Operations Management: What Is It and Why Does It Matter?

Operations management executes backend business functions. It is an exciting career field that
oversees manufacturing, inventory, and quality control to prepare products for the market.
Efficient operations enable businesses to thrive and succeed.
What is operations management?
Operations management is the administration of business structure, practices, and processes to
enhance efficiency and maximize profit. It refers to the management of functions that a business
needs to run effectively day-to-day, including:
a. Overseeing multiple departments and providing goals
b. Overseeing and streamlining processes
c. Balancing revenue and costs
d. Developing strategic plans
e. Production, logistics, and supply chain

Why is operations management important?

Operations are the foundation of a business, including how it deals with supply chain and logistics.
Profits rely on lean, efficient operations. Poor business operations can threaten a business’s
survival, so processes must be optimized, the right staff needs to be employed, and physical
locations must be strategic, ethical, and safe.

Operations Management: The Concept, Swot Analysis And The Basics

The Nature of Operations management: Operations Management is the management of

resources and processes to create and deliver goods or services. It appeared as a separate area of
study at the beginning of the 20th century. The term “operations management” covers all aspects
of the management of an organization, from the design to the execution of the processes that
create its output.

As for operations management, the goal is to guarantee that the operations of the organization
are efficient and effective. This blog post will explore the fundamentals of operations
management, its scope and nature. We will also look at some of the challenges that operations
managers face.

Before diving into the type of operations management, you should check out our Advanced
Certificate in Operations, Supply Chain and Project Management that comes with all the
necessary learning materials you need to become an operations manager.

Objectives of Operations Management

Operations management is a field concerned with designing, planning, controlling, and operating
an organization’s production systems. The objectives of operations management are to:

1. Ensure that the organization’s production systems can meet customer demand.
Operations management is the process of ensuring that business operations are efficient with
regards to using as few resources as necessary and effective in terms of meeting customer
demand. The ultimate goal and nature of operations management are to improve the efficiency
and effectiveness of an organization’s operations while also reducing costs.

2. Maximize the efficiency of the organization’s production systems.

The goal of operations management is to maximize the efficiency of these production systems so
that the organization can produce goods and services more effectively and efficiently. There are
plenty of different tools and techniques that operations managers use to achieve this goal, such as
process improvement methods, quality control techniques, and work measurement tools.

3. Minimize the cost of producing goods and services.

The objective of operations management is to minimize the cost of producing goods and services
while still providing high levels of quality and customer satisfaction. One of the effective ways
this can be accomplished is by streamlining production processes and eliminating waste.
Additionally, effective operations managers will continuously look for ways to improve
efficiency and productivity to keep costs low.

4. Improve the quality of the goods and services made by the organization.
The objective of operations management is to improve the quality of the goods and services of
the organization. It can be done through a variety of means, such as improving the efficiency of
production processes, ensuring that products are produced to meet customer specifications, and
reducing waste and defects in finished products. Improving quality can lead to increased
customer satisfaction and loyalty, which can, in turn, lead to higher sales and profits for the
organization.

5. Increase the flexibility of the organization’s production systems.

Operations management strives to increase the flexibility of an organization’s production
systems. The goal is to make the organization more responsive to market demands and better
adapt to changes in the business environment. This may be accomplished through various means,
such as introducing new technologies, revising processes, or changing the organizational
structure.

6. Reduce the risk of disruptions to the organization’s production systems.

The leading objective of operations management is to reduce the risk of disruptions to the
organization’s production systems. This includes ensuring that all necessary resources are
available and that processes are running smoothly and efficiently. Operations managers work to
identify and mitigate potential risks before they can cause problems. Doing so helps keep the
organization’s production systems running smoothly and avoid costly downtime.

7. Improve communication and coordination among all parties involved in operating an

organization’s production systems.
The objective of operations management is to Improve communication and coordination among
all parties involved in the operation of an organization’s production systems. This includes
managers, employees, suppliers, customers, and other stakeholders. By improving
communication and coordination among all parties involved in production, operations managers
can improve efficiency and effectiveness throughout the organization.
Scope Of Operations Management

It is the process of planning, organizing, directing, and controlling the resources needed to
produce goods and services. The scope of operations management includes all the activities
necessary to plan, design, and manage the production and distribution process.

The eight scopes of operations management are as follows:

1) Facility layout planning: This step involves deciding how best to utilize the space in a factory
or office to optimize workflow.

2) Workforce planning and management: This includes ensuring that there are enough employees
with the right skills to do the work required and managing employee performance.

3) Inventory management: This encompasses everything from raw materials to finished products
and ensuring that inventory levels are maintained at an optimum level.

4) Scheduling: This is creating a production schedule that meets customer demand while
maximizing efficiency.

5) Quality control: Quality control is essential to ensuring that products meet customer
expectations and standards.

6) Transportation and logistics: Operations managers must plan to move goods from suppliers to
customers efficiently.

7) Maintenance: Regular maintenance is necessary to keep equipment and facilities running

smoothly.

8) Project management: Many operations require project management to ensure that they are
completed within time and budget.
Components of Operations Management
Forecasting
Forecasting is a critical component and nature of operations management. It helps organizations
make informed decisions about future production needs and capacity requirements. There are
several vital elements to consider when developing a forecasting system, including:

 The type of product or service being produced

 The underlying demand for the product or service
 The lead time required to produce the product or service
 The amount of variability in the production process
 The level of inventory desired
An effective forecasting system takes all of these factors into account and provides accurate
information that can be used to make sound operational decisions.

Total Quality Management

Total Quality Management is a strategic approach to improving an organization’s

competitiveness. It is a philosophy that emphasizes the need for continuous advancement in all
aspects of an organization’s operations, with the ultimate goal of providing customers with
products and services that meet or exceed their expectations.
The Basic Component of Total Quality Management:
1. Quality Planning
2. Quality Control
3. Quality Assurance
4. Quality Improvement
Just In Time

Just In Time (JIT) is a manufacturing philosophy that arose in the 1970s. Its main goal is to
eliminate waste throughout the production process by producing only what is needed and in the
quantities needed.

This philosophy was born out of necessity as businesses increasingly felt the squeeze of overseas
competition. To survive and thrive, they had to find ways to operate more efficiently and cut
costs wherever possible. JIT became one of the most popular methods for achieving this.

1) Produce only what is needed

2) Produce only what is demanded

3) Do not overproduce or keep excessive inventory on hand

4) Streamline the production process to minimise waste and maximise efficiency.

When properly implemented, JIT can result in significant cost savings, improved quality control,
and customer satisfaction. It can also lead to shorter lead times, increased flexibility, and reduced
inventories.

Inventory Management

It is the process of tracking inventory levels and making decisions about what levels are
acceptable. This includes both raw materials and finished goods. The aim should be to strike a
good balance between having too much inventory (which ties up cash and can lead to
obsolescence) and too little inventory (which can lead to stockouts and lost sales).

Inventory management is a critical component of operations management. It encompasses all of

the activities and processes associated with the management of inventory, including but not
limited to procurement, warehousing, transportation, and customer service.
An effective inventory management system must take into account both the physical and
financial aspects of inventory. The physical aspect includes the actual goods or materials that
make up the inventory, while the financial aspect encompasses the costs associated with
procuring, storing, and transporting the inventory.

An effective inventory management system will minimise both the physical and financial risks
associated with excess or obsolete inventory. Excess inventory can tie up valuable resources and
lead to storage costs, while obsolete inventory can result in lost sales and customers.

The components of an effective inventory management system include:

1) A clear understanding of customer demand: This involves forecasting future demand for
products or services and ensuring that there is enough inventory on hand to meet this demand.

2) An efficient procurement process: This ensures that the right products are ordered from
suppliers at the right time and in their required quantities.

3) An effective warehousing strategy: This involves storing inventory in a way that minimizes
damage, loss, or theft while maximizing space utilization.

4) A well-designed transportation network: This ensures that finished goods are delivered to
customers within the stipulated time and in good condition.

Historical Evolution and Key Milestone in the Field

The Historical Evolution of Operations

Management Industrial Evolution Operations Management began in the 1770s at England and
spread at the rest of Europe and to the United States during the 19th century. It substituted
machine power for human power wherein the most significant machine used is the steam engine.
Because of this, production became fast and low cost, economies become scale, standard gauging
system was developed, factories grew rapidly, and countless jobs were provided.

Scientific Management

Scientific Management widely changed the management of factories. It was developed by

Frederick Winslow Taylor, the father of scientific management. This management is hugely
based on observation, measurement, analysis and improvement of work methods and economic
incentives wherein different procedures were studied to identify the best method in doing each
job. During this evolution, Henry Ford practically adopted the scientific management principles
for Taylor. The moving assembly line was introduced which hugely affected many industries.
The mass production was also introduced to the automotive industry.
Humans Relations Movement

Human Relations generally deals with the way on how managers interact with their employees, it
is invented to increase the satisfaction of the workers without sacrificing the quality of a service
or product. This originated from the belief that a satisfied employee will do work more
efficiently. The Human Relations Movement attempted to approach the subject of organizational
management psychologically. Elton Mayo’s work on human behavior at The Hawthorne Works
of The Western Electric Company in Chicago (1924-1927) produced many conclusions in
respect of human relations and motivation theory. This movement led the use, invention and
application of digital computer, linear programming, mathematical programming, commercial
digital computer and large scale computations, and the organizational behavior wherein people
are studied at work.

Decision Models and Management Science

This period is accompanied by the development of several quantitative techniques. In this period,
F.W. Harris developed a mathematical model for inventory order size in 1915. During this
movement, W.A. Shewart applied statistical inference to product quality and made use of quality
control charts. H.F. Dodge and H.G. Roming applied statistical sampling to quality control
wherein the sampling plans were inspected. L.H.C. Tippott conducted studies that provided the
groundwork for statistical sampling theory in 1935. P.M. Blacker and his companions also
involved themselves by doing operations research applications in World War II. These models
were widely used during the said world war specially in forecasting, inventory management,
project management, and other areas of operations management.

The Influence of Japanese Manufacturers

Japanese Manufacturers played a huge role in the evolution of operations management. They
developed management practices that increased productivity and quality. Because these practices
were seen as effective and is considered as a good approach, companies outside Japan became
interested towards them. Different quality and productivity applications from Japan robotics
were also developed which made arose towards W.E. Deming and J. Juran’s names in the world
of management. These operations of the Japanese Manufacturers were still widely used today
and greatly influenced operations management.

Historical Milestone on Operation Management

Henry Ford's invention of the assembly line in the early twentieth century, which significantly
increased productivity and enabled mass production of automobiles, making them more
affordable to the general public, was a watershed moment in operations management; this
marked a significant shift toward standardized manufacturing processes.
Other Historical Milestone includes:

Division of Labor by Adam Smith

Division of labor is one of the most important concepts in social science, not just for economics
but for the study of societies in general. Many scholars, such as Ibn Kalduhn in the 14th century,
or Emile Durkheim in the 20th, have considered the importance of division of labor for how
societies function. But Adam Smith’s discussion in The Wealth of Nations united two key
concepts: division of labor as a motor for generating prosperity, and market systems based on
self-interest as a fuel for that motor.
Lionel Robbins famously gave a definition of his field: "Economics is the science which studies
human behaviour as a relationship between ends and scarce means which have alternative uses."
Although Robbins is rightly seen as one of the foremost free market economists of the early 20th
century, we have been ill-served by this narrow and technical definition.
The reason that division of labor increases wealth, if voluntary exchange is allowed, is what
economists call “increasing returns.” If four people separately produce everything each one
needs, each will be independent but very poor. If the same four people specialize, with one
making shoes and clothing, one growing grain and vegetables, one focusing only on hunting for
meat, and one becoming skilled in making and repairing housing, then the cooperating group will
be wealthier by far than when they were living independently.
Such artisanal specialization was common in the Stone Age, and explains why many of us still
have ancient guild names: Coopers made barrels. Bakers made bread. Smiths worked with iron.
Barber, Brewer, Shoemaker, Skinner, Tailor: the knowledge that allowed a single artisan to have
a trade and make a living is a way of increasing wealth. But it is not yet division of labor,
because it is not yet commerce. Commerce requires (among other things) the division of labor
within a specialization. Since, as Smith pointed out, division of labor is limited by the extent of
the market, the greater the expansion of commerce to new participants the greater the increase in
“opulence,” as Smith charmingly called it, for everyone.
One of Adam Smith’s great contributions was the recognition that the desire to cooperate, in and
of itself, does not ensure prosperity. The institutional form in which cooperation is embedded
makes all the difference. In fact, once cooperation is established, the desire for cooperation as a
primary goal can sometimes be dispensed with. The institutional setting is commerce in a market
system; the new form of cooperation is division of labor.

Interchangeable parts by Eli Whitney

In 1801, Whitney demonstrated to the U.S. Government how muskets could be constructed using
standardized interchangeable parts. After 1801, interchangeable parts helped grow the First
Industrial Revolution in the United States.
Interchangeable parts are components of manufactured goods that are standardized and are easily
replaced with new parts. The concept of interchangeable parts allows for manufactured goods to
be mass-produced rather than individually crafted.
The first example of interchangeable parts was developed for muskets so that soldiers on the
battlefield could easily and quickly repair their muskets. Interchangeable parts were then found
in the cotton gin, which helped clean cotton fibers. Today, interchangeable parts can be found in
appliances and the automotive industry. For example, car parts can be easily replaced with new
parts quickly and without always requiring a great deal of skill or training.
Interchangeable parts were the concept that manufactured goods could be assembled using
standardized parts, which could be replaced in the item as needed with new parts. Before this
concept, manufactured goods were constructed by skilled craftsmen. Items were crafted by hand
and each item was unique, which meant production was slow and if the item broke it could not
be easily repaired.

Gantt chart by Henry Gantt:

Henry Gantt, an American engineer and social scientist, created the Gantt chart in the 1910s to
help plan, coordinate, and track tasks in a project. The Gantt chart is a bar chart that shows the
start and end dates of tasks, as well as their dependencies and deadlines.
A Gantt chart is a commonly used graphical depiction of a project schedule. It’s a type of bar
chart showing the start and finish dates of a project’s elements, such as resources, planning, and
dependencies.
The Gantt chart is the most widely used chart in project management. These charts are useful in
planning a project and defining the sequence of tasks that require completion. In most instances,
the chart is displayed as a horizontal bar chart.
A Gantt chart helps in scheduling, managing, and monitoring specific tasks and resources in a
project. The chart shows the project timeline, which includes scheduled and completed work
over a period of time. The Gantt chart aids project managers in communicating project status and
completion rate of specific tasks within a project, and helps ensure the project remains on track.
By convention, it is a standard tool that makes communication unified among the engineering
and project management communities.
A Gantt chart is a visual description of a project’s timeline. The chart shows the start and end
dates of a project’s components, such as resources and planning. If you are involved in a project,
it is recommended to use a Gantt chart to help organize the various tasks within the project.
Taylor believed that all workers were motivated by money, so he promoted the idea of "a fair
day's pay for a fair day's work." In other words, if a worker didn't achieve enough in a day, he
didn't deserve to be paid as much as another worker who was highly productive.
With a background in mechanical engineering, Taylor was very interested in efficiency. While
advancing his career at a U.S. steel manufacturer, he designed workplace experiments to
determine optimal performance levels. In one, he experimented with shovel design until he had a
design that would allow workers to shovel for several hours straight. With bricklayers, he
experimented with the various motions required and developed an efficient way to lay bricks.
And he applied the scientific method to study the optimal way to do any type of workplace task.
As such, he found that by calculating the time needed for the various elements of a task, he could
develop the "best" way to complete that task.
These "time and motion" studies also led Taylor to conclude that certain people could work more
efficiently than others. These were the people whom managers should seek to hire where
possible. Therefore, selecting the right people for the job was another important part of
workplace efficiency. Taking what he learned from these workplace experiments, Taylor
developed four principles of scientific management. These principles are also known simply as
"Taylorism".
The Role of Operations Management in various industries, including manufacturing and
services

Responsibilities in Operations Management

Operations management is a field of business that involves managing the operations of a

business to ensure efficiency in the execution of projects. It means that the individual in charge
of the department will be required to perform various strategic functions. Some of the functions
include:

1. Product Design
Product design involves creating a product that will be sold to the end consumer. It involves
generating new ideas or expanding on current ideas in a process that will lead to the production
of new products. The operations manager’s responsibility is to ensure that the products sold to
consumers meet their needs, as well as match current market trends.

Consumers are more interested in the quality of the product more than the quantity, and the
organization should create systems that ensure the products produced meet the needs of the
consumer.

2. Forecasting
Forecasting involving making predictions of events that will occur in the future based on past
data. One of the events that the operations manager is required to predict is the consumer
demand for the company’s products.

The manager relies on past and present data on the uptake of the company’s products to
determine future trends in consumption. The forecasts help the company know the volume of
products needed to meet the market demand.

3. Supply Chain Management

Supply chain management involves managing the production process from raw materials to the
finished product. It controls everything from production, shipping, distribution, to delivery of
products.

The operations manager manages the supply chain process by maintaining control of inventory
management, the production process, distribution, sales, and sourcing of suppliers to supply
required goods at reasonable prices. A properly managed supply chain process will result in an
efficient production process, low overhead costs, and timely delivery of products to consumers.

4.Delivery Management

The operations manager is in charge of delivery management. The manager ensures that the
goods are delivered to the consumer in a timely manner. They must follow up with consumers to
ensure that the goods delivered are what the consumers ordered and that they meet their
functionality needs.

If the customer is unsatisfied with the product or is complaining about certain features of the
product, the operations manager receives the feedback and forwards it to the relevant
departments.

Ideal Skills of an Operations Manager

Unlike the marketing or finance departments, where managers are responsible for their
departments, operations management is a cross-department role where the manager assumes an
array of responsibilities across multiple disciplines. To be successful, an operations manager
must possess the following skills:

1. Organizational Abilities
Organizational abilities refer to the ability of the operations manager to focus on different
projects without getting distracted by the many processes. The operations manager should be
able to plan, execute, and monitor each project to the end without losing focus.

If a manager is not organized, uncompleted tasks will pile up, important documents will get lost
in the process, and a majority of the time will be spent finding lost documents that could be
easily accessible had the manager been organized. Good organization skills can increase
production efficiency and help the manager save time.

2. Coordination
An operations manager needs to have good coordination by knowing how to integrate resources,
activities, and time to ensure proper use of the resources toward the achievement of the
organization’s goals. Coordination involves carrying out specific activities simultaneously and
switching between the activities with ease. It also involves dealing with interruptions, obstacles,
and crises, and efficiently going back to the normal routine functions to prevent further
interruptions.

3. People Skills
Most of the responsibilities of an operations manager involve dealing with people. This means
that they must know how to relate with the employees, outside stakeholders, and other members
of senior management. An operations manager should know how to manage the fine lines with
other colleagues by knowing how to communicate, listen, and relate to them on professional and
personal levels.

Since workplaces are made up of people from diverse cultures, the operations manager needs to
show tolerance and understanding to other people. Also, the manager should be able to resolve
conflicts and mediate disputes between employees and members of the senior staff.

4. Tech-savvy
In this age of rapidly advancing technologies, an operations manager needs to have an affinity
for technology in order to be in a position to design processes that are both efficient and tech-
compliant. Modern organizations are becoming increasingly tech-dependent in order to gain a
competitive advantage in the market.

This means that most of the processes conducted manually, such as procurement, must transition
to more efficient automated processes. When an operations manager is familiar with the latest
innovations in the tech industry, they can use the innovations to improve internal processes.

Understanding the transformation process: Converting inputs into outputs

A transformation process is any activity or group of activities that takes one or more inputs,
transforms and adds value to them, and provides outputs for customers or clients. Where the
inputs are raw materials, it is relatively easy to identify the transformation involved, as when
milk is transformed into cheese and butter. Where the inputs are information or people, the
nature of the transformation may be less obvious. For example, a hospital transforms ill patients
(the input) into healthy patients (the output).

Transformation processes include:

changes in the physical characteristics of materials or customers

changes in the location of materials, information or customers

changes in the ownership of materials or information

storage or accommodation of materials, information or customers

changes in the purpose or form of information

changes in the physiological or psychological state of customers.

Often all three types of input – materials, information and customers – are transformed by the
same organization. For example, withdrawing money from a bank account involves information
about the customer's account, materials such as cheques and currency, and the customer. Treating
a patient in hospital involves not only the ‘customer's’ state of health, but also any materials used
in treatment and information about the patient.

One useful way of categorizing different types of transformation is into:

manufacture – the physical creation of products (for example cars)

transport – the movement of materials or customers (for example a taxi service)

supply – change in ownership of goods (for example in retailing)

service – the treatment of customers or the storage of materials (for example hospital wards,
warehouses).

Several different transformations are usually required to produce a good or service. The overall
transformation can be described as the macro operation, and the more detailed transformations
within this macro operation as micro operations.

The Interplay between Operational and Other Business Functions

The role of operations management impacts on all functional areas of a business organization
including Marketing, Human Resources (HR) and Finance.

In general, the Operations Department depends on other departments in the firm, if it is to run
smoothly. It is because it is concerned with providing the right products in the right quantities, at
the right quality level, to the right customers, in a cost-effective and timely manner.

How is operations management linked with other business functions?

The relationship between operations and the other business functions is fairly easy to understand,
so let’s take a look.

Impact of production on Marketing

Production affects quantity, uniqueness and quality of products.

Product, price, promotion and distribution play an important part in the overall Marketing Mix.
The production method used will affect both the quality and the individuality of the product. An
exclusive product means that it can be marketed at a high price due to its uniqueness and high
quality. However, when there are likely to be plenty of substitutes of the product available on the
market, prices will be much more competitive. Promotional strategies are also more impersonal
and aggressive in order to gain market share from rival firms. Marketing will ask questions
where to distribute products. Businesses that rely on high volume sales to gain high profits such
as supermarkets aim to increase the number of distribution channels to ensure maximum sales.
The correct types of packaging to appeal to customers. Process, physical evidence and people
also play an important part in the extended Marketing Mix. Research and Development (R&D)
of products will be done jointly by the operations department and marketing department.

Example 1: Customers of the car brand Lamborghini are invited by a sales manager to meet in
person and discuss personal requirements for their super cars. By contrast, mass produced
products such as Coca-Cola or BigMac are standardized and sold in millions every single day.

Impact of production on Human Resources (HR)

Different production methods require workers to possess different expertise.

The role of operations management has a direct impact on Human Resource (HR) management.
Any change in production methods can either increase or decrease the size of the workforce. Job
production will increase the number of workers required while mass production uses capital-
intensive technologies, so it tends to deskill the workforce. Motivation will also be affected by
aspects of operations management. Whilst flow production suffers from a lack of teamwork and
group dynamics, cell production benefits from using the individual skills of people working
within a team. There are also training implications when it comes to different production
methods – both training and organizing training for staff. Job production techniques require more
training whereas mass production requires minimal instructional training only. When it comes to
recruitment, it is relatively easy to hire workers for mass production whereas attractive
remuneration packages may be needed to entice specialist workers for job production. Crisis
management can be highly disruptive and unsettling for people, so effective contingency plans
are needed. The Human Resources (HR) department will also need to handle any disputes and
grievances involving staff.

Example 2: Many multinational companies managed to enter China prior to its membership of
the World Trade Organization (WTO) by setting up labor-intensive operations – manufacturing
plants where the operations could easily be automated.

Impact of production on Finance

Capital-intensive production or labor-intensive production affects the sources and amount of
finance differently.

Different types of products require different production techniques. Questions will be asked
which supplies to use. Capital intensity and lean production require heavy investment in
machinery and equipment. This is expensive although with mass production the fixed investment
costs can be spread over time. Capital-intensive firms are likely to use investment appraisal
techniques to assess whether the risks are worthwhile. They are also likely to need external
sources of finance to fund the investment projects. A contingency fund, which is finance kept for
emergency use, may also be reserved in case of machinery breakdowns or late deliveries from a
supplier, which would delay production. On another hand, labor-intensive production requires a
greater proportion of a firm’s cost to go into remunerating labor with wages, salaries and other
financial benefits. Methods of payment to be used for employees departmental budgeting.
Operations management will also suggest efficient ways of warehousing the produced products.

Production is part of an integrated system of a business, therefore cannot be considered in

isolation. As a consequence of the fact that all business functions depend on one another,
operations managers of large businesses company must work with the other departments to make
necessary requests and valuable recommendations.