Chapter 1

Overview of
Production and
Operations
Management
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 Basic Functions of Organisations
Most businesses have three basic functional
areas:
• Finance/accounting – secure, allocate and
manage financial resources.
• Marketing – assess consumer needs, generate
demand, sell, promote and distribute
solutions (i.e. products)
• Operation – manage the production process.
Linked to supply chain, also vital for all firms.
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 Levels of OM
Strategic level - Strategic issues such as determining size
and location of manufacturing plants; the structure and
designing supply chains, etc.
Tactical level - Tactical issues such as plant layout and
structure, project management methods, equipment
selection and replacement etc.
Operational level - Operational issues such as production
scheduling and control, inventory management, quality
control and inspection, traffic and materials handling,
equipment and maintenance policies etc.

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 Supply Chain
Supply chain - the sequence of organizations’ facilities
and production and distribution functions.

Why manage supply chain?

• To handle complex challenges in improving
performance
• To avoid unwanted inventory oscillations and quality
problems by streamlining the marketing, production
and inventory functions.
• To adjust to emerging practices such as lean operation,
JIT and TQM which improve quality and reduce costs.

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 Why manage supply chain?
• To deal with increasing levels of outsourcing - which
increase time and money spent on supply-related
activities (e.g. wrapping, packaging, moving, loading,
unloading and sorting).
• To reduce increasing freight and haulage costs through
proper planning
• To deal with competition related challenges of incessant
new products, shorter product development cycles and
increased demand for customization
• To deal with the emerging vast expanse of the supply
chain playing field due to globalization.

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 Why manage supply chain?
• To deal with the challenges of the emerging
all-important ‘e-business’.
• To ensure optimal inventory levels at all times
(i.e. no shortages; no excesses).
• To deal with numerous supply chain related
challenges such as: late deliveries, inaccurate
forecasts, substandard quality equipment or
machine breakdowns, power failure and
cancelled or changed orders etc.

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 Essential Activities in OM
• Forecasting – Estimating demand, and required
operational conditions to achieve set goals.
• Capacity planning – Estimating optimal
operating levels with adequate cash flow and
revenue projections.
• Scheduling – setting time schedules for
production schedules to meet estimated demands.
• Managing inventory – Maintaining optimal
stock levels; EOQ; right quality; storage facilities;
material handling systems, supplier relations etc.
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 Essential Activities in OM
• Assuring quality – Ensuring reliable quality
control measure to meet customer
expectations.
• Motivating employees – Training and
motivating employees to meet production
targets
• Locating facilities – Deciding location of
operations units and distribution points.

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 OM Defined
• Set of activities that creates value in the form of
goods and services by transforming input into out
output.
• The organizing and controlling of the
fundamental business activity of producing goods
and services to customers.
• The management of processes or systems that
create goods and/or provide services.
• The maintenance, control, and improvement of
organizational activities that are required to
produce goods and services for customers.
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 Production Management
The facilitation of activities involved in the
creation of goods and services.

Goods - physical items (e.g. mobile phone

including its components)

Services - activities that provide a

combination of time, location or
psychological value. 10
 Importance of Operating Systems
Operation Systems - An operating system is a configuration (design,
pattern) of resources for the conversion of inputs into outputs to
satisfy customer wants and needs.

Importance of Operations - An effective and efficient operating

system enables organizations to:
• Compete on Cost – eliminate waste by analysing activities and
value and tightening production standards
• Competing on Quality - minimizing defect rate; conforming to
design specification and meeting customers expectation of quality
• Competing on Flexibility - produce variety of products; introduce
new products; modify existing products; respond quickly to
customer needs
• Competing on speed – making fast moves; adapting fast and
maintaining tight linkages with suppliers

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 Why Study OM?
• For strong business intelligence, strategic inititiatives and
international competitive advantage in today’s fast paced global
market.
• The OM function permeates all other business functions. 50% or
more jobs in OM–related areas—e.g. customer service, Q-assurance,
production, planning & control, job design, scheduling, inventory
management etc. - all intertwined.
• OM knowledge required to improve technology (procedures and
equipment) used in accounting, finance, administration, HR,
logistics, MIS, marketing, purchasing etc.
• Work is interrelated – Accountants need OM knowledge e.g.
(inventory management, work measurement and processing
systems) to estimate costs, conduct audits, and prepare financial
reports. Also, finance – for ‘make-or-buy’ decisions.

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 Why Study OM?
• To ensure steady growth and expansion of
establishments, entrepreneurs need OM
knowledge to guarantee customers value for their
money.
• OM spells effective management and thus all
managers need some knowledge in all aspects of
it.
• OM is a costly facet of an organization and
knowledge enhances managerial judgments and
decision making.
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Careers in Operations Management
Opportunities abound in both service and manufacturing
establishments

• Technology/methods - Professional institutions, e.g., ACCA

• Facilities/space utilization - Consultancy firms
• Strategic issues - Production and Inventory Control or
management departments
• Response time – Parcel delivery and restaurant services
• People/team development - Religious bodies, societies etc,
• Customer service and Quality control and assurance units

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Careers in Operations Management
• Procurement or National Association of Purchasing and supply
Management
• Management information systems units
• Banking and Financial Services institutions
• Operations research and statistical service institutes
• Cost reduction/productivity improvement - manufacturing
companies
• Project management sections of constructions companies, etc.

• Job titles include plant manager, operations analyst, quality

manager, supply chain manager and planner, process improvement
consultants, etc.

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 What Operations Managers Do
In addition to the basic management functions of:
Planning; Organizing; Staffing; Leading and
Controlling

Ten Critical Decisions

• Designing of goods and services
• Managing quality
• Process and capacity design
• Location strategy
• Layout strategy
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 What Operations Managers Do
Ten Critical Decisions (cont’d)
• Human resources and job design
• Supply chain management
• Inventory, material requirements planning and
JIT
• Intermediate and short-term scheduling
• Maintenance

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 Major Inputs Used in Production
• Materials - physical inputs - include land,
buildings, raw materials, fuel, indirect materials
etc.
• Plant and machinery - Tools and equipment,
vehicles, etc.
• Labour - Human efforts (mental and physical) –
without them, even machines cannot be
effectively utilized.
• Information/knowledge (IT) – ‘know-how’ –
regarded lately as the most crucial resource –
particularly with regards to innovation
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 Functions of Operating Systems
• Manufacture – Tangible transformation which
converts resources (inputs) into outputs which
differ in form, content and use compared to their
inputs.
• Transport – A Change in the location of a
resource without altering the form or content.
• Supply – A change in possession or ownership
without a physical transformation.
• Service – A treatment or accommodation of
something or someone which alters the output or
satisfaction obtained from a resource.
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 Functions of OS - Manufacturing
Manufacturing - It is the principal functional category of
operating systems.

Types of Manufacturing Systems

Two traditional ways of grouping / classifying
manufacturing systems.

First approach - to identify:

a) continuous
b) repetitive
c) intermittent manufacture.

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 Functions of OS - Manufacturing
Continuous process
Non-stop (24/7; 52 weeks / year) process – usually single product
manufactured in very large quantities. E.g. cement factory,
petroleum refinery, stone quarry

Advantages
• Standardization of product and process sequence
• Higher rate of production with reduced cycle time
• Higher capacity utilization due to line balancing
• Manpower is not required for material handling as it is completely
automatic
• Unit cost is lower due to high volume of production
• Persons with limited skills can be used on the production line.

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 Functions of OS - Manufacturing
Continuous Process - Limitations
• Product differentiation is limited
• Very high investment for setting flow lines
• Flexibility to accommodate and process number of products does
not exist

Repetitive process – Applying the same sequence of operations to

product(s) (or products) manufactured in lots. E.g. Assembly plant
for cars or computers.

Intermittent process – Production activities tailored towards

individual customers’ specific requirements. E.g. carpenter working
on a customer’s living room furniture.

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 Functions of OS - Manufacturing
Second approach - process (or mass), batch and
jobbing.

• Process manufacture – A continuous production

system of a commodity in bulk or large quantities,
often by chemical rather than mechanical means.

• Mass production – Single or small range of

related items manufactured in large quantities.
similar to process - just that items are discrete.
E.g. mobile phones, pens.
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 Functions of OS - Manufacturing
Mass Production - Advantages
• Higher rate of production with reduced cycle time
• Higher capacity utilisation due to line balancing
• Less skilled operators required
• Low process inventory (W.I.P)
• Manufacturing/ production cost per unit is low

Limitations
• Breakdown of one machine will stop an entire production line
• Line layout needs major change with a change in product design
• High investment in production facilities
• The cycle time is determined by the slowest operation

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 Functions of OS - Manufacturing
Batch Production
Similar items (usually fewer compared to mass production) are
manufactured together in batches.

Advantages
• Better utilization of plant and machinery
• Promotes functional specialization
• Cost per unit is lower as compared to job order production
• Lower investment in plant and machinery
• Flexibility to accommodate and process number of products
• Job satisfaction exists for operators

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 Functions of OS - Manufacturing
Batch Production - Limitations
• Material handling is complex because of
irregular and longer flows
• Production planning and control is complex
• Work in process inventory is higher compared
to continuous production
• Higher set up costs due to frequent change in
set up
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 Functions of OS - Manufacturing
Jobbing / Job Shop Production
The manufacture of different products in unit quantities, which is
technically in consonance with the intermittent process mentioned
above.

Advantages
• Because of general purpose machines and facilities, variety of
products can be produced
• Enhanced skills and competence by learning from each job
• Full potential of operators can be utilized
• Opportunity exists for creative methods and innovative ideas

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 Functions of OS - Manufacturing
Jobbing - Limitations
• Higher cost due to frequent set up changes
• Higher level of inventory at all levels and
hence higher inventory cost
• Production planning is complicated
• Larger space requirement

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 Functions of OS - Manufacturing
Transport
• Examples - Taxi or bus services, ambulance services, refuse disposal
systems.
• In manufacturing – movement of raw materials, W.I.P between
manufacturing depts. Removal of waste materials, etc.

Supply
• Examples - As an organization, suppliers include: retail shops,
warehouse, petrol dump/station etc.
• Within organizations, e.g. internal stores etc.

Service
• Examples: Hospital wards, Fire service, hotels, etc.
• Within organizations - welfare department, counseling, etc.

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 OM Contributions to Society
OM promotes:
• Higher standard of living
• Ability to increase productivity
• Lower cost of goods and services
• Better quality goods and services
• Healthy competition geared towards quality improvement
• Concern for the environment
• Recycling and concern for renewable natural resources
• Improved working conditions
• Better job design that captures employee and end user
participation

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 The Transformation Process
Inputs, e.g. (material, labour, capital and
information) are transformed (e.g. heat, force,
storing, transporting, repairing etc.) into goods
and services.

Measures are taken at various points (i.e.

feedback) and compared with standards for
corrective action (i.e. control) to be taken
where necessary

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 The Nature of OM
 Nature/Problems of OM manager’s job – function of
nature of OS/OS structure.
 OM managers’ strategies - influenced by OM objectives
structure of OS.
 OM is central to any form of enterprise, private/public.
 OM - concerned with design & operations of systems
for manufacture, transport, supply and service.
 OM managers’ job, strategies and ways of tackling
problems vary with activities of each organisation.

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 Design & Management of OS
Factors include the degree:
1. of involvement of customers in the creation
process. The greater the involvement, the more
challenging the design n’ management.
2. to which technology is employed to produce
and/or deliver a product or service – choice of
technology can impact productivity, costs,
flexibility and quality and customer satisfaction.
3. others
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Exciting New Trends & challenges in
OM
From: To:
• Local or national focus Global focus
• Batch shipments Just-in-time
• Low bid purchasing Supply chain partnering
• Lengthy product dev’t Rapid product dev’t
alliances
• Standard product Mass customization
• Job specialization Empowered employee
teams
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 The heritage of OM
Legends whose theories and knowledge have contributed
immensely to the promotion of OM
Originator Contribution/Concept
• Adam Smith 1776 Division of labour
• Whitney Eli 1790 Interchangeable or
Standardized parts
• F. W. Taylor 1911 Principles of scientific
management
• Henry Ford 1913 Moving or coordinated
assembly line
• Henry Gantt 1916 Chart for scheduling
activities (Gantt Chart)

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 The heritage of OM
• Originator Contribution/Concept
• Frank and Lillian Gilbreth 1911 Motion study, use of
industrial psychology

• Elton Mayo 1930 Hawthorne studies on

worker motivation
• W. Edwards Deming 1980s Emphasis on quality
control
• Numerous 1950s Automation
• Numerous 1990s Internet, supply chain
management
• Numerous 2000s Applications service
providers and outsourcing
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 The heritage of OM
Division of labour - Adam Smith, 1776
• Break up production process into small (narrow) - each
worker - small portion of overall job – virtually no skills
required
• Under craft production - each worker - many tasks thus
skills are required

Interchangeable or standardised parts - Whitney Eli,

1790
• Rationale - standardize parts so any parts in a batch-of-parts
would fit any automobile coming down the assembly line.
Under craft production – parts had to be custom fitted. 37
 The heritage of OM
Moving or coordinated assembly line for mass
production - Henry Ford 1913
• To improve efficiency of operations, Ford adopted
FW Taylor’s scientific management principles -
introduced moving assembly line which had
tremendous impact on production methods in
many industries.
• Ford also introduction mass production - large
volumes of standardized goods produced by low
skilled or semi-skilled workers using highly
specialized and often costly equipment.

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 The heritage of OM
Scientific management principles - F. W.
Taylor 1911
Management should take more responsibility for:
• Matching employees to right job
• Providing the proper training
• Providing proper work methods and tools
• Establishing legitimate incentives for work to
be accomplished
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 What is Value Added
• Value-added – The difference between the cost of
inputs and the value or price of outputs.

• OM increases value during transformation processes.

• Profit Organizations - value of outputs is price

customers are willing to pay for products

• Nonprofit Organizations – (e.g. police, fire services,

etc.) value placed on output by society’s which reflects
effectiveness of operations.

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Sustainability of Value Added
Organizations use money generated by value-
added for:
• Research and development,
• Investment in new facilities and equipment,
• Workers salaries - to improve performance and
profits.
• Thus, greater value-addition means more funds
reserved for these important operational
activities.
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 How OM Managers Can Add
Value
By operating to:
• reduce how much products cost to customers
• make the product more readily available
• provide faster service
• provide customers with additional relevant
information
• customize the product to the customer’s
specific needs
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 Goods Prodn. v Services Provision
• Production of goods - tangible outputs. E.g. refrigerator.
• Delivery of service – output can be felt rather than seen or touched.

Points of comparison
• Degree of customer contact
• Labour content of job
• Uniformity of inputs
• Measurement of productivity
• Quality assurance
• Inventory
• Wages
• Ability to patent

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 Similarities – Goods & Services
• Entail customer satisfaction as the major measure
of effectiveness and or value
• Include common measures of satisfaction (e.g.
quality, speed, flexibility etc.)
• Require demand forecasting
• Can involve routing the product through more
than one process
• Are subject to automation
• Are shaped by production and operation strategy

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 Similarities – Goods & Services
• Depend on location and arrangement of resources
for success
• Forecasting and capacity planning to match
supply and demand
• Process management
• Managing variations
• Monitoring and controlling costs and productivity
• Supply chain management
• Location planning, inventory management,
quality control and scheduling.

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 Similarities – Goods & Services
Many service activities are essentially roped in
goods-producing companies. Examples:
• Training
• HRM
• Customer services
• Equipment repair
• Procurement
• Administrative services.

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 Characteristics of Goods
• Tangible products
• Can be Stored or inventoried
• Have consistent product definition
• Production is usually separate from
consumption
• Have low customer interaction
• Goods are transformed from other goods

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 Characteristics of Services
• Intangible
• Always produced and consumed at the same time
• Often unique
• Have high degree of customer interactions
• Have inconsistent product definition
• Often knowledge based
• Frequently dispersed
• Are such that, sometimes, the clients themselves
are transformed.
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 Self Assessment Questions
1. Briefly describe OM
2. Identify the three major functional areas of
business organsations and briefly describe how
they interrelate.
3. List four important difference between goods
production and service operations
4. Discuss the importance of the following:
a) managing supply chain
b) matching supply and demand

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 Self Assessment Questions
• Explain the term value added
• One way that organisations compete is through
technological innovation. However, there can
be downsides for both the organization and the
consumer. Explain.
• Define Operations Management and explain
how transformation activities “add value”

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