CHAPTER ONE

NATURE OF OPERATIONS
MANAGEMENT
Learning objectives
After completing this chapter, you will be
able to:
Define Operations management
Discuss history of operations
management
Distinguish manufacturing and service
operations
Explain operations decision making
Discuss productivity measurement
 Introduction

Today companies are competing in a very

different environment than they were only a few
years ago.
Production and operations management has seen
many innovations in recent years, becoming a
topic of critical importance in business today.
Demands for business reengineering, quality,
time-based competition, value-adding processes,
and a global view have demonstrated that superior
management of the operations function is vital to
the survival of the firm.
Cont’d
An understanding of production and
operations management strategy and its
function is a necessary part of any good
business education.

The subject matter represents a

blend/mexture of concepts from industrial
engineering, cost accounting, general
management, quantitative methods, and
statistics.
 1.2 What is Operations Management?
 OM is the set of activities that creates value in the form of
goods and services by transforming inputs in to outputs
(Heizer and Render, 2011).
 OM can be defined as the management of the conversion
process, which converts land, labor, capital, and management
inputs into desired outputs of goods and services (Roy,
2005).
 OM is defined as the design, operations, and improvement of
the systems that create and deliver the firm’s primary
products and services (Chase et.al, 2005).
 In other way, OM is the business function that plans,
organizes, coordinates, and controls the resources needed to
produce a company’s goods and services.
Cont’d
 Production/operations management is the process, which
combines and transforms various resources used in the
production/operations subsystem of the organization into
value added product/services in a controlled manner as
per the policies of the organization.
◦ Therefore, it is that part of an organization, which is concerned
with the transformation of a range of inputs into the required
(products/services) having the requisite quality level.
 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.
 Why Study Operations Management

OM creates an understanding of modern

approaches to managing operations.
OM provides a systematic way of looking at
organizational processes.
OM presents interesting career opportunities.
 The concepts and tools of Operations
Management are widely used in managing
other functions of a business.
What is Role of OM?
OM Transforms inputs to outputs
◦ Inputs are resources such as
 People, Material, and Money

◦ Outputs are goods and services

OM’s Transformation Process
OM’s Transformation Role
 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 – means performing activities well for least possible
cost

10
 Manufacturing and Service Operations
Organizations can be divided into two
broad categories: manufacturing
organizations and service organizations.
Manufacturing implies production of a
tangible output
 (i.e. something that can be seen or touched) such as a
car , bread, knife, etc.
Service on the other hand, generally
implies an act.
 Examples here include a doctor’s examination, TV
and auto repair, lawn care and lodging in a hotel.
Difference between Manufacturing and service operation

Characteristics Manufacturing operation Service operation

Product Tangible, durable product Intangible, perishable

Inventory Output can be inventoried Output cannot be inventoried

Customer contact Low High

Uniformity of input High Low

Intensity Capital intensive Labor intensive

Measurement of
Easy Difficult
productivity

Quality measurement Quality easily measured Quality not easily measured

On the other hand… similarity

Both have processes that must be designed and

managed effectively.
Both use technology… be it manual or computerized
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
Operations Decision Making
No. Decisions areas Issues
1
Operations What are the unique features of the business that will
strategy make it competitive?
2
Product design What are the unique features of the product?
3
Process What are the unique features of the process that give
selection the product its unique characteristics?
4
Supply chain What sources of supply should we use to ensure regular
managements and timely receipt of the exact materials we need? How
do we manage these sources of supply?
5
Quality How will managers ensure the quality of the product,
management measure quality, and identify quality problems?
6 Forecasting What is the expected demand for the product?
Operations Decision Making
7 Location analysis Where will the facility be located?
8 Capacity planning How large should the facility be?
9 Facility layout How should the facility be laid out? Where should
the kitchen and ovens be located? Should there be
seating for customers?
10 Job design and work What jobs will be needed in the facility, who
measurement should do what task, and how will their
performance be measured?

11 Inventory How will the inventory of raw materials be

monitored? When will orders be placed and how
management
much will be kept in stock?
Scheduling Who will work on what schedule?
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 Productivity Measurement

 Productivity is measure of how efficiently inputs are

being converted into outputs.
 It is computed as a ratio of outputs (goods and
services) to inputs (e.g., labor and materials).
 The more efficiently a company uses its resources, the
more productive it is:
Productivity =
The measurement possibilities are shown as
follows.
 Partial productivity measurement
 Multi-factor productivity measurement
 Total productivity measurement
 Productivity Measurement

Partial Productivity Measurement

Partial productivity measurement is used when the
firm is interested in the productivity of a selected
input factor.
It is the ratio of output values to one class of input.
PPM = or or
 Productivity Measurement

Example: Two workers paint tables in a

furniture shop. If the workers paint 22 tables
in 8 hours, what is their productivity?

PPM = =1.375 tables/hour

 Productivity Measurement

Multi-factor Productivity Measurement

This productivity measurement technique is used when
the firm is interested to know the productivity of a
group of input factors but not all input factors.

MFPM = or
 Productivity Measurement

 Example: Let’s say that output is worth of 382 birr

and labor and capital costs are 168 and 98 birr,
respectively. A multifactor productivity measure of
our use of labor and materials would be:
 MFPM = 1.436
 Productivity Measurement

Total (Composite) Productivity Measures

A firm deals about composite productivity when it is
interested to know about the overall productivity of all
input factors.
This technique will give us the productivity of an
entire organization or even a nation.

TPM = or
 Productivity Measurement

Example: Suppose the weekly dollar value of a

company X 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 $8600.
The company’s total weekly productivity would be
computed as follows:

TPM =
1.186
 Productivity in the Service Sector

 Service productivity is more problematic than manufacturing

productivity.
 In many situations, it is more difficult to measure, and thus to
manage, because it involves intellectual activities and a high
degree of variability.
◦ Think about medical diagnoses, surgery, consulting, legal services,
customer service, and computer repair work. This makes productivity
improvements more difficult to achieve.
 Where services are involved, process yield measurement
is often dependent on the particular process.
◦ For example, in a car rental agency, a measure of yield is the
ratio of cars rented to cars available for a given day.
END!