence it could not provide value when there
was a shift in the needs of the market.

Summary

 Operations Management is the management of an organisation's productive resources or

its production system, which converts inputs into the organisation's products and services.
 Production may be defined as the conversion of inputs – men, machines, materials,
money, methods and managemen (6 Ms) into output through a transformation process.
 Production is a primary business function along with marketing and finance, other
management areas being HRD (Personnel & Industrial Relations) and Materials
Management, etc.
 The major objective of production management is to produce quality goods and services.
 Production management is viewed as a continuous process of planning, organising and
controlling.
  Automation is the self-controlling operation of machinery that reduces or dispenses with
human communication or control when used in normal conditions.
 Operations Management is fundamental to an organization's achievement of its mission
and competitive goals.
 Products can be tangible or intangible. Tangible products are called 'goods' or
'manufacturing', while intangible products include 'services'.
 Customer contact is a key characteristic of services. A high quality of customer contact is
characteristic of a good service organization.
 "Productivity" relates output to the quantity of resources or inputs used to produce them.
It is basically concerned with how efficiently a certain output of goods and services is
produced, and the value created by the production process.
 There are several concepts of productivity. In addition to the single factor measure of
productivity there are also multifactor productivity measures.
 Productivity is also used at the national level. Productivity typically is measured as the
rupee value of output per unit of labour.
 Productivity is linked to the competitive strategy of the organisation. Corporate strategy
and objectives have a major impact in determining the different operational parameters at
the corporate level.
 There are two basic types of competitive advantage a firm can possess: low cost or
differentiation.
 Effectiveness of production management is measured by the efficiency through which the
inputs are converted into outputs, i.e., effectiveness of outputs and inputs.

Keywords

Automation: Act of converting the controlling of a machine or device to a more automatic

system.

Cost Leadership: A firm attempts to gain competitive advantage by reducing its economic costs
below that of its competitors.

Differentiation: Firm seeks to be unique in its industry along some dimensions that are widely
valued by buyers

Focus Strategy: Choice of a narrow competitive scope within an industry.

Green Productivity: It signifies a new paradigm aimed at the pursuit of productivity growth while
protecting the environment.

Labour Productivity: Quantity of output produced by one unit of production input in a unit of
time.
Manufacturing: Tangible items that are usually produced in one location and purchased in
another.

Operations Management: Management of an organisation's productive resources or its

production system.

Production: Conversion of inputs – men, machines, materials, money, methods and management
(6 Ms) into output through a transformation process

Productivity: Output/input

Services: Intangible products that are consumed as they are created.

Total Factor Productivity: Year-by-year change in the output where a number of factors are taken
into consideration.

Wastivity: 1/productivity

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