Chapter 1 Overview of Operation Management
Chapter 1 Overview of Operation Management
FUNDEMENTALS OF OPERATIONS
MANAGEMENT
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Learning Objectives
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Production, operation, management and OM
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.
What is operation?
Operation is a process by which goods and services are created’.
What is management?
• Management is the function of planning, oganizing, directing and
controlling the business activities.
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Cont’d
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Why conversion is needed?
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Types of conversion to create value
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Cont’d
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Cont’d
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1.3. System concepts in operations management
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KEY TERMS IN OPERATIONS SYSTEM
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Cont’d
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Cont’d
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Why study Operations Management?
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Typical Organization Chart
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Cont’d
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Manufacturing operation Vs Service operation
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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
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Cont’d
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Current trends influencing the field of OM
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.
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Service Economy
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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
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Cont’d
c) Environmental quality
• Environmental concerns have traditionally not been the focus of
operation managers.
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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
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Cont’d
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OM Decisions
-Tactical decisions are very frequent
-Strategic decisions less frequent
-Tactical decisions must align with strategic decisions
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Plan of Book-Chapters link to Types of OM Decisions
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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
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producing goods or providing services.
Historical Development of OM
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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
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Productivity-----cont’d
Units produced
Productivity =
Input used
Measures of Productivity
Single-factor (Partial) productivity
Multi-factor productivity
Total factors productivity
Productivity Calculations
Labour Productivity
Productivity = Units produced
Labor-hours used
Example 1
If 1000 units of output produced by
250 labor hour, then calculate labor = 1,000/250= 4 units/labor hour
productivity per hour
Some examples of partial productivity measures
• Labor productivity
– Units of output per labor hour
– Units of output per shift
– Value-added per labor hour
– Birr value of output per labor hour
• Machine productivity
– Units of output per machine hour
– Birr value of output per machine hour
• Capital productivity
– Units of output per birr input
– Birr value of output per birr input
• Energy productivity
– Units of output per kilowatt hour
– Birr value of output per kilowatt hour
Example 2 Collins Title Productivity
Old System:
8 titles/day
Old labor
productivity = 32 labor-hrs
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Collins Title Productivity----cont’d
Old System:
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Collins Title Productivity------cont’d
Old System:
New System:
8 titles/day
Old labor
productivity = 32 labor-hrs = .25 titles/labor-hr
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Collins Title Productivity----cont’d
Old System:
New System:
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Collins Title Productivity----cont’d
Old System:
New System:
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Collins Title Productivity----cont’d
Old System:
New System:
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Collins Title Productivity---cont’d
Old System:
New System:
8 titles/day
Old multifactor
productivity = $640 + 400 = .0077 titles/dollar
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Collins Title Productivity----cont’d
Old System:
New System:
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Example 3
Three employees process 600 insurance policies
in a week. They work 8 hrs per day, 5 days a
week.
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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
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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
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Example
..
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Solution:
..
MFP = Output
Labor + Materials + Overhead
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Total-Factor Productivity
Output
Productivity = All inputs
TFP = Output
Labor + Materials +capital +Energy +miscellaneous
NB:
-You can calculate output in terms of units (100,000)or value of output(100,000 X100)
-Total labor cost=10,000 X 20
-Total machine cost=5000 X 10
Summary
Productivity Growth Rate
P2 P1
Growth Rate
P1
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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
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Productivity Improvement(PI)
O O O O O
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I I I I I