CHAPTER ONE

NATURE OF OPERATIONS MANAGEMENT

1.1 Definition of Operation Management

Every business is managed through three major functions: finance, marketing, and operations
management. Other business functions such as accounting, purchasing, human resources, and
engineering support these three major functions. Finance is the function responsible for
managing cash flow, current assets, and capital investments. Marketing is responsible for sales,
generating customer demand, and understanding customer wants and needs.

President or CEO

Marketing Operations Finance

V.P. of Marketing V.P. of Operations V.P. of Finance
Manages: Manages: - people Manages:
-customer demands -equipment -cash flows
Generates: -technology -current assets and
-sales for goods and -materials and - -capital investments
services
information
To produce: goods and/or
services

Figure 1.1 Organizational charts showing the three major business functions

Operations management (here after OM) is defined by many authors in deferent ways.
However, following definitions are proposed here.

 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).

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  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.

 Like marketing and finance, OM is a functional field of business with clear line
management responsibilities.

 Operations management is a management function. It involves managing people,

equipment, technology, information, and many other resources.

 Operations management is the central core function of every company. This is true
whether the company is large or small, provides a physical good or a service, and is
for profit or not for profit.

 Every company has an operations management function. Actually, all the other
organizational functions are there primarily to support the operations function.
Without operations, there would be no goods or services to sell.

1.2 Operations Management Functions and Model

The role of operations management is to transform a company’s inputs into the finished goods or
services. In order to produce goods and service operations management carries out the following
functions on the required inputs: designing the product
deciding what resources are needed
arranging schedules, equipment, and facilities
managing inventory
controlling quality
designing the jobs to make the product and
Designing work methods.
Operations management model portray the transformation of inputs into outputs in an
organization.

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 Customer feedback

Inputs
The Outputs
-Human resource
Transformation  Goods
-Facilities and process
process  Services
-Technologies
-Materials

Performance information
Figure1.2. OM model

Table 1.1 Examples of productive systems their inputs, transformation process and outputs.

System Primary Inputs Resources Transformation Functions Typical Output

Hospital Patients MDS, Nurses, Examination, surgery,
Medical supplies, monitoring , medication and Healthy individual
Equipment Therapy
Restaurant Hungry Customers Food, chef, wait- Well prepared well served
staff, environment food agreeable environment Satisfied customers
(physical and exchange
Automobile Sheet steel, engine Tools, equipment, Fabrication and assembly of High quality
factory parts workers cars physical) automobile
College or High school Teachers book, Imparting knowledge and Educated
university graduates classrooms skills via lecture individuals
(informational)
Department Shoppers Displays, stocks of Attract customers promote Sales to satisfied
store goods, sales clerks products fill orders (exchange) customers
Airline Travelers Airplanes, crews , Move to destination On-time, safe
scheduling/ delivery to
ticketing systems destination
In general, transformation processes can be categorized as follows:
Physical (as in manufacturing)
Location (as in transportation)

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 Exchange (as in retailing)
Storage (as in warehousing)
Physiological (as in health care)
Informational (as in telecommunications)
These transformations are not mutually exclusive. For example, a department store can (1)
allow shoppers to compare price and quality (informational), (2) hold items in inventory until
needed (storage), and (3) sell goods (exchange).
1.3. Historical Development of Operation Management
When we think of what operations management does namely, managing the
transformation of inputs into goods and services we can see that as a function it is as old
as time. Think of any great organizational effort, such as organizing the first Olympic
Games, building the Great Wall of China, or erecting the Egyptian pyramids, and you
will see operations management at work.
Operations management did not emerge as a formal field of study until the late 1950s and
early 1960s, when scholars began to recognize that all production systems face a common
set of problems and to stress the systems approach to viewing operations processes.
Many events helped shape operations management. We will describe some of the most
significant of these historical milestones and explain their influence on the development
of operations management. Later we will look at some current trends in operations
management.
Table 1.3 the historical milestones and current trends of operation management
Concept Time Explanation
Industrial Revolution Late 1700s Brought in innovations that changed production by
using machine power instead of human power
Brought the concepts of analysis and measurement of
Scientific management Early 1900s
the technical aspects of work design, and development
of moving assembly lines and mass production
Focused on understanding human elements of job
Human relations movement 1930s to 1940s
design, such as worker motivation and job satisfaction

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 Focused on the development of quantitative
Management science 1940s to 1960s
techniques to solve operations problems
Enabled processing of large amounts of data and
Computer age 1960s
allowed widespread use of quantitative procedures
Designed to achieve high-volume production with
Just-in-time systems (JIT) 1980s
minimal inventories
Sought to eliminate causes of production defects
Total quality management 1980s
(TQM)
Reengineering 1980s Required redesigning a company’s processes in order
to provide greater efficiency and cost reduction
Considered waste reduction, the need for recycling,
Environmental issues 1980s
and product reuse
Offered customization on a mass scale.
Flexibility 1990s
Time-based competition 1990s Based on time, such as speed of delivery
Supply chain management 1990s Focused on reducing the overall cost of the system that
manages the flow of materials and information from
suppliers to final customers
Designed operations to compete in the global market
Global competition 1990s
Electronic commerce Late 1990s; early Used the Internet for conducting business activity
twenty-first century

1.4. 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, tyre, 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.
The majority of service jobs fall into the following categories:

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 Education (schools, colleges, universities, etc.)
Business services (data processing, delivery, employment agencies, etc.)
Personal services (laundry, dry cleaning, hair/ beauty, gardening etc)
Health care (doctors, dentists, hospital care, etc)
Financial services (banking, stock brokerages, insurance, etc)
Wholesale / retail (clothing, food, appliances, stationeries, toys, etc)
Government (federal, state, local)

The difference between Manufacturing and service operation

The differences between manufacturing and service operations fall into the six categories.

 First, manufacturing organizations produce physical, tangible goods that can be stored in
inventory before they are needed. By contrast, service organizations produce intangible
products that cannot be produced ahead of time.

 Second, in manufacturing organizations most customers have no direct contact with the
operation. Customer contact is made through distributors and retailers. For example, a
customer buying a car at a car dealership never encounters the automobile factory.
However, in service organizations the customers are typically present (inputs) during the
creation of the service. Hospitals, colleges, theaters, and barbershops are examples of
service organizations in which the customer is present during the creation of the service.

 Third, service operations are subject to greater variability of input than typical
manufacturing operations. For example, each patient, each lawn and each auto repair
presents specific problems that often must be diagnosed before it can be remedied.
Manufacturing operations often have the ability to carefully control the amount of
variability of inputs and thus achieve low variability in outputs. Consequently, job
requirements for manufacturing are generally more uniform than those for services.

 Fourth, because of the on-site consumption of service and the high degree of variation of
inputs, service require a higher labor content whereas manufacturing, with exceptions,
can be more capital intensive (i.e., mechanized).

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  Fifth, measurement of productivity is more straightforward in manufacturing due to the
high degree of uniformity of most manufactured items. In service operations, variations
in demand intensity and in requirements from job to job make productivity measurement
considerably more difficult. For example, compare the productivity of two doctors. One
may have a large number of routine cases while the others do not, so their productivity
appears to differ unless a very useful analysis is made.

 The final distinction between manufacturing and service operations relates to the
measurement of quality. Since manufacturing systems tend to have tangible products and
less customer contact, quality is relatively easy to measure. However, the quality of
service systems, which generally produce intangibles, is often very difficult to measure.
Coupled with this, the subjective nature of individual preferences further makes the
measurement of services difficult (objective measurement of quality is sometimes
impossible). For example, one customer might value a friendly chat with the sales clerk
during the purchase. However, another customer might assess quality by the speed and
efficiency of transaction.
 To sum up, the distinctions between manufacturing and service operations are as follows

Characteristics Manufacturing operation Service operation

Product Tangible, durable product Intangible, perishable product

Inventory Output can be inventoried Output cannot be inventoried

Customer contact Low High

Uniformity of input High Low

Intensity Capital intensive Labour intensive

Measurement of productivity Easy Difficult

Quality measurement Quality easily measured Quality not easily measured

Similarities between manufacturing and service operations

In spite of the differences already discussed there are compelling similarities between
manufacturing and service operation. Since manufacturing and service operations are often

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similar in terms of what is done but different in terms of how it is done. For instance both involve
the following characteristics.
 Firstly both have processes that must be designed and managed effectively.
 Secondly, some type of technology be it manual or computerized, must be used in each
process.
 Thirdly, both of them are usually concerned about quality, productivity and the timely
response to customers.
 Fourthly they must make choices about capacity, location, and layout of their facilities.
 Fifthly, both deal with suppliers of outside services and materials, as well as scheduling
problems.
 Finally, matching staffing levels and capacities with forecasted demand is a universal
problem.
1.5. Operations Decision Making
All good managers perform the basic functions of the management process. The management
process consists of planning, organizing, staffing, leading, and controlling. Operations managers
apply this management process to the decisions they make in the OM functions. The 12 major
decisions of OM are shown in Table 1.2. Successfully addressing each of these decisions
requires planning, organizing, staffing, leading and controlling. Typical issues relevant to these
decisions are also presented.
No. Decisions areas Issues
1 Operations strategy What are the unique features of the business that will make it
competitive?
2 Product design What are the unique features of the product?
3 Process selection What are the unique features of the process that give the product its
unique characteristics?

4 Supply chain managements What sources of supply should we use to ensure regular and timely
receipt of the exact materials we need? How do we manage these
sources of supply?
5 Quality management How will managers ensure the quality of the product, measure quality,
and identify quality problems?

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6 Forecasting What is the expected demand for the product?

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 should do what task, and
measurement how will their performance be measured?

11 Inventory management How will the inventory of raw materials be monitored? When will orders
be placed and how much will be kept in stock?
12 Scheduling Who will work on what schedule?

1.6. . Productivity Measurement

 Recall that operations management is responsible for managing the transformation of
many inputs into outputs, such as goods or services.
 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:
Output
Productivity =
Input

 We can use this equation to measure the productivity of one worker or many, as well as
the productivity of a machine, a department, the whole firm, or even a nation.
 The measurement possibilities are shown as follows.
The measurement of productivity can be quite direct. Such is the case when productivity is
measured by labor-hours per ton of a specific type of steel. Although labor-hours is a common
measure of input, other measures such as capital (dollars invested), and materials (tons of ore), or
energy (kilo- watts of electricity) can be used. An example of this can be summarized in the
following equation:

𝑈𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
Productivity =
𝑖𝑛𝑝𝑢𝑡𝑠 𝑢𝑠𝑒𝑑
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For example,ifunitsproduced=1,000andlabor-hoursusedis250,then:

𝑈𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 1000

Productivity = = = 4 units per labor-hour
𝐿𝑎𝑏𝑜𝑟−ℎ𝑜𝑢𝑟𝑠 𝑢𝑠𝑒𝑑 250

The use of just one resource input to measure productivity, as shown in Equation (1-1), is known
as single-factor productivity. However, a broader view of productivity is multifactor
productivity, which includes all inputs (e.g., capital, labor, material, energy). Multifactor
productivity is also known as total factor productivity. Multifactor productivity is calculated by
combining the input units as shown here:

𝑂𝑢𝑡𝑝𝑢𝑡
Productivity =
𝐿𝑎𝑏𝑜𝑟+𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙+𝐸𝑛𝑒𝑟𝑔𝑦+𝐶𝑎𝑝𝑖𝑡𝑎𝑙+𝑀𝑖𝑠𝑐𝑒𝑙𝑙𝑎𝑛𝑒𝑜𝑢𝑠

Labor productivity Units of output per labor hour

Units of output per shift
Value- added per labor hour
Dollar value of output per labor hour
Machine productivity Units of output per machine hour
Dollar value of output per dollar input
Capital productivity Units of output per dollar input
Dollar value of output per dollar input
Energy productivity Units of output per kilowatt-hour
Dollar value of output per kilowatt-hour

To aid in the computation of multifactor productivity, the individual inputs (the denominator)
can be expressed in dollars and summed as shown below.

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

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 Output 22 tables
Productivity = 1.375 tables/hour
Labour input 2 wokrs x 8 hours

Example: Let’s say that output is worth of 382 birr and labor and materials costs are 168 and 98
birr, respectively. A multifactor productivity measure of our use of labor and materials would be:
Output 382 birr
Productivity = 1.436
Labour+capital 168 birr+98 birr
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:
Output 10,200
Productivity = 1.186
Inputs 8,600

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.

 Nonetheless, because service is becoming an increasingly large portion of our economy,

the issues related to service productivity will have to be dealt with.
 It is interesting to note that government statistics normally do not include service firms.
 A useful measure closely related to productivity is process yield.

 Where products are involved, process yield is defined as the ratio of output of good
product (i.e., defective product is not included) to the quantity of raw material input.
 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.
 In education, a measure for college and university admission yield is the ratio of student
acceptances to the total number of students approved for admission.

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 For subscription services, yield is the ratio of new subscriptions to the number of calls
made or the number of letters mailed.

 However, not all services provide themselves to a simple yield measurement. For
example, services such as automotive, appliance, and computer repair don’t readily
provide themselves to such measures.

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