Chapter 1

Introduction to
Operations Management

April 2019 1
 Learning Objectives

• Define Operations Management (OM)

• Explain the role of OM in business
• Describe the decisions that operations managers make
• Describe the differences between service and manufacturing
operations
• Identify major historical developments in OM
• Identify current trends in OM
• Describer the flow of information between OM and other
business functions

April 2019 2
 Production, operation, management and OM

• Concepts of:
 Production
 Operation
 Management and
 Operation management

April 2019 3
 What is production?

• Production is defined as “the step-by-step conversion of

one form of material into another form through chemical
or mechanical process.

April 2019 4
 What is operation?

 Operation is a process by which goods and

services are created’.

April 2019 5
 What is management?

• Management is the function of planning,

oganizing, directing and controlling the business
activities.

April 2019 6
 What is operations management?

 OM refers to the application of management function in the

conversion of inputs in to outputs(creation of goods and/or
services)

 More specifically, OM is the business function responsible for

planning, coordinating, and controlling the resources needed to
produce a company’s products and services

April 2019 7
 Cont’d

• Operations Management (OM) is concerned with the

management of resources and activities that produce and deliver
goods and services for customers

• In a nut shell, all definitions consider OM as the management of

transformation process that converts input into output

April 2019 8
Cont’d

April 2019 9
 Why conversion is needed?

• To add values i.e. to create or enhance the utility of the

product to the user.”

• Since every business exists to create value to the

customers, OM is common function.

• Thus, operations function is the heart of and indeed the

very reason for an organization to come in to being

April 2019 10
 Types of conversion to create value

a) Alter: refers to change in the form or state of the inputs.

This change may be:
i) physical as in manufacturing such as car assembly
ii) psychological (sensual) such as satisfaction after enjoining
recreational center
iii) Physiological such as feeling of comfort after getting cured from
an illness

April 2019 11
 Cont’d

• Transport: - the entity (input) gets value added through transport

because it may have more value if located somewhere other than
where it currently is.
• Store: - the value is enhanced if the entity is kept in a protected
environment for some period of time, such as potatoes in a cold
storage
• Inspect: - the value of an entity may be enriched through an
inspection as we better understand its properties and can there
for take more informed decisions regarding their purchase, use,
repair etc.
April 2019 12
 Cont’d

• Thus, we see that the value may be added to an entity through a

number of different means. It may directly change in space, in
time, in form, or even just in our mental image of it.
• All these processes can be called operations

April 2019 13
 1.3. System concepts in operations management

• A system may be defined as “a purpose full collection of people,

objects and procedures for operating within an environment”.

• Thus every organization can be represented as a system consisting

of interacting sub systems.

• The basic process of the system converts (transforms) the resource

inputs (such as people, plant, part processes, planning and controlling
systems) in to some useful form of outputs.

April 2019 14
 KEY TERMS IN OPERATIONS SYSTEM

 Inputs: inputs to the system may be labor, material, machine,

facilities, energy, information, technology etc. Other inputs to
operating system can be: customer in a bank, patient in a hospital,
commuters to public transport system, files and papers to an
office situations and program to be run in a computer centers
 Components: are machines, persons, tools, in the system.

 Outputs: similarly output from the system may be in terms of

finished products, transported goods, delivered massages, cured
patients, serviced customers etc.

April 2019 15
 Cont’d

• Transformation:-all operation functions are essentially a part of

the conversion process which transforms entities in shape, size,
form, location, space, time, and state to have higher value than
the original value.

• Hence, every organization can be considered essentially as a

conversion system which converts inputs in to outputs through the
conversion/transformation processes.

April 2019 16
 Cont’d

System Inputs Components Transformations Output

Hospital Patients Doctors ,Nurses, Cured person
Staff, Equipment, Physiological
Facility, Energy,
etc
Bank Clients Teller, Staff, Exchange Loan/deposit etc.
Facility etc
College High school Teacher, Class Imparting Educated person
graduate room, Books etc
knowledge
Automobile Steel, Sheet, Tools, Equipments, Physical Automobile
factory Engine Power etc
Restaurant Hungry Waiter, Physical Satisfied
Customer Environment, customers
Energy etc

April 2019 17
 Why study Operations Management?

a) OM is one of organization’s core function

• Operations management (OM) is one of the three major
functions of any organizations, and it is integrally related to all
the other business functions. All organizations finance
(account), Produce (operate) and market (sell)

• As operation is one of the key area of any organization it is

important to know how the operations management segment
the activity.

April 2019 18
Typical Organization Chart

April 2019 19
 Cont’d

• ii. We study operations management because we want to know

how goods and services are produced. The production function is
the segment of our society that creates the products we use.

• iii. We study OM to understand what operations managers do. By

understanding what these messages do, you can develops the
skills necessary to become such a manager.

• iv. We study OM because it is such a costly part of an

organization. A large percentage of revenue of most firms is spent
in the operations management functions

April 2019 20
 Manufacturing operation Vs Service operation

Similarities between Service & Manufacturers

• All use technology
• Both have quality, productivity, & response issues
• All must forecast demand
• Each will have capacity, layout, and location issues
• All have customers, suppliers, scheduling and staffing issues

April 2019 21
 Differences between manufacturing & services

• Services: • Manufacturers:
• Intangible product • Tangible product
• Product cannot be inventoried • Product can be inventoried
• High customer contact • Low customer contact
• Short response time • Longer response time
• Labor intensive • Capital intensive
• quality and productivity is difficult to • Quality and productivity easy to
measure measure
• High degree of variety of input • High degree of uniformity of
• Difficult to automate input& output
• Easy to automate

April 2019 22
 Cont’d

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
 Current trends influencing the field of OM

• There are significant trends outside of the field of operations that

will influence the evolution of OM in the coming decades

a) Growth and dominance of services: - At one time, the primary

employment sector in the world economy was agriculture; with
the industrial revolution that changed, and manufacturing was
the primary employment sector. Today it is services

For example, the percentage of employment in service sector jobs in 1993 for a
sampling of nations was: Canada 75%, USA 74%, Belgium 71%, Israel 68%,
France 66%, Italy 60%, and Japan 60%. Today for most of these countries, the
percentage of workers employed by service business is even higher.

April 2019 24
Service Economy

25
 Cont’d
b) Internationalization: Business competition is now global.
Improvement in logistic systems, communication technologies
along with greater opportunities for international trade have
created new opportunities and challenges in the design of value
adding system

Internationalization:
• demands for global competitiveness
• demands for higher quality
• Results in huge technology changes
• demands for time based competition
• Results in Work force diversity

April 2019 26
 Cont’d

c) Environmental quality
• Environmental concerns have traditionally not been the focus of
operation managers.

• Increased regulation, public scrutiny, customer expectations, and

the concern of employees for their community are beginning to
change OM activities

• Recent regulations in the USA and other countries have forced

industry to find less polluting ways to satisfy their customers

April 2019 27
 Operation Management Decisions
Strategic (long term) decisions:
• Strategic Decisions – set the direction for the entire company;
they are broad in scope and long-term in nature
• Product selection and design: what product or services are to offer constitute
crucial decisions.
• Process selection and planning: choosing optimal processes of conversion
systems is an important decision concerning choices of technology, equipment
and machines
• Facilities location: - is a long term decision which concerns decision regarding
location of production system or its facilities
• Facilities lay out and materials handling
• Capacity planning:-is a long term decisions which concerns the acquisition of
productive resources

April 2019 28
 Cont’d

Operational (tactical/short term) decisions

• Operational level decisions deal with short term specific day to
day planning and control problems.
E.g.
• Resource needs & quantities to produce
• Production planning, scheduling and control
• Inventory planning and control
• Quality assurance
• Work and job design
• Maintenance and replacement
• Cost reduction and control

April 2019 29
 Cont’d

– Tactical decisions are very frequent

– Strategic decisions less frequent
– Tactical decisions must align with strategic decisions

April 2019 30
OM Decisions

April 2019 31
Plan of Book-Chapters link to Types of OM Decisions

April 2019 32
 Scope of Operations Management
.. important decision areas in Operations Management
Ten critical/
includes:
1. Design of goods and services
2. Managing quality
3. Process and capacity design
4. Location strategy
5. Layout strategy
6. Human resources and job design
7. Supply chain management
8. Inventory, MRP, JIT
9. Scheduling
10. Maintenance
The operations function Consists of all activities directly related to
producing goods or providing services.
 Historical Development of OM

• Industrial revolution Late 1700s

• Scientific management Early 1900s
• Human relations movement 1930s-1960s
• Management science Mid-1900s
• Computer age 1970s
• Environmental Issues 1970s

April 2019 34
Historical Development of OM

• Just-in-Time Systems (JIT) 1980s

• Total quality management (TQM) 1980s
• Reengineering 1990s
• Global competition 1980s
• Flexibility 1990s

April 2019 35
Historical Development of OM

• Time-Based Competition 1990s

• Supply chain Management 1990s
• Electronic Commerce 2000s
• Outsourcing flattening of the world 2000s

April 2019 36
 Today’s OM Environment
• Customers demand better quality, greater speed, and
lower costs
• Companies implementing lean systems concepts – a
total systems approach to efficient operations
• Recognized need to better manage information using
ERP and CRM systems
• Increased cross-functional decision making

April 2019 37
 OM Across the Organization
• Most businesses are supported by the
functions of operations, marketing, and
finance
• The major functional areas must interact to
achieve the organization goals

• All business functions need information from

OM in order to perform their tasks

April 2019 38
Business Information Flow

April 2019 39
 Cont’d
• Marketing is not fully capable of meeting customer needs if
they do not understand what operations can produce

• Finance cannot judge the need for capital investments if they

do not understand operations concepts and needs

• Information systems enables the information flow throughout

the organization

• Human resources must understand job requirements and

worker skills

• Accounting needs to consider inventory management, capacity

information, and labor standards

April 2019 40
 Productivity Measurement
• Productivity is the relationship between the
Outputs generated from a system and the Inputs
that are used to create those outputs.
– A measure of the effective use of resources,
usually expressed as the ratio of output to input
• Productivity ratios are used for
– Planning workforce requirements
– Scheduling equipment
– Financial analysis
 Productivity-----cond
Units produced
Productivity =
Input used
 Productivity is a measure of how efficiently
inputs are converted to outputs
 It is a measure of process improvement
 It represents output relative to input
 Only through productivity increases can our
standard of living improved
 Productivity Calculations
One resource input  single-factor productivity

Labour Productivity
Productivity = Units produced
Labor-hours used

e.g. If 1000 units of output

produced by 250 labour hour
= 1,000/250= 4 units/labor hour
 Multi-Factor Productivity

Multiple resource inputs  multi-factor productivity

Output
Productivity =
Labor + Material + Energy +
Capital + Miscellaneous
 Also known as total factor productivity if all total inputs are
considered
 In multi-factor productivity outputs and inputs are
often expressed in dollars
 e.g.: Collins Title Productivity
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day

8 titles/day
Old labor
productivity = 32 labor-hrs
Collins Title Productivity----cond
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr
Collins Title Productivity------cond
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day

New System:

14 titles/day Overhead = $800/day

8 titles/day
Old labor
productivity = 32 labor-hrs = .25 titles/labor-hr

New labor 14 titles/day

productivity = 32 labor-hrs
Collins Title Productivity----cond
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day

New System:

14 titles/day Overhead = $800/day

Old labor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr

New labor 14 titles/day

productivity = 32 labor-hrs = .4375 titles/labor-hr
Collins Title Productivity----cond
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day

New System:

14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = $640 + 400
Collins Title Productivity----cont’d
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day

New System:

14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = $640 + 400 = .0077 titles/dollar
 Collins Title Productivity---cond
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day

New System:

14 titles/day Overhead = $800/day

8 titles/day
Old multifactor
productivity = $640 + 400 = .0077 titles/dollar

New multifactor 14 titles/day

productivity = $640 + 800
Collins Title Productivity----cond
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day

New System:

14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = $640 + 400 = .0077 titles/dollar

New multifactor 14 titles/day

productivity = $640 + 800 = .0097 titles/dollar
 Class work 1
..

7040 Units Produced

Sold for $1.10/unit

Cost of labor : $1,000 What is the

multifactor
Cost of materials: $520 productivity?

Cost of overhead: $2000 And Explain your result.

 Solution:
..

MFP = Output
Labor + Materials + Overhead

MFP = (7040 units)*($1.10)

$1000 + $520 + $2000

MFP =7744/3520=2.20 This means that using input

that has 1 $ value we can produce output which will have 2.20$ value
 Class work 2

Example1. Three employees process 600

insurance policies in a week. They work 8 hrs
per day, 5 days a week.

Required calculate labor productivity?

 Cont’d
Solutions
Labor productivity=output/inputs.
Where, output is number of insurance policies
processed(600 policies) and input is hours
worker(3workers X 8hrs/day X 5days)
3workers X40 hrs=120 hrs

= 5 polices/hours
 Productivity Growth Rate

• Can be used to compare a process’

productivity at a given time (P2) to the same
process’ productivity at an earlier time (P1)

P2  P1
Growth Rate 
P1
57
 Productivity Growth Rate------cond
Example:
– Last week a company produced 150 units using 200
hours of labor. This week, the same company
produced 180 units using 250 hours of labor.
– Determine its productivity growth rate.
150 units
P1   0.75 units / hour
200 hours
180 units
P2   0.72 units / hour
250 hours
P2  P1 0.72  0.75
Growth Rate    0.04
P1 0.75
or a negative 4% growth rate 58
 Productivity Variables
1. Labor - contributes about
10% of the annual
increase
2. Capital - contributes
about 38% of the annual
increase
3. Management -
contributes about 52% of
the annual increase
Productivity Measurement Problems
1. Quality may change while the quantity
of inputs and outputs remains constant

2. External elements may cause an

increase or decrease in productivity
 There may be lack of Precise units of
measure
 Service Productivity
1. Typically labor intensive
2. Frequently focused on unique individual
attributes or desires
3. Often an intellectual task performed by
professionals
4. Often difficult to mechanize
5. Often difficult to evaluate for quality
 How countries can improve productivity?

• As students of Operations Management, we need to

know and understand how the concepts of
productivity can help a nation to improve its quality of
life and economy.
1. Increase capital formation by saying no to foreign
goods. This would increase savings and decrease
consumption. Foreign goods only make why to a
market if there is high consumption.
• BE ETHIOPIAN BUY ETHIOPIAN!
 How countries can improve productivity?----
cond
• 2. Decrease administrative ( non productive) regulations of the
government. Self explanatory.
• 3. Right balance between Services and Manufacturing activities.
In all of our cities, there is an availability of surplus services,
which is often less productive than manufacturing operations
• 4. An emphasis on both long term and short term objective
based performance. (Closely monitor and audit the variances
between planed and actual results).
• 5. Exploit the inherent resources of domestic market. Let it be
known to all that the best productive market for Ethiopian
Producer is Ethiopian market.
Factors Affecting Productivity
• Numerous factors affect productivity.
Generally:
– methods
– quality
– technology and
– management
 Other Factors Affecting Productivity

• Standardization
• Use of Internet
• Computer viruses
• Searching for lost or misplaced items
• Scrap rates
 Other Factors Affecting…cond
• Safety
• Shortage of IT workers
• Layoffs/Labor turnover
• Design of the workspace
• Incentive plans that reward productivity
• Absenteeism
• New workers
• Experience, level of education and skill, etc.
 Productivity Improvement(PI)

Productivity Improvement (PI) is the result of

managing and intervening in key transformation
or work processes.
PI will occur if:

O O O O O
I I I I I 67
 Improving Productivity------cond
Key steps toward improving productivity
- Develop productivity measures
- Determine critical (bottleneck) operations
- Develop methods for productivity
improvements
- Establish reasonable goals
- Get management support
- Measure and publicize improvements
- Don’t confuse productivity with efficiency
• Efficiency is a narrower concept that pertains
to getting the most out of a fixed set of
resources.
• Productivity is a broader concept that pertains
to effective use of overall resources.
• E.g. An efficiency perspective on
mowing/cutting a lawn/grass given a hand
mower focus on the best way to use the hand
mower. But
• A productivity perspective would include the
possibility of using a power mower.
 Key OM Concepts:
• Efficiency = Doing something at the lowest
possible cost

• Effectiveness = Doing the right things to create

the most value for the organization

• Value = Quality divided by price= It is estimate

of monetary worth of an activity.