CHAPTER I.

PRODUCTION AND OPERATIONS MANAGEMENT

When we mention the term “Production”, we often imagine factories, machinery, assembly lines and the
like. This is typical, since traditionally, production management focused more on manufacturing management,
or the operation of factories.

However, in recent years, the scope of Production Management had broadened, since we recognize that
producing commodities that satisfy the needs of people covers not only Goods but also Services. In line with
this, the term had been changed to “Production and Operations Management”, with the word “operations”
pertaining to other non-manufacturing activities related to the creation of services and overseeing of the
operations related to administering these commodities to consumers.

Production concepts and techniques are applied to a wide range of activities and situations outside of
manufacturing, that is, in services such as health care, food service, recreation, banking, hotel management,
retail sales, education, transportation, and government.

We will now define Production and Operations Management as the scientific and logical application of
management, through the use of quantitative techniques in planning, coordinating and executing systems and
processes that create goods and services offered by the organization to satisfy the needs of society.

The scope of production and operations management basically covers the following:

a. Forecasting – predicting supply and demand, potential opportunities and threats, trends etc.

b. Capacity Planning – limitations involving resources such as cash, work hours, materials, etc.

c. Scheduling – creating timetables of activities, scheduling employee work hours, etc.

d. Managing Inventory – for maintenance and control of stocks and supply.

e. Assuring Quality – Quality control especially for standardized items.

f. Employee Motivation – providing leadership and direction to all personnel.

g. Location of Facilities – the proper placement of equipment, people and buildings.

PRODUCTION AND THE SOCIETY

This topic is for discussion purposes. Our guide question shall be:
What is the relationship between the society and production (of goods and services)?

FUNCTIONS WITHIN BUSINESS ORGANIZATIONS

Organizations are formed to pursue goals that are achieved more efficiently by the concerted efforts of a
group of people than by individuals working alone. Business organizations are devoted to producing goods
and/or providing services. They may be for profit or non-profit organizations. Their goals, products and services
may be similar or different. Nonetheless, their functions and the way they operate are similar.

A typical business organization has three basic functions: Finance, Marketing and
Production/Operations. These three major functions and other supporting functions perform different but related
activities necessary for the operation of the organization. These functions must interact to achieve the goals and
objectives of the organization, and each gives an important and unique contribution.

In most cases, the success of the organization lies not on how strong a function performs but how well
they all work together. For instance, unless production and marketing work together, marketing may promote
goods and services that production cannot profitably deliver, or production may turn out goods and services for
which there is no demand. Similarly, unless finance and production people work closely, funds for expansion or
new equipment may not be available when needed.

1
Finance

The finance function comprises the activities related to securing resources at favorable prices and
allocating those resources throughout the organization. Finance and Operations management personnel
cooperate by exchanging information and expertise in such activities as:

1. Budgeting. Budgets must be periodically prepared to plan financial requirements. Budgets must
sometimes be adjusted, and performance relative to a budget must be evaluated.

2. Economic Analysis of Investment proposals. Evaluation of alternative investments in plant and

equipment requires inputs from both operations and finance people.

3. Provision of Funds. The necessary funding of operations and the amount and timing of funding can
be important and even critical when funds are right. Careful planning can help avoid cash-flow
problems. Most “for profit” firms obtain the majority of their funds through the revenues generated
by sales of goods and services.

Marketing

Marketing consists of selling and/or promoting the goods or services of an organization. Advertising and
pricing decisions are made by marketing people. Marketing is also responsible for assessing customer wants and
needs, and for communicating those to operations people and to design people.

That is, operations people need information about demand over the short-to-intermediate terms so that it
can plan accordingly (e.g., purchase materials or schedule work), while design people need information that
relates to improving current products and services and designing new ones.

Marketing, design and production must work closely to successfully implement design changes and to
develop and produce new products that will be attractive to the market. Marketing can also provide a valuable
insight to what the competitors are doing. Marketing also provides information on consumer preferences so that
the design people can determine what kinds of products and features are needed in the market.

Operations can supply information about capacities and judge the feasibility of designs and proposals.
Operations will also have an idea or warning if there will need for new equipment, facilities or people if
proposals will be implemented. Finance people should be included in these exchanges in order to provide
information on what funds may be available and to learn what funds might be needed for new products and
services.

One important information marketing people needs from operations is the manufacturing or service lead
time in order to give customers realistic estimates on how long will it take to fill their orders. Lead time refers to
the time necessary to create or deliver an order or perform a service.

Production / Operations

The operational function consists of all activities directly related to producing goods or providing
services. The production function exists not only in manufacturing and assembly operations, which are goods
oriented, but also in areas such as health care, transportation, food handling and retailing, which are primarily
service-oriented.

The following are typical examples of Production / Operations Functions:

1. Goods Producing. Examples are farming, mining, construction, manufacturing, power generation.

2. Storage / transportation. Examples are trucking, warehousing, mail service, moving, taxis, buses,
hotels, airlines.

3. Exchange. Examples are retailing, wholesaling, banking, renting or leasing, library, loans.

4. Entertainment. Examples are films, radio and television, plays, concerts, recording.

5. Communication. Examples are newspapers, radio and TV newscasts, telephone companies, satellites.
2
 The operations function is the core of most business organizations; it is responsible for the creation of an
organization’s goods or services. Inputs are used to obtain finished goods or services using one or more
transformation processes (e.g. storing, transporting, cutting, and assembling).

To ensure that the desired outputs are obtained, measurements are taken at various points in the
transformation process (feedback) and then compared with previously established standards to determine
whether corrective action is needed (control). The following diagram illustrates some examples of inputs,
transformation processes and outputs:
Value - added
Inputs: Outputs
- Land Transformation / - Goods
- Labor Conversion - Services
- Capital Process
- Information

Feedback

Feedback Control Feedback

INPUTS TRANSFORMATION OUTPUTS

Land Processes Goods
- Cutting - Houses
Human - Drilling - Automobiles
- Physical - Transporting - Clothing
- Intellectual - Teaching - Computers
- Farming - Machines
Raw Materials - Mixing - Televisions
- Energy - Packing - Food Products
- Water - Canning - Textbooks
- Chemicals - Consulting - Magazines
- Metals - Copying - Shoes
- Wood - Faxing - CD Players

Equipment Services
- Machines - Health Care
- Computers - Entertainment
- Trucks - Car Repair
- Tools - Delivery
- Gift Wrapping
Facilities - Legal
- Hospitals - Banking
- Factories - Communication
- Offices
- Retail stores

Other
- Information
- Time

The Essence of the Operations function is to add value during the transformation process. Value-Added
is the term used to describe the difference between the cost of inputs and the value or price of the outputs. In
non-profit organizations, the value of outputs (e.g. highways construction, police and fire protection) is their
value to society; the greater the value added, the greater the effectiveness of operations.

3
 In for-profit organizations, the value of outputs is measured by the prices that customers are willing to
pay for those goods or services. Firms use the money generated by the value-added for research and
development, investment in new facilities and equipment, and profits.

Consequently, the greater the value-added, the greater will be the amount of funds available for these
purposes. One way that businesses attempt to become more productive is to examine critically whether the
operations performed by their workers add value. Business considers those that do not add value to be wasteful.

Eliminating or improving such operations decreases the cost of inputs or processing, thereby increasing
the value-added. For instance, a firm may discover that it is producing an item much earlier than the scheduled
delivery date to a customer, thus requiring the storage of the item in a warehouse until delivery. In effect,
additional costs are incurred by storing the item without adding to the value of the item. Reducing storage time
would reduce the transformation cost and, hence, increase the value-added.

Thus, Marketing, Finance and Operations people must work well together on product process and
design, forecasting, setting realistic schedules, quality and quantity decisions, and keeping each other informed
on the other’s strengths and weaknesses.

Other Functions

There are a host of other supporting functions that interface with operations, finance and marketing.
Among them are accounting and purchasing. Also, depending on the nature of the organization, they may
include personnel or human resources, product design and development, industrial engineering and
maintenance.

Accounting has the responsibility for preparing the financial statements, including the income statement
and balance sheet. It also supplies information to management on costs of labor, materials and overhead and
may provide reports on items such as scrap, downtime, and inventories. It must keep track of receivables,
payables and insurance costs and prepare tax statements for the firm.

Purchasing has responsibility for procurement of materials, supplies and equipment. Close contact with
operations is necessary to ensure correct quantities and timing of purchases. The purchasing department is often
called on to evaluate vendors for quality, reliability, service, price and ability to adjust to changing demand.
Purchasing is also involved in receiving and inspecting the purchased goods.

The Personnel department is concerned with recruitment and training of personnel, labor relations,
contract negotiations, wage and salary administration, assisting in manpower projections, and ensuring the
health and safety of the employees.

Public relations have the responsibility of building and maintaining a positive public image of the
organization. This involves news releases announcing promotions and new products or services. It may also
involve such things as sponsoring a little league team, donating to cultural events, giving public tours of
facilities and sponsoring community affairs (e.g. marathons, bike races). Good public relations provide many
potential benefits. An obvious one is in the market place. Other potential benefits include public awareness of
the organization as a good place to work (labor supply), improve chances of approval of zoning change
requests, community acceptance of expansion plans and instilling a positive attitude among employees.

Industrial engineering is often concerned with scheduling performance standards, work methods,
quality control and material handling. Manufacturing plants of medium and large firms typically include this
function.

Distribution involves the shipping of goods to warehouses, retail outlets, or final customers.

Maintenance is responsible for general upkeep and repair of equipment, buildings and grounds, heating
and air-conditioning; removing toxic wastes; parking and perhaps security.

The importance of production / operations management, both for organizations and society, should be
fairly obvious: the consumption of goods and services is an integral part of our society. Productions / operation
management is responsible for creating those goods and services. Organizations exist primary to provide
services or to create goods. Hence, production is the core function of an organization. Without this core, there
would be no need for any of the other functions – the organization would have no purpose. Given the central of
4
its function, it is not surprising that more than half of all employed people in this country have jobs in
production and operations. Further more, the operations function is responsible for a major function of the
assets in most organizations.

DESIGNING AND OPERATING PRODUCTION SYSTEMS

Creating a production system that will be used for operating a business organization include vital,
careful and logical decision-making. These decisions can be grouped into two categories:

a. System Design. Decisions concerning capacity, location, arrangement of departments, product and
service planning, acquisition and placement of equipment.

b.System Operation. Decisions concerning personnel, inventory, scheduling, project management and
quality assurance.

DIFFERENTIATING FEATURES OF PRODUCTION SYSTEMS

There are a number of features that differentiate production systems. A brief discussion of some of these
features will help you to develop a better understanding of the nature and scope of operations management. The
three described are degree of standardization, type of operation and production of goods versus services
operations.

1. Production of Goods versus Service Operations. – For discussion purposes, what is the difference
between Goods and Services?

2. Degree of Standardization. – The output of the production systems can range from highly-standardized
to highly-customized. Standardized output means that there is a high degree of uniformity in goods or
services. Standardized goods include radios, televisions, computers, newspapers, canned goods,
automobile tires, pens and pencils. Standardized services include automatic car washes, televised
newscasts, recorded lectures and commercial airline services. Customized output means that the product
or service is designed for a specific case or individual. Customized goods include eyeglasses, custom-
fitted clothing, window glass (cut or order) and customized draperies. Customized services include
tailoring, taxi rides and surgery.

Systems with standardized output can generally take advantage of standardized methods, materials and
mechanization. All of which contribute to higher volumes and lower unit costs. In custom systems, on
the other hand, each job is sufficiently different so that workers must be more skilled, the work moves
slower, and the work is less susceptible to mechanization.

3. Type of Operation. – The degree of standardization and the volume of output of a product or service
influence the way a firm organizes production. On one end of the scale is a single large-scale product or
service such as the launching of a space shuttle (service) or the construction of a skyscraper (product).
On the other end is a continuous process such as oil refining. In between these extremes are customized
individual units of output, such as custom-made furniture, special purpose machines, and auto-repair;
batches such as paint and food products and mass production such as automobiles, personal computers
and appliances.