CHAPTER ONE

INTRODUCTION TO OPERATIONS MANAGEMENT

1.1. Operations management general concept:
What is operation?
Operation is where the organizations goods & services produced. Operation is common to all
organization-be it small or large, private or government, local or international, manufacturing or
service giving.
What is management?
Management is the process of planning, organizing, leading, and controlling an organization’s
human and capital resources in order to accomplish its objectives.
What is operations management?
By bringing the above definitions of operation and management together, operations
management can be defined as:
 The administration of process that transforms inputs of labor, capital and materials in to
output bundles of products and services that are valued by customers.
 The coordination of an organization’s resources and a transformation process that will end up
with the production of goods and services. The essential features of the production functions
are to bring together people, machine, and materials to provide goods or services there by
satisfying the wants of the people.
 An activity which deals with processes that produce goods and services that people use every
day. Process is any activity or group of activities that takes one or more inputs, transforms
and adds value to them, and provides one or more outputs for its customers.
 Operation/Production management is the set of activities that creates goods and services by
transforming inputs in to outputs. Activities creating goods and services take place in all
organizations. In manufacturing firms, the production activities that create goods are usually
quite obvious. In them, we can see the creation tangible product such as TV or car. While in
organizations that do not create physical products the production function may be less
obvious. An example is the transformation that takes place at bank, hospital or college.
Production is the creation of goods and services.

In nut shell, all definitions consider operations management as the management of

transformation process that converts input into output. By and large, managing operation is
crucial to each area of an organization because only successful management of resources
(people, capital, information, and materials) can meet its goals.

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 Operations Management Vs Production Management
The term “operation management” and “production management” in large part suffer from
myopia. In the early history of operation management and until the middle of the twentieth
century, the focus was on manufacturing organization, and the field was thus called industrial
management or production management. Service organizations, because they perform almost at
handicraft levels, were largely ignored. Latter as the service sector takes the lion share of the
economy growth, the name production management, was expanded to production and operations
management or more simply, operations management to include the service industry as well.
Today’s managers apply concepts of process analysis, quality, job design, capacity, facility
location layout, inventory, and scheduling to both manufacturing and the provision of services.
Inclusion of services within the scope of production enables us to look at the problem of
production management in a much wider perspective. This brings a number of seemingly non
manufacturing sectors of economy such as transport, energy, health, agriculture, warehousing,
banking etc. Therefore, operation management exists both in manufacturing and service giving
institutions.

System concepts in operations management

A system may be defined as “a purpose full collection of people, objects and procedures for
operating within an environment”. Thus every organization can be represented as a system
consisting of interacting sub systems. The basic process of the system converts (transforms) the
resource inputs (such as people, plant, part processes, planning and controlling systems) in to
some useful form of outputs. Of course, depending up on the efficiency of the conversion
process we may have undesirable outputs too-such as pollution, scrap/wastage rejections, losses
of human life(in a hospital) etc. Using the generalized concepts of operations management we
can call such system as operations system and the operation management has the prime
responsibility for transforming input in to output.
Inputs transformation process output
Illustrations of the transformation process
Food processor
Input Processing Output
 Raw vegetables - Cleaning -Canned vegetables
 Metal sheets - Making cans
 Water - Cutting
 Energy - Cooking
 Labor - Packing
 Building - Labeling
 Equipment

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 Hospital
Input Processing Output
 Doctors, nurses -Examination -Healthy patients
 Hospital -Surgery
 Medical supplies -Monitoring
 Equipment -Medication
 Laboratories -Therapy
In manufacturing, inputs of raw materials, energy, labor, and capital are transformed into
finished goods. In service operation, these same types of inputs are transformed into service
outputs. Managing the transformation process in an efficient and effective manner is the task of
the operations manager in any type of organization.

1.2. Manufacturing operation Vs Service operation

*Similarities between manufacturing and services
Every organization whether manufacturing or service giving, has processes (transform input in to
output) that must be designed and managed effectively. Some type of technology be it manual or
computerized must be used in each process. Every organization is concerned about quality,
productivity, and the timely response to customers. A service provider, like a manufacturer, must
make choices about the capacity, location, and lay out of its facility. Ever organization deals with
suppliers of outside services and materials, as well as scheduling problems. Finally, matching
staffing levels and capacities with forecasted demand is universal problems.

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*Differences between manufacturing and services
The difference between manufacturing and service operations are shown as follows

More like a manufacturing organization More like a service organization

-Tangible, durable product -intangible perishable product
-Output that can be inventoried - output that can’t be inventoried
- Low customer contact - high customer contact
- Long response time - short response time
- Regional, national or international - local market
market -small facilities
- Large facilities - labor intensive
- Capital intensive -quality and productivity is difficult to
- Quality and productivity easy to measure
measure - high degree of variety of input and -
- High degree of uniformity of input& high degree of variety of input and
output -difficult to automate etc.
- Ease to automate etc.

The first distinction arise from the physical nature of the product: manufacturing goods are
tangible and durable products whereas services are intangible, perishable products often being
ideas, concepts or information.
The second distinction also relates to the physical nature of the product: manufactured goods are
output that can be produced, stored, and transported in anticipation of future demand. Creating
inventories allow managers to cope with fluctuation in demand by smoothing output levels. By
contrast, service cannot be pre-produced.
A third distinction is related to customer contact: Most customers for manufactured products
have little or no contact with the production system. Primary customer contact is left to
distributors and retailers. However, in many service organizations the customers themselves are
inputs and active participants in the process. At a college, for example, the student studies,
attends lectures, takes exams, and finally receives a Diploma. Hospitals and entertainment
centers are other places where the customer is present during the provision of most of the
services. Some service operations have low customer contacts at one level of the organization
and high customer contact at other levels. For example, the branch offices of parcel delivery,
banking, and insurance organizations deal with customers daily, but their central offices have
little direct customer contact.
Still a related distinction is response time to customer demand. While manufacturers generally
have days or weeks to meet customer demand, many services must be offered within minutes of

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customer arrival. The purchase of fork lift may be willing to wait 16 weeks for delivery. By
contrast, a grocery store customer may grow impatient after waiting five minutes in a checkout
line. Because customers for services usually arrive at times of their choosing, service operation
may have difficulty matching capacity with demand. Furthermore arrival patterns may fluctuate
daily or even hourly, creating even more short term demand uncertainties.
 Two other distinctions concern the location and size of operation. Manufacturing
facilities often serve regional, national, or even international markets and therefore,
generally requires larger facilities, more automations and greater capital investment. In
general, service cannot be shifted to distant locations. For example, a hairstylist in Addis
cannot give a hair cut to someone in Arba Minch. Thus, service organization requires
direct customer contact and must locate relatively near their customers.

 Still other distinction is the measurement of quality and productivity. As manufacturing

system tends to have tangible products quality and productivity is relatively easy to
measure. The quality of service system, which generally produces intangibles, is harder
to measure.

1.3. Operations management decision making areas

Operations management is essentially function concerning decision making with respect to
operation system so as to render the necessary customer satisfaction at lowest cost. Operation
managers manage all activities in the transformation of input in to output by making three broad
types of decisions.
a) Strategic (long term) decisions: - a decision is said to be strategic if it has a long term impact
influence a large part of the system and is difficult to undo once implemented. This decision in
the context of oppression systems are essentially those which deals with the design and planning
(long range or intermediate range) aspects. Some examples of such decisions are:
i. Product selection and design: - what product or services are to offer constitute crucial
decisions. Wrong choices of products or a poor choice of design of the product may
render our systems’ operations ineffective and non competitive.
ii. Process selection and planning: - choosing optimal processes of conversion systems is
an important decision concerning choices of technology, equipment and machines.
Process planning pertain to careful detailing of process of resource conversion required
and their sequence includes in such decisions are the aspects of mechanizations and
automations.
iii. Facilities location: - is a long term decision which concerns decision regarding
location of production system or its facilities. Poor locations may spell operating
disadvantages for all times to come. There for it is important to choose right locations
which will minimize total delivered to customers cost (production and distribution costs)
by virtue of location. Evidently such a decision calls for evaluation of location

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 alternatives against multiplicity of relevant factors considering their relative importance
for the system under considerations.
iv. Facilities lay out and materials handling:- is a strategic decisions which are concerned
with relative locations of one department (activity center) with another in order to
facilitate material flow, reduce handling costs, delays and congestion, provide good
housekeeping, facility co ordinations etc. There are many factors that influence the lay
out decision which the decision maker should consider.
v. Capacity planning:-is a long term decisions which concerns the acquisition of
productive resources. Capacity may be considered as the maximum available amount of
output of the conversion process over some specified time span. Capacity planning may
be over short term as well as on a long term basis.
The above mentioned five decision areas will be described in detail in the following units.
b) Operational (short term) decisions: - operational level decisions deal with short term
planning and control problems. Some of these are:
i) Production planning, scheduling and control: - in operation scheduling we
wish to determine the optimal schedule and sequence of operations, economic batch
quantity, machine assignments, and dispatching priorities for sequencing. Production
control is a complementary activity to production planning and involves follow up of the
production plan.
ii. Inventory planning and control:-this problem deal with determinations of optimal
inventory levels at raw materials, in processes and finished goods stage of production
system. How much to order, when to order are two typical decisions involving
inventories. Material requirement planning (MRP) is an important upcoming concept in
such a situation.
iii. Quality assurance: - quality is an important aspect of production systems and we must
ensure that whatever products /services is produced it satisfies the quality requirements of
the customers at lowest cost. This may be termed as quality assurance. Setting standard of
quality, control of quality of products, processes are some of the aspects of quality
assurance.
Iv. Work and job design:-these are problems concerning design of work method systems
and procedure methods improvement, eliminations of avoidable delays, work
measurement, work place lay out, ergonomic considerations in the job design, work and
job restructuring, job enlargement etc.
v. Maintenance and replacement: - these include decisions regarding optimal polices for
preventive, scheduled and breaks down maintenance of the machines repair policies and
replacement decisions. Maintenance is extremely crucial problem area particularly for a
developing economy such as ours because it is only through a very effective maintenance

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 management that we can improve capacity utilization and keep our plant and machinery
productive and available for use.
vi. Cost reduction and control:-for an ongoing production system the role of cost
reduction is prominent because through effective control of total cost of production, we
can offer more competitive products and services. Cost avoidance and cost reductions can
be achieved through various productivity techniques.
c) Controlling decisions: - In every system, the actual accomplishment of objectives may not be
as planned for various reasons. It is there for very important to monitor the actual
performance by measuring the actual output or some performance indicators. The decision in
control system should consider cost benefit aspects of control in mind. If cost of control
exceeds its benefits, it becomes counterproductive. Thus selective control must be exercised
employing the exception principle or Pareto’s law. While taking these decisions, one must
bear in mind the general objective of OM. Let us see the objectives of OM.

Objective of operations management

In general term, the objective of operation management is to produce goods and/or service in
required quantities and quality as per the schedule and at a minimum cost i.e. to maximize the
value created. Briefly, the difference between the value of input and the value of output
represented the value created (profit or customer satisfaction) through production activities.
Quality, quantity, and time schedule are the objectives which determine the extent of customer
satisfaction. If an organization can provide for these at a minimum cost then the value of goods
created or services rendered enhance and that is the only way to remain competitive –which is
the objective of OM.
Why we study operations management?
We study operations management for the following reasons:
Operations management (OM) is one of the three major functions of any
organizations, and it is integrally related to all the other business functions. All
organizations finance (account), Produce (operate) and market (sell) .As operation is
one of the key area of any organization it is important to know how the operations
management segment the activity.
We study operations management because we want to know how goods and services
are produced. The production function is the segment of our society that creates the
products we use.
We study OM to understand what operations managers do. By understanding what
these messages do, you can develops the skills necessary to become such a manager.
We study OM because it is such a costly part of an organization. A large percentage of
revenue of most firms is spent in the operations management functions. Indeed,
operations management provides a major opportunity for an organization to improve
its profitability and enhance its services to society.

1.4. Measuring productivity

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It has been said, “If you can’t measure it, you can’t manage it”. This is particularly true of
productivity.
Now we come to the main question of how we know that we are managing our operation system
well. This concerns the efficiency with which we are converting the input in to outputs. This
conversion efficiency can be roughly gauged by the ratio of: Output /inputs (a term which
generally known as productivity of the system).
Productivity is used for making comparison or to measure improvement. Productivity is a
relative term i.e. it gives sense only when we compare it with: company’s previous performance,
with other similar company’s performance or with the performance of leader of the industry.
Many measures of productivity are possible, and all are rough approximations. Values of output
may be measured by: what the customers pay (dollar values of the output) or simply by the
number of units produced (in manufacturing industry) or customers served (in service industry).
The values of inputs can be measured by: their cost or simply by the number of hours worked.
Productivity may be expressed as:
 Total factor productivity measure:-is the ratio of all output to all input i.e. total
outputs/total inputs. Total inputs include all resources used in the production of goods
and services: labor, capital, raw materials, and energy.
 Multi factor productivity: - measures only a sub set of these inputs.
i.e. output/ (labor + capital), output/ (labor+ capital + materials), output/
(materials + energy).
 Single factor (partial productivity) measure:-is the ratio of output to a single resource
(inputs).
i.e. output/labor, output/capital , output/material, output/energy etc.

Commonly used partial productivity

* Labor productivity
-Units of output per labor hr
-dollar output per labor hr
* Machine productivity
-units of output per machine hr
-tons of output per machine hr
*Capital productivity

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 -units of output per dollar inputs
-dollar output per dollar inputs
* Energy productivity
-units of output per kilowatt hr
-production value per barrel of fuel
-units of output per energy cost

Numerical examples
Example1. Three employees process 600 insurance policies in a week. They work 8 hrs per day,
5 days a week.
Required calculate labor productivity?
Solutions
Labor productivity=output/inputs.
Where, output is number of insurance policies processed and input is hours worked.
600 polices
Labor productivity=
(3 employees )X ( 40 hrs/ employees)
= 5 polices/hours
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. See the following example.
Example: ABC Furniture Company produced 10,000 chairs, with annual labor and equipment
cost of $50,000 and $25000 respectively. Total productivity can be calculated as:
Productivity: chairs/dollar input = __10000chairs____ 0.133chairs/dollar input
$50000 + $ 25000

Labor productivity, however, is measured for this example as:

10,000/50,000=0.20 c h airs /dollar inputs−labor.

Suppose that a $10,000 reduction in labor can be achieved by investing in a more advanced
machine. Labor productivity will increase to: 10,000/40,000=0.25 chairs/labor- dollar. Thus,
from a productivity perspective, it would appear that this investment is attractive. If, however,
that annual cost with the new equipment increases to $40,000 then, total productivity will be:

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 10,000
=0.125 chairs/dollar inputs
$ 40,000+40000
And hence overall productivity would decrease. It is necessary, therefore to examine the
simultaneous effects of all changes on productivity.
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.
Productivity is more difficult to measure in service organization than in manufacturing
organization. In manufacturing, physical inputs and outputs are easy to identify and the values of
outputs are easy to measure. For service, the value of an output is often intangible. For instance,
how does one assess the value of healthy patient?
Productivity measures in service organization are often stated as: benefit/cost ratio.
Exercise
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 labor, and RM & supplies, and labor, capital and
others for the year 2001.
3. Compute partial productivity for labor, and RM and supplies for the year 2000
Measurement is only the first step in improving productivity. Understanding the factors which
affect productivity and selecting the appropriate improvement factors in any given situation is
the second step.

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