Chapter

One

Department By:
• Management
Terefe G. (Ph.D.)
Program Email- [email protected]

• MBA
1
 Chapter 1

Nature of
Operations
Management

1.2
 Introduction

• Definition:
– Operations
• is the set of activities that creates goods and
services by transforming inputs into outputs.
– is an intentional act of producing something in an
organized manner.

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 Management

is the art and science concerned with:

» planning,
» directing and

» controlling the work of human beings towards a

common aim.
» Efficient and effective utilization of
organizational resources

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 Definition

• Operations management:

– the management of systems or processes that create goods

and/or services.

– the design, operation, and improvement of the production

system that creates the firm’s primary products and

services.

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 Con’t….
• Operations management is about getting the day to day work
done quickly, efficiently, without errors and at lowest cost.
• Thus, the primary objectives of Operations management are
to:
• Make a process work right
• Improve customer service
• Reduce wastage/cost

• In general operations management is all about effectiveness

and efficiency. 6
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 In a more comprehensive manner

 operations management is the activity whereby

• resources in a defined system,

• are combined and transformed in a controlled manner

• to add value in accordance with

• policies communicated by management.

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 2. Resources:
 There are two types of resources
• Transforming resources – like staff and facility
• Transformed resources - which give the operation system its
purpose or goal like
 Physical – manufacturing
 By location – transportation
 By ownership- Retail
 By physiological state – health services
 By psychological state – entertainment
 Information - accountant

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 3. Transformation and Value adding

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 Example
Food Inputs Processing Output therapy
processor
Raw vegetables Cleaning Canned vegetable
Metal sheets Making cans
Water Cutting
Energy labor Cooking
Building Packing
Equipment Labeling

Hospital
Doctors, nurses Examination Treated patients
Hospital Surgery
Medical supplies Monitoring
Laboratory Medication
Equipment Therapy

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 Role of Operations Manager

 Understand the overall objectives of the

organization
 Develop the operation plan of the organization and
control the function
 Assume responsibility in the design of
goods/services and jobs
 Explain their own plans to the other functions
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 Why Study OM?

• Four reasons:
– OM is one of the three major functions of any
organization.
– To know goods and services are produced
– To understand what operations managers do
– It is such a costly part of an organization
 It has been recognized as an important factor in a country’s
well being.
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 Cont’d
 OM plays an important role in the society in which
we live in terms of:
 Improving standard of living
 Offering better quality goods and services
 Enhancing concern for the environment
 Improving working conditions

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 The Three Major Functions Of Business Organizations
Overlap

Operations

Marketing Finance

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1.16
 OM and other functional areas of
business organizations

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 Historical Development of Operation
Management
• Systems for production have existed since ancient times:
 the Great Wall of China,

 the Egyptian Pyramids and the ships of Spanish empire

• provide examples of the human ability to organize production.
• Industrial revolution (1770s)
• Scientific management (1911)
• Human relation movement (1920-60)
• Decision models/ management science (1915, 1960-70s)

• Influence of Japanese manufacturers

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 Industrial revolution (1770s)

The Wealth of Nations

• Replaced traditional craft methods

• Substitute machine power for labor

• Major contribution
• James watt (1764): steam engine

• Adam Smith (1776): division of labor

• Eli Whitney (1790): interchangeable parts

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 • Scientific management (1911)

• Separated ‘planning’ from ‘doing’

• Introduced ‘science of management’ based on measurement, analysis,

and observation and economical incentives

• Major contributions

• Fredrick Taylor: stopwatch time studies

• Created efficiency principles

• Finding best way to do activities

• The Glibreths: motion and time study

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 Scientific management

• Henry Gantt: Gantt chart

• Henry Ford: developed the concept of

• Mass production and

• arranged workstations into an assembly line with moving belt

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 Human relation movement(1920-60)

• Recognition that factors other than money to workers

productivity

• Unlike scientific management “Focus of human aspects”

• Major contributions
• Understanding of the Hawthorne experiment – workers motivation

• Abraham Maslow’s hierarchy of needs

• Theory X and Y
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 Decision models and management
science (1915, 1960-70s)

• Quantitative techniques and models introduce in

factory
• LP, Simulation, queue Theory etc

• Influence of Japanese manufacturers

• Kaizen

• Theory Z…life time employment

• Quality control charts and statistics

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 Recent trends
» Global market place
» Operations strategy
» Total quality management
» Time reduction
» Flexibility
» Technology
» Workers environment
» Reengineering
» Environmental issues

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 MANUFACTURING OPERATIONS AND SERVICE OPERATIONS

• Manufacturing

• is the transformation of raw materials into finished goods for sale,

or intermediate processes involving the production or finishing of
semi-manufactures.

• Service/s

• are deeds, processes, and performance or

• is a time-perishable, intangible, experience performed for a

customer acting in the role of a co-producer
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 • Manufacturing and service are often different
in terms of what is done but quite similar in
terms of how it is done?

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 Coun’t…
Primarily Service Primarily Goods
Producers Producers
Intangible, nondurable Tangible, durable

Output can’t be Output can be

inventoried inventoried

High customer contact Low customer contact

Long response time
Short response time Capital intensive

Labor intensive

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1.28
 On the other hand…

• Both use technology

• Both have quality, productivity, & response issues

• Both must forecast demand

• Both will have capacity, layout, and location issues

• Both have customers, suppliers, scheduling and staffing issues

• Manufacturing often provides services

• Services often provides tangible goods

1.29
 OM and Decision making
Operations managers are planners and decision makers
Key decision areas for operations managers 5W2H approach
What : What resources will be needed/ in what amounts
Why: The work is needed to be done
When: Needed/ scheduled/ordered
Where: Work to be done
How much: Quantity to be produced or served,
How: Designed/capacity planning
Who: To do the work

1.30
 OM Decisions

• Strategic decisions
• Decisions that set the direction for the entire company

• Broad in scope and long-term in nature

• Tactical decisions
• Short term and specific in nature

• Bound by the strategic decisions

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 Productivity Measurement

• production is an organized activity of transforming raw materials into

finished products which have higher value.
• Production in an industry can be increased by:
– employing more labor,
– installing more machinery, and

– putting in more materials, regardless of the cost of production.

• But increase of production does not necessarily mean increase in
productivity
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 Cont’d …

 Higher productivity results when we put in a production system an

element of efficiency with which the resources are employed.
 For instance, 50 persons employed in an industry may be producing
the same volume of goods over the same period as 75 persons
working in another similar industry.
 Productions of these two industries are equal, but productivity of the
former is higher than that of the later.

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 PRODUCTIVITY

 Productivity: The reduction in wastage of resources such as labor,

machines, materials, power, space, time, capital, etc.

 It implies development of an attitude of mind and a constant urge

to find better, cheaper, easier, quicker, and safer means of doing a
job, manufacturing a product and providing service

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 Cont’d …
• Higher productivity leads to:

– a reduction in cost of production

– reduces the sales price of an item
– expands markets and

– enables the goods to compete effectively in the world

market.

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 How do we measure Productivity?

Output
Productivity =
Input

Output Ouput Output

Partial Measures ; ;
Single Input Labor Capital
Output Ouput Output
Multifactor Measures ; ;
Multiple Inputs Labor +Machine Labor +Capital +Energy

Goods or services produced

Total Measure
All inputs used to produce them

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 Cont’d
• Three employees work for five days (8 working hours
a day) to produce 800 units, calculate the labor hour
productivity
• Labour hr. productivity = 800units
• 3employees x 40 hrs./employees
• 6.67 units/hr.

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 • Determine the MFP for the combined input of labor
and machine time using the following data:
• Output: 7040 units @ ETB. 10 each
• Input:
-- Labor: ETB. 1000
-- Materials: ETB. 520
-- Overhead: ETB. 2000
• A team of workers make 500 units of a product having
cost of ETB. 10 each. Actual cost is Rs.400 for labor
and ETB. 2000 for material & ETB. 500 for
overheads, calculate the productivity
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 • Productivity = Output
Labor+Materials+Overhead

7040 units * ETB.10

1000+ 520+ 2000

• = 20units output / ETB.input

(500 units)(10/unit) 5000

• 400 + 2000 + 500 2900
= 1.72
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 Questions
• Why do you need to study operations management (explain the
reasons) and what contributions does it have to a business firm, to
citizens and the economy of a nation? Explain briefly.
• Discuss how the operations function of organizations help them to
achieve competitive advantage over their rivalries?
• Explain How globalization could affect the continuous development
of operations management
• Explain the roles of an operations manager in today's dynamic and
complex business environment.
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