OPERATIONS MANAGEMENT

(MBA 572 )

Berhanu Endeshaw
[email protected]

April 2019

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Topics covered in this chapter:

◦Why study operations Management?

◦What is Operations Management?
◦Organizational functions
◦Basic components of OM systems
◦OM‘s Role and Career opportunities
◦Manufacturing versus Service systems
◦Major issues in Operation Management
◦Historical Development of Operations Management
◦Current Trends

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After completing this lesson you should be able to:
– Explain the basic components of
Production/Operations systems
– Understand operations management
– Illustrate the differences between manufacturing and
service operations
– Identify major issues in operations management
– Discuss some of the major factors affecting today

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 We want (and need) to know how goods and
services are produced
 We want to understand what operations

managers do
 OM is such a costly part of an organization

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 Operations- is those activities concerned with the acquisition of
raw materials their conversation into finished product, and the
supply of that finished product to the customer (Galloway, 1999)
 Operation is what the company does.
 Operation Management- is the design, operation, and improvement of
those systems that create and deliver the firms primary products and
services, like marketing and finance.
 Operation Management is functional field of business with clear
line of management responsibility (Chase, Aqullano & Jacobs,
2001)
 The business function responsible for planning, coordinating, and
controlling the resources needed to produce a company’s
products and services
 operations management is a management  function, an
organization’s core function, in every organization whether
Service or Manufacturing, profit or Not for profit
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Organizational functions
All organizations perform at least three basic functions

Organization

Production/
Marketing Finance
operations

Production/
operations

Marketing Finance

Figure : The three basic functions of business organizations  6

 Most businesses are supported by the functions of
operations, marketing, and finance
 The major functional areas must interact to achieve the
organization goals
 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

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 In some organizations the product is a physical
good (refrigerators, bread, etc.) and the
activities creating such tangible product is
usually referred to as Production.
 In others the product is a service (insurance,
health care for elderly, etc.). The production
that takes place to produce a service is called
Operations.

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  Production System

Conversion
Inputs

Subsystem
Outputs
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Control
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Subsystem

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 All organizations have in common the following basic
elements within their operations system:
 input

 transformation/ conversion subsystem,

 output, and control subsystem.

Inputs: All physical and nonphysical resources coming into the

system
 External

◦ Legal, Economic, Social, Technological

 Market

◦ Competition, Customer Desires, Product Info.

 Primary Resources

◦ Materials, Personnel, Capital, Utilities

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Outputs can be classified as:
 Direct

◦ Goods
◦ Services
 Indirect

◦ Waste
◦ Pollution
◦ Technological Advances
 Output

 A pure good is a tangible product that can be stored,

transported, and purchased for later use

 A pure service is an intangible product which cannot be

stored since it is consumed as it is produced.

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 Transformation/Conversion subsystem: which converts inputs
into goods or services. It consists of:
◦ Concepts
◦ Procedures
◦ Non-equipment technologies
◦ Rules, Guideline, Steps, etc.
 Examples of transformations: Cutting, drilling, Transporting,
Teaching, Packing, Mixing, Consulting, Copying, faxing.
 Control Subsystem:
To ensure that the desired outputs are obtained (e.g. it is
acceptable in terms of quantity, cost and quality), measurements
are taken at various points in the transformation process
(feedback) and then compared to previously established standards
to determine if corrective action is needed (control).

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 To add value
◦ Increase product value at each stage
◦ Value added is the net increase between output
product value and input material value
 Provide an efficient transformation
◦ Efficiency – perform activities well at lowest
possible cost

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• Operations manager
• Production analyst
• Production manager
• Industrial engineer
• Time study analyst
• Inventory manager
• Quality analyst
• Quality manager

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Characteristics of Service
 Intangible product
 Produced and consumed at
same time
 Difficulty in measuring output
 High customer interaction
 Inconsistent product definition
 Often knowledge-based
 Shorter response time
 Time-perishable capacity
 Labor intensive
 Characteristics of Goods
 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction
 Longer response time
 Capital intensive
• Differences
Services Goods
Output Intangible Tangible
Output Inventoried No Yes
Customer contact Extensive Little
Lead time Short Long
Intensity Labor Capital
Quality Subjective Objective

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 ◦ 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
• Common issues
– Concerns for productivity and quality
– Similar basic components of managerial responsibility
• In the new world business, a factory is a service operation and
service is a factory operation.
• Intense competition is forcing firms to provide more and better
“total product” (a mix of goods and services).

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 The service package is defined as a bundle consisting of the following features:
supporting facility; facilitating goods; explicit services and implicit services
• Supporting facility:
– The physical resources that must be in place before a service can be offered
– Examples: an airplane, tennis course
• Facilitating goods:
– The material purchased or consumed by the buyer, or the items provided by
the customer.
– Examples: food items, replacement motor parts
• Explicit services:
– Essential or intrinsic features of the service
– Examples: smooth-running of motorbike after a tune-up; response time of a
fire department
• Implicit services:
– Psychological benefits of the service
– Examples: certificate of a graduate degree from a well-known school, privacy
of a loan office

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 Service sector growing
to 50-80% of non-farm
jobs-
 Global competitiveness
 Demands for higher
quality
 Huge technology
changes
 Time based competition
 Work force diversity

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 Some organizations are a blend of
service/manufacturing/quasi-manufacturing
(QM) organizations
 QM characteristics include
◦ Low customer contact & Capital Intensive

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• Design:
– Product and service design
– Process and capacity design
– Facility location and layout
• Planning/Scheduling
– Forecasting
– Planning
– Scheduling
• Materials management
– Inventory control and management
– Supply chain management
– Material requirement planning (MRP)
– Just-In-Time (JIT)
• Quality
– Quality assurance - Standards & Awards
– Statistical Quality Control
– Total Quality Management (TQM)
• Productivity
– Productivity Measurement
– Work Measurement and Analysis
 Maintenance
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 OM has the most diverse organizational function
 Manages the transformation process
 OM has many faces and names such as;

◦ V. P. operations, Director of supply chains,

Manufacturing manager, Plant manger, Quality
specialists, etc.
 All business functions need information from OM
in order to perform their tasks

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• OM is highly important function in today’s dynamic
business environment.
• Among the trends with significant impact are just-in-time,
TQM, reengineering, flexibility, time-based competition,
SCM, global marketplace, and environmental issues.
• OM works closely with all other business functions
A number of historical milestones have shaped OM. Some of
the more significant of these are:
 Industrial revolution………………….Late 1700s
 Scientific management………………Early 1900s
 Human relations/Human Resources…1930s -
 Management science (Operations Research)……Mid-
1900s
 Computer age……………………………………1970s
 Environmental Issues…………………………...1970s

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 Just-in-Time Systems (JIT) 1980s
 Total quality management (TQM) 1980s
 Reengineering 1990s
 Global competition 1980s
 Flexibility 1990s
 Time-Based Competition 1990s
 Supply chain Management 1990s
 Electronic Commerce 2000s
 Outsourcing and flattening of the world 2000s

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 The industrial revolution developed in England in the 1700s.
 The steam engine, invented by James Watt in 1764, largely replaced
human and water power for factories.
 Adam Smith’s The Wealth of Nations in 1776 touted the economic
benefits of the specialization of labor.
 Thus the late-1700s factories had not only machine power but also ways
of planning and controlling the tasks of workers.
 The industrial revolution spread from England to other European
countries and to the United Sates.
 In 1790 an American, Eli Whitney, developed the concept of
interchangeable parts.
 In the 1800s the development of the gasoline engine and electricity
further advanced the revolution.
 By the mid-1800s, the old cottage system of production had been
replaced by the factory system.

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 Frederick Taylor is known as the father of scientific
management. His shop system employed these steps:
◦ Each worker’s skill, strength, and learning ability were
determined.
◦ Stopwatch studies were conducted to precisely set standard
output per worker on each task.
◦ Material specifications, work methods, and routing sequences
were used to organize the shop.
◦ Supervisors were carefully selected and trained.
◦ Incentive pay systems were initiated.
• In the 1920s, Ford Motor Company’s operation embodied the
key elements of scientific management: standardized product
designs; mass production; low manufacturing costs;
mechanized assembly lines; specialization of labor;
interchangeable parts. 3
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• In the 1927-1932 period, researchers in the
Hawthorne Studies realized that human factors were
affecting production.
• Researchers and managers alike were recognizing
that psychological and sociological factors affected
production.
• From the work of behavioralists came a gradual
change in the way managers thought about and
treated workers.

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 During World War II, enormous quantities of
resources (personnel, supplies, equipment, …) had to
be deployed.
 Military operations research (OR) teams were formed
to deal with the complexity of the deployment.
 After the war, operations researchers found their way
back to universities, industry, government, and
consulting firms.
 OR helps operations managers make decisions when
problems are complex and wrong decisions are
costly.

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  . From  To
 Local or national focus  Global focus
 Batch shipments  Just-in-time
 Low bid purchasing  Supply chain
partnering
 Lengthy product  Rapid product
development development,
alliances
 Standard products  Mass
customization
 Job specialization  Empowered
employees, teams
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 END

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