Chapter One

NATURE OF OPERATIONS
MANAGEMENT

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 OBJECTIVES
 Operations Management

 Why Study Operations Management?

 Historical Development of OM

 Differences between Manufacturing and Service

Organizations
 Operations Decision Making

 Productivity Measurement
 1.1. What is operation Management?

Operations management (OM) is

The business function that plans, organizes,
coordinates, and controls the resources needed to
produce a company’s goods and services.
Operations management is a management function.
• It involves managing people, equipment, technology,
information, and many other resources to produce goods
and services.

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What is DDodusaacdfct1.1iqweewon/Operations
Management?sdfff
Operations management is
It is the set of activities that creates goods and
services through the transformation of inputs into
outputs.
A series of activities along a value chain extending
from supplier to customer.
Activities that do not add value are superfluous and
should be eliminated

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 Value-Added Process

The operations function involves the conversion of

inputs into outputs
Value added
Inputs
Transformation/ Outputs
Land
Conversion Goods
Labor
process Services
Capital
Feedback

Control
Feedback Feedback

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 Food Processor

Inputs Processing Outputs

Raw Vegetables Cleaning Canned
Metal Sheets Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment

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 Hospital Process

Inputs Processing Outputs

Doctors, nurses Examination Healthy

Hospital Surgery patients
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy

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 CONT....

Operations management is
– Defined as the design, operation, and improvement of the
production system that creates the firm’s primary products
(goods and/or services).
– Concerned with the management of the entire
production/delivery system that produces a goods and
delivery a product.
– it is the management of systems or processes
that create goods and/or provide services
 The Production System
Environment
Customers . Competitors .Suppliers
Government regulations . Technology . Economy

Inputs Transformation
Capital System Outputs
Materials  Alteration Goods
Equipment  Transportation Services
Facilities  Storage
Suppliers  Inspection
Labor
Knowledge
Time

Data Action
Data Data
Monitoring &
Action
Control
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 Operation mgmt of a Typical Original Equipment Manufacturer

Source: Operations & Supply Management by Richard B. Chase, Ravi Shankar, F. Robert Jacobs, and
Nicholas J. Aquilano; Tata McGraw-Hill 2010 (12th Edition)
 cont....
Operations management is the central core function of
every company.
Every company has an operations management
function.
Without operations, there would be no goods or
services to sell.

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 Operations as the Technical Core

Finance/Accounting
Production and Budgets
Inventory data Cost analysis
Capital budgeting requests Capital investments
Capacity expansion and Stockholder
Orders for materials Technology plans requirements Product/Service
Production and delivery Availability
Schedules Quality Lead-time estimates

Marketing
Suppliers

Requirements Design/ Status of order

Performance specs Delivery schedules

Operations
Material availability Sales forecasts
Quality data Customer orders
Delivery schedules Customer feedback
Designs Personnel needs Promotions
Hiring/firing
Skill sets
Training
Performance evaluations
Legal requirements
Job design/work
Union contract negotiations
measurement

Human Resources

Source: Operations Management by Roberta S. Russell & Bernard W. Taylor; Pearson Education, 4 th Edition
 1.2. Why Study Operations
Management?
Systematic Approach
to Org. Processes

Business Education Operations Career Opportunities

Management

Cross-Functional
Applications
 1.3. Historical Development of Operations
Management

Manufacturing strategy developed

Late 1970s
Just-in-time (JIT) production
Early 1980s pioneered by the Japanese
Mid 1980s Service quality and productivity
Total quality management Early 1990s
(TQM) and Quality Six-sigma quality
certification programs Mid 1990s Supply chain
Business process management (SCM)
Late 1990s
reengineering (BPR)
Electronic commerce
Early 2000s Service science

Mid 2010s
Business analytics
1.4. Manufacturing versus Service organization

Every organization can be broadly classified in to two broad

categories.
1. Manufacturing Organization
 It produce physical, tangible goods that can be stored in
inventory before they are needed.
 customers have no direct contact with the operation. Customer
contact is made through distributors and retailers.
2. Service Organization
 It produce intangible products that cannot be produced ahead
of time.

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 Manufacturing versus service organization

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 Manufacturing vs Service

Characteristic Manufacturing Service

Output Tangible Intangible
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Measurement of productivity Easy Difficult
Opportunity to correct High Low
quality problems
High
 1.5. Operation Mgmt Decision Making
• The major areas in which operations managers
make decisions are:
1.Strategic decision
 Long-term decisions that set the direction for the entire
organization are called strategic decisions.

-Product and service plan

-Competitive priorities (TQM, statistical process, Location,

capacity and layout decision ).

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 Cont...

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 1.6. Measuring Productivity

 Productivity is a measure of how efficiently

inputs are converted to output.

Output
Productivity =
Inputs
 Productivity
 Productivity is a measure of how well resources are
used
• Productivity =

 Productivity is a relative measure

– Must be compared to something else to be meaningful
• Operations can be compared to each other
• Firms can be compared to other firms
• Partial productivity measures compare output to a
single input
• Multifactor productivity measures compare output to
a group of inputs
• Total productivity measures compare output to all
inputs
Productivity

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Productivity Calculation
 Example 2.
Collins Title Company has a staff of 4 each working 8 hours per day
(for a payroll cost of $640 /day) and overhead expenses of $400 per
day. Collins processes and closes on 8 titles each day. The company
recently purchased a computerized title-search system that will allow
the processing of 14 titles per day. Although the staff, their work
hours, and pay will be the same, the overhead expenses are now $800
per day.

- Labor productivity with the old system = 8 titles per day = 0.25 titles per
32 labor-hours labor hour

- Labor productivity with the new system = 14 titles per day = 0.4375 titles
32 labor-hours per labor-hour

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 Cont…
Multifactor productivity with the old system = 8 titles per day = 0.0077 titles
640+400
per dollar

Multifactor productivity with the new system= 14 titles per day = 0.0097 titles
640+800 per dollar

• Labor productivity has increased from 0.25 to 0.4375. The

change is 0.43750.25=1.75 or a 75% increase in labor
productivity.
• Multifactor productivity has increased from 0.0077 to 0.0097.
This change is 0.00970.0077=1.259, or a 25.9% increase in
multifactor productivity.

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 Example 3
• You have just determined that your service employees have
used a total of 2400 hours of labor this week to process 560
insurance forms. Last week the same crew used only 2000
hours of labor to process 480 forms.
• Which productivity measure should be used?
• Answer: Could be classified as a Total Measure or Partial
Measure.
• Is productivity increasing or decreasing?
• Answer: Last week’s productivity = 480/2000 = 0.24, and
this week’s productivity is = 560/2400 = 0.23. So,
productivity is decreasing slightly.
 Ex.
 Osborne Industries is compiling the monthly productivity report for
its Board of Directors. From the following data, calculate (a) labor
productivity, (b) machine productivity, and (c) the multifactor
productivity of dollars spent on labor, machine, materials, and
energy.
 The average labor rate is $15 an hour, and the average machine
usage rate is $10 an hour.

 Units produced 100,000

 Labor hours 10,000
 Machine hours 5,000
 Cost of materials $35,000
 Cost of energy $15,000
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Bottleneck Operation

30
units
Sanding 50 units/hr /hr
Sanding Polishing
Machine Polishing
Machine

Bottleneck
operation
Improving Productivity
 Eliminate bottleneck operations
 Eliminate non-value added steps
 Use improved technology
 Improve quality