BY SHIMELIS TAMIRAT 2023

CHAPTER 1: OPERATIONS FUNCTION

1.1. Introduction
1.2. Definition of Production
1.3. Definition of Production and Operations Management
1.4. Objectives of Operations Management
1.5. Scope of Production and Operations Management
1.6. Operations Management as a study decisions making
1.7. Operations as a function
1.8. Operations as a production system
1.9. Reasons for the study of Operations Management
1.10. New Operations Themes
1.11. Efficiency and Effectiveness

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1.1 Introduction

• Operations function consists of all activities directly related to producing goods or providing
services.

• Previously it was considered as production. Production is the creation of goods and services.

• The field of production management in the past focused almost exclusively on manufacturing
management, with a heavy emphasis on the methods and techniques used in operating a
factory.

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1.2 Definition of Production
❖Production is the creation of goods and services. Whereas operation is that part of
as organization, which is concerned with the transformation of a range of inputs
into the required output (services) having the requisite quality level.

✓ Activities creating goods and services take place in all organizations. The production activities
that create goods/tangible product are usually quite-obvious.

✓ In organizations that do not create physical products, the production function may be less
obvious (service rendering organization).
✓ Example a bank, hospital, airline, or college.

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Examples of Production/Operations:
Operations Examples
▪ Goods Production ▪ Farming, Mining, Construction,
Manufacturing, Power Generation

▪ Storage / Transportation ▪ Warehousing, Trucking, Mail Service,

Moving, Taxis, Buses, Hotels, Airlines

▪ Exchange ▪ Retailing, Wholesaling, Banking, Renting,

Leasing, Library, Loans

▪ Entertainment ▪ Films, Radio, Television, Concerts, Recordings

▪ Communication ▪ Newspapers, Radio and Television,

Newscasts, Telephone, Satellites

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 Cont.

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• Manufacturing and service organizations differ chiefly because manufacturing is goods
oriented, and service is act-oriented. The differences involve the following:

Manufacturing Operations Service Operations

• Tangible & Durable product • Intangible and perishable product
• Product is inventoried • Product cannot be inventoried
• Low customer contact • High customer involvement
• Longer response time • Short response time
• Capital intensive • Labor intensive
• Consumption takes more time • Immediate Consumption
• Available at regional, national and • Local Market
international market • Require small facilities
• Require large facilities • Quality is not easily measured
• Quality is easily measured • Demand is variable on hourly, daily, weekly
• Demand is variable on weekly, monthly, basis

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seasonally
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1.3. Definition of Production and Operations Management

✓ Regardless of whether the end-product become good or service the production activities that go
on in the organization are often referred to as operations or operations management.
❖ Management is the process, which combines and transforms various resources used in the operations
subsystem of the organization into value added services in a controlled manner as per the policies of
the organization.
❖ The set of interrelated management activities, which are involved in manufacturing certain products,
is called as production management. If the same concept is extended to services management, then
the corresponding set of management activities is called as operations management.
❖ Operations management is the set of activities that creates goods and services through the
transformation of inputs into outputs.
❖ Operations management (OM) is defined as the design, operation, and improvement of the systems
that create and deliver the firm’s primary products and services

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 Responsibilities of Operations Management

OM
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Cont.

OM
• The primary concern of an operations manager is the activities of the conversion process.

• A production system takes inputs and converts them into outputs.

• The conversion process is the predominant activity of a production system.

• Operations management is the management of an organization’s productive resources or its

production system.

• Planning => Capacity, Location, Products & Services, Make or Buy, Layout, Projects, Scheduling

• Organizing => Process selection, Degree of decentralization

• Directing => Job assignments, Incentive Plans, Issuance of work orders

• Staffing => Hiring/Layoff, Overtime assignments

• Controlling => Quality, Productivity, Cost, Inventory

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1.4. Objectives of Operations Management

• The ultimate objective of operations management (OM) is to render the necessary customer
satisfaction at lowest cost. In other terms

• To add value (high value for customers)

• Increase product value at each stage
• Value added is the net increase between output product value and input material value

• Provide an efficient transformation (Low cost or cost reduction)

• Efficiency – means performing activities well for least possible cost.

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1.5. Scope of Production and Operations Management

• In recent years, the scope of production management has broadened considerably.

• This broadened scope has given the field the name production/operations management, or
more simply, operations management, a term that more closely reflects the diverse nature of
activities:-
• Forecasting
• Capacity planning
• Scheduling
• Managing inventory
• Assuring quality
• Employee motivation and training
• Location of facilities

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Operations Interfaces
Industrial
Engineering
Maintenance
Distribution

Purchasing Public
Operations Relations

Legal
Personnel

Accounting
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Operations Overlap

Operations

Marketing Finance

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1.6. Operations Management as a study decisions making

• Thousand of business decisions are made every day. Not all the decisions will make or break
the organization. But each one adds a measure of success or failure to the operations.

• Hence decision making essentially involves choosing a particular course of action, after
considering the possible alternatives.

• Operation managers manage all activities in the transformation of input in to output by making
two broad types of decisions.
• Strategic long-term decisions
• Tactical /specific decisions

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 Cont.,

OM
Strategic Decisions Tactical Decisions
• Strategic long-term decisions • Tactical decisions that focus on
that set the direction for the specific departments and
entire organization. tasks.
‒ They are broad in scope and set
• Short-term decisions focus on
the tone for other, more specific more specific day-to-day issues,
decisions. such as the quantities and timing
‒ Therefore, we must start with
of specific resources which are
strategic decisions and then move made more frequently and
on to tactical decisions and then day routinely.
to day operational decisions.
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 Cont.,

OM
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Cont.,

• Operations have responsibility for four major decision areas:

• Process,

• Quality,

• Capacity and

• Inventory.

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1. Process- Decisions
• Related to physical process or facility used to produce the product or
service. Include the type of:-
• equipment and technology,
• process flows, layout of the facility and
• all other aspects of the physical plant or service facility.

• Many of these process decisions are long range in nature and cannot
be easily reversed, particularly when heavy capital investment is
needed.

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 Cont.,

OM
2. Quality
• Quality decisions must ensure that quality is designed and built into the product in all stages
of operations:
• standards must be set, people trained, and the product or service inspected for quality to result.
Operations have a particular responsibility for producing products and services that meet the
defined specifications and standards.
3. Capacity
• Capacity decisions are aimed at providing the right amount of capacity at the right place at the right time.
• Long-range capacity is determined by the size of the physical facilities built by the firm and its
suppliers. In the short run, capacity can sometimes be augment by subcontracting, extra shifts, or
rental of space. Capacity planning the size of facilities & the proper number of people in operations.
The available capacity must be allocated to specific tasks and jobs in operations by scheduling
people, equipment, and facilities.
4. Inventory
• Inventory management decisions in operations decisions determine what to order, how much to order,
and when to order. Inventory control systems are used to manage materials from purchasing through raw materials,
work in process, and finished goods inventories. Inventory managers manage the flow of materials within the firm and

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within the supply chain.

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1.7. Operations as a function
• Operation function is
• ‘the part of an organization, which is
concerned with the transformation
of a range of inputs into the
required outputs (products) having
the requisite quality level’.

• Most businesses are supported by the

functions of operations, marketing, and
finance.

• The major functional areas must interact

to achieve the organization goals.
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 OM
Cont.…

Organization

Production/
Finance Marketing
Operations

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 1.8. Operations as a production system

OM
• Concept of Production
• Edwood Buffa defines production as ‘a process by which goods and services are created’.

• Production is defined as ‘the step-by-step conversion of one form of material into another
form through chemical or mechanical process to create or enhance the utility of the
product to the user’.
• Thus, production is a value addition process. At each stage of processing, there will be value
addition. Value added is the difference between the cost of inputs and the value or price of outputs.

• The production system is that part of an organization, which produces products of an

organization.
• It is the sub part of the institution whereby resources, flowing within a defined system, combined and
transformed in a controlled manner to add value in accordance with the policies communicated
by management.

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 A simplified production system is shown

OM
below:

❖ The production system has the following

characteristics:
1. Production is an organized activity, so every
production system has an objective.

2. The system transforms the various inputs to

useful outputs.

3. It does not operate in isolation from the other

organization system and its environment.

4. There exists a feedback about the activities,

which is essential to control and improve

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system performance.

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 1.9. Reasons for the study of Operations Management

OM
• You may be wondering why you need to study operations management.
There are several very good reasons:
‒ Operations management activities are at the core of all business organizations.
‒ Activities in all the other areas of business organizations (all jobs) are all
interrelated with operations management activities.
‒ Operations management has been recognized as an important factor in a
country’s well being.
‒ It plays an important role in the society in which we live.

‒ Higher standard of living

‒ Better quality goods and services
‒ Concern for the environment
‒ Improved working conditions

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1.10. New Operations Themes
• Historical Development of Operation Management
• Operations in some form has been around as long as human endeavor itself but, in
manufacturing at least, it has changed dramatically over time.

• Many events helped shape operations management. Some of the most significant of
these historical milestones are:-
• Craft manufacturing
• The Industrial Revolution • Scientific Management
• The Human Relations Movement • Time-Based Competition
• Management Science • Supply Chain Management
• The Computer Age • Global Marketplace
• Just-in-Time • Environmental Issues
• Total Quality Management • Electronic Commerce
• Business Process Reengineering (BPR) • Flexibility

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Cont.,
• During the 1970s, markets became highly fragmented, product life cycles reduced
dramatically, and consumers had far greater choice than ever before.
• TQM
• JIT
• SCM

• Modern Period (Different Approaches)

• Flexible specialization
• Lean production
• Mass customization
• Agile manufacturing
• These approaches all seek to combine the high volume and low cost associated with mass
production with the craft production.
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1.11. Efficiency and Effectiveness
• Operational performance should be measured to ensure success in satisfying
customers and achieve goals. Two general measures are used:-
• Effectiveness &
• Efficiency
• Effectiveness: a measure of the appropriateness of the goals chosen (are
these the right goals?), and the degree to which they are achieved.
• Organizations are more effective when managers choose the correct goals and
then achieve them.

• Effectiveness is often described as “doing the right things”.

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 Contd.,

OM
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Efficiency
• A measure of how efficiently inputs are being converted into outputs is called
productivity.
• Productivity measures how well resources are used.

• The more efficiently a company uses its resources, the more productive it
is.
• It is computed as a ratio of outputs (goods and services) to inputs (e.g., labor
and materials).

• It has been said, “If you can’t measure it, you can’t manage it”. This is
particularly true of productivity.
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 Outputs

OM
Productivity Measures Productivity =
Inputs

Partial = Output or Output or Output or Output

measures Labor Machine Capital Energy
Multifactor = Output or Output
measures Labor + Machine Labor + Capital + Energy

Total = Goods or Services Produced

measure All inputs used to produce them

• We can use these equations to measure the productivity of one worker or many, as well as

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the productivity of a machine, a department, the whole firm, or even a nation.
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 Partial Productivity

OM
• Often it is much more useful to measure the productivity of one input
variable at a time in order to identify how efficiently each is being used.

• When we compute productivity as the ratio of output relative to a single

input, we obtain a measure of partial productivity also called single-
factor productivity.

Example: A bakery oven produces 346 pastries in 4 hours. What is its productivity?

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Multifactor productivity
• Sometimes we need to compute productivity as the ratio of output relative to a group
of inputs, such as labor and materials. This is a measure of multifactor productivity.

• For example, let us say that output is worth $382, and labor and materials costs are
$168 and $98, respectively. A multifactor productivity measure of our use of labor and
materials would be:
𝑂𝑢𝑡 𝑝𝑢𝑡 $382 $382
Productivity = = = = 1.44
𝐼𝑛𝑝𝑢𝑡 $168+$98 $266

NB: These 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.

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 Total Productivity

OM
• When we compute productivity for all inputs, such as labor, machines, and capital,
we are measuring total productivity. Total productivity describes the productivity of an
entire organization.
• For example, let us say that the weekly dollar value of a company’s output, such as
finished goods and work in progress, is $10,200 and that the value of its inputs, such as
labor, materials, and capital is $8,600.
• The company’s total productivity would be computed as follows:

❖ Total or multifactor productivity measures are generally preferable than partial

productivity. The reason for this is that focusing on productivity improvement in a
narrow portion of an organization may actually decrease total productivity.

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 Factors that Affect Productivity

OM
External factors Internal factors
‒ government regulation • Product,
• Product diversity
‒ investment policy,
• Value engineering
‒ competition,
• Process,
‒ suppliers' capacity, and
• Automation
‒ customers demand etc.
• Capacity and inventory,
• These factors are outside the control of the • Work force
firm.
• Worker's health,
• Education, and
• These factors may affect both volume of
output and the availability of scarce inputs. • Better nourished labor force.

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Improving Productivity

• There are several ways in which operations manager can improve productivity.
These may be classified as:
• increasing output while keeping input constant

• decreasing input while keeping output constant

• increasing output at higher rate than increasing input

• decreasing output at lower rate than decreasing input

• Increasing output while decreasing input (Most challenging but effective).

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 Exercise

OM
• A furniture company has provided the following data for the year 2000 and 2001:
2000 2001
Output 22000 35000
Inputs
- Labor 10000 15000
- RM & supplies 8000 12500
-Depreciation 700 1200
-Others 2200 4800

Required:
1. Compute total productivity for year 2000 and 2001
2. Compute multi factor productivity for labour, and RM & supplies, and labour, capital and
others for the year 2001.
3. Compute partial productivity for labour, and RM and supplies for the year 2000.

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End of the Chapter

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