OPERATIONS

MANAGEMENT
Introduction: Operations as a
competitive weapon
ACROSS THE ORGANIZATION
Operations as a competitive weapon is important to….
 Accounting, which prepares financial and cost accounting
information that aids operations managers in designing and
operating production systems.
 Finance, which manages the cash flows and capital investment
requirements that are created by the operations function.
 Human Resource, which hires and trains employees to match
process needs, location decisions, and planned productions levels.
 Management Information System, which develops information
systems and decision support systems for operations managers.
 Marketing, which helps create the demand that operations must
satisfy, link customer demand with staffing and production plans,
and keep the operations function focused on satisfying customer’s
needs.
 Operations, which designs and operates processes to give the
firma sustainable competitive advantage.
LEARNING GOALS
After reading this chapter, you will be able to…
1. Describe operations in the terms of inputs, processes, outputs,
information flows, suppliers and customers.
2. Explain the meaning of nested processes
3. Identify the set of decisions that operation managers make
4. Describe operations as a function alongside finance, accounting,
marketing and human resource
5. Explain how operations management is fundamental to both
manufacturers and service providers
6. Describe the difference and similarities between manufacturing and
service organization
7. Discuss trends in operations management, including service sector
growth; productivity changes; global competitions; and competition
based on quality, time and technology.
8. Discuss the need for operations management to develop and maintain
both intra and inter organizational relationships.
9. Give examples of how operations can be used as a competitive
weapon.
OPERATIONS MANAGEMENT
It deals with processes that produce goods and
services that people use everyday.
Processes are the fundamental activities that
organization use to do work and achieve
their goals.
Every organization, whether public or private,
manufacturing or service, must manage
processes and the operations where these
processes are performed.
WHAT IS A PROCESS?
Any activity or group of activities that takes
one or more inputs, transforms and add value
to them, and provides one or more outputs
for its customers.
External Customers: A customer who is either
an end user or an intermediary buying the
firm’s finished products and services.
Internal Customers: One or more other
employees who rely on inputs from earlier
processes in order to perform processes in
the next office, shop or department.
PROCESSES AND OPERATIONS
Internal and External
Customers

Inputs
•Workers
•Managers 1 3
•Equipment Outputs
•Facilities 5 •Services
•Materials •Goods
•Services
•Land 2 4
•Energy

Information on
performance
NESTED PROCESSES
Processes can be broken down into
subprocesses, which can be in turn broken
down into still more subprocesses. We refer
to this concept of a process within process as
a “nested process.”
 BANK

Operations Retail Products Wholesale

Cash Management Distribution Auto Finance Trading

Loan Operations Compliance Cards Loan Administration
Trading Operations Finance Mortgages Leasing
Human Resource Others Others
Others

ATM Support Teller Line Transactions Credit Applications Fund Management

Customer Transactions Track Branch Sales Manage Retail Products Market-making Spot
Service Quality ATM Hotline Originate Lease Portfolio Dealer Support
Others Others Others Others

Maintain Cards Process Deposits Loan Documentation Prepare Reports

Research Problems Cash Checks Review Credit Standing Attend Meetings
Site Analysis Safe Deposit Boxes Obtain Manager Approval Input Funds Deals
Others Others Others Others
WHAT IS OPERATIONS
MANAGEMENT?
The direction and control of the processes that
transform inputs into products and services.
Two principles which has to be kept in mind
while studying Operations Management:
1. Each part of an organization, not just the
operations function, must design and
operate processes and deal with quality,
technology and staffing issues.
2. Each part of an organization has its own
identity and yet is connected with
operations.
TYPES OF OM DECISIONS
 Strategic Decisions
 Process
 Quality
 Capacity, Location & Layout
 Operating Decisions
OPERATIONS MANAGEMENT AS
A FUNCTION
As firm grows in size, different departments must be created
that assume responsibilities for certain clusters of processes.
These departments are organized around functions (Sometimes
called functional areas).
Each function is specialized, having its own knowledge and skill
area, primary responsibilities, processes and decision
domains.
Regardless of how lines are drawn, departments and functions
remain interrelated.
Thus, coordination and effective communication are essential
to achieve organizational goals.
In large organizations, the operations department is usually
responsible for the actual transformation of inputs into
finished products and services and work in tandem with
other departments for smooth functioning.
MANUFACTURING & SERVICES
More Like Manufacturing Organization: More like a service organization:
 Physical, Durable Products  Intangible, perishable product
 Output that can be inventoried  Output that can not be inventoried
 Low customer contact  High customer contact
 Long response time  Short response time
 Regional, National or International  Local markets
Markets  Small facilities
 Large facilities  Labor intensive
 Capital intensive  Quality not easily measured
 Quality easily measured
BUSINESS INFORMATION FLOW
HISTORICAL DEVELOPMENT OF
OM
 Industrial revolution Late 1700s
 Scientific management Early 1900s
 Hawthorne Effect 1930s
 Human relations movement 1930s-
 Management science 1940s-
 Computer age 1960s-
 Environmental Issues 1970s-
 JIT & TQM* 1980s-
 Reengineering 1990-
 Global competition 1980-
 Flexibility 1990-
 Time-Based Competition 1990-
 Supply chain Management 1990-
 Electronic Commerce 2000-
 Outsourcing & flattening of world 2000-
TRENDS IN OPERATIONS
MANAGEMENT
 Services Sector Growth
1. Government
2. Wholesale and retail sales; and
3. Other Services
 Productivity Changes
 Global Competition
 Competition based on Quality, Time, &
Technology
 Ethical, Workforce Diversity, &
Environmental Issues
TRENDS IN SERVICES SECTOR
TRENDS IN OPERATIONS
MANAGEMENT
 Productivity Changes
Productivity = Output/Input

 Decision Point: Productivity measures must be

compared with both performance levels in prior
periods and with future goals. If they are not living
up to expectations, the process should be
investigated for improvement opportunities.
 Use Multiple measures: Although labor and
multifactor productivity measures can be
informative, they can also be deceptive when
applied to the firm or process levels. For example in
case of Outsourcing.
 Productivity and standard of living
PRODUCTIVITY IMPROVEMENT

EXAMPLE 1.1
Calculate the productivity for the following operations:

a. Three employees process 600 insurance policies in a week.

They work 8 hours per day, 5 days per week.

SOLUTION
Policies processed
a. Labor productivity =
Employee hours

600 policies
= = 5 policies/hour
(3 employees)(40 hours/employee)
PRODUCTIVITY IMPROVEMENT

EXAMPLE 1.1
Calculate the productivity for the following operations:

b. A team of workers makes 400 units of a product, which is

sold in the market for $10 each. The accounting
department reports that for this job the actual costs are
$400 for labor, $1,000 for materials, and $300 for
overhead.

SOLUTION
Value of output
a. Multifactor productivity =
Labor cost + Materials cost
+ Overhead cost

(400 units)($10/unit) $4,000

= =
$400 + $1,000 + $300 $1,700
= 2.35
APPLICATION
This Year Last Year Year Before
Last
Factory unit sales 2,762,103 2,475,738 2,175,447
Employment (hrs) 112,000 113,000 115,00
Sales of manufactured $49,363 $40,831 —
products ($)
Total manufacturing cost $39,000 $33,000 —
of sales ($)

 Calculate the year-to-date labor productivity:

This Year Last Year Year Before Last
factory unit sales 2,762,103 2,475,73 2,175,447
= 24.66/hr 8 = 21.91/hr = $18.91/hr
employment 112,000 115,000
113,000

 Calculate the multifactor productivity:

This Year Last Year
sales of mfg products $49,363 $40,831
= 1.27 = 1.24
total mfg cost $39,000 $33,000

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

ETHICAL, WORKFORCE DIVERSITY,
& ENVIRONMENTAL ISSUES
Firms which:
 Have responsibilities that go beyond
producing goods and services at a profit,
 Help solve important social problems,
 Respond to a broader constituency than
shareholders alone,
 Have impacts beyond simple marketplace
transactions, and
 Serve a range of human values that go
beyond the merely economic.
Are said to be having more ethical approach.
OPERATIONS MANAGEMENT
ACROSS THE ORGANIZATION
 Operations management as an inter-functional
imperative
 Cross functional coordination
 Achieving cross functional coordination

 Operations management as a competitive

weapon