Chapter 1 - Introduction to

Operations
Management

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 Learning Objectives

• Define Operations Management (OM)

• Explain the role of OM in business
• Describe the decisions that operations managers
make
• Describe the differences between service and
manufacturing operations
• Identify major historical developments in OM
• Identify current trends in OM
• Describe the flow of information between OM and
other business functions
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What is Operations Management?

The business function responsible for planning,

coordinating, and controlling the resources
needed to produce a company’s products and
services

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 What is Operations Management?

• It is a management function

• Organization’s core function

• Every organization has OM function

– Service or Manufacturing

– For profit or Not for profit

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 Differences between Manufacturers
and Service Organizations
• Services: • Goods:
• Intangible product • Tangible product
• Product cannot be • Product can be
inventoried inventoried
• High customer contact • Low customer contact
• Short response time • Longer response time
• Labor intensive • Capital intensive

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 Similarities-Service/Manufacturers

• All use technology

• Both have quality, productivity, & response
issues
• All must forecast demand
• Each will have capacity, layout, and location
issues
• All have customers, suppliers, scheduling and
staffing issues

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 Service - Manufacturing
• Manufacturing often provides services
• Services often provides tangible goods
• Some organizations are a blend of
service/manufacturing/quasi-manufacturing
(QM) organizations
• QM characteristics include
– Low customer contact & Capital Intensive

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Typical Organization Chart

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 What is Operations Management
Role?
• OM Transforms inputs to outputs
– Inputs are resources such as
• People, Material, and Money

– Outputs are goods and services

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OM’s Transformation Process

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 OM’s Transformation Role

• To add value
– Increase product value at each stage

– Value added is the net increase between output product value

and input material value

• Provide an efficient transformation

– Efficiency – perform activities well at lowest possible cost

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 Product
• For a Customer: It is a combination of or optimal mix
of potential utilities.

• For a Production Manager: It is a combination of

various surfaces and processes as he is solely
responsible for producing the product.

• For a Financial Manager: It is a mix of various cost

elements.

• For a Personnel Manager: It is a mix of various skills

as he selects and trains the personnel to meet future
demand.

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Product: It is defined as a bundle of tangible and
intangible attributes, which along with the service is
meant to satisfy the customer wants.

Production: It means application of processes to the

raw material to add the use and economic values to
arrive at the desired product by the best method
without sacrificing the desired quality.

Management: It is an art or science of getting things

done by the people, by planning, coordinating,
organizing, directing and controlling the activities to
meet specified goals, within the framework of
agreed policies.
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 Production Management
It is a function of management, related to planning,
coordinating and controlling the resources required
for production to produce specified product by
specified methods and by optimal utilization of
resources.

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 Ways of Production
• Production by Disintegration: By separating a
mixture, the desired products are produced.

• Production by Integration: Here various

components of the products are assembled together
to get the desired product

• Production by Service: Here the chemical and

mechanical properties of materials are improved
without any physical change. Ex. Heat treatment of
metals.

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 Difference between OM and PM
• PM is more used for a system where tangible goods
are produced whereas OM is more frequently used
where various inputs are transformed into intangible
services. Hence OM will cover organizations like
banks, airlines, super bazaars, teaching institutions,
libraries etc.

• The term OM is used now a days and it includes PM

and PM precedes OM in the historical growth of the
subject.

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 Objective of OM
To produce the desired product by specified methods
so that the optimal utilization of available resources
is met with. Hence it is responsible to produce the
desired product, which has marketability at the
cheapest price by proper planning, manpower,
material and processes. So it must take care that
right quality goods of right quantity at right place and
at right price should be delivered.

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 Scope of OM
It enables to solve the problems of the organization
like educational institution, production shop,
hospital, departmental store etc. The knowledge of
OM will help manager to tackle the problems of day
to day business as OM consists of planning,
selection of raw materials, planning of processes,
routing, scheduling and controlling the activities.
Ex. Educational Institution.

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 Benefits Derived from Efficient OM

• Consumer: Products are available to him at right

place, at right time, in desired quantity and of
desired quality.

• Investors: Get increased security for their

investments, adequate market returns, credibility
and good image in the society.

• Employer: Gets adequate wages, job security,

improved working conditions and increased
personnel and job satisfaction.
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Benefits Derived from Efficient OM
• Suppliers: They would get confidence in
management and their bills can be released without
any delay.

• Community: Enjoys benefits from economic and

social stability.

• Nation: Will achieve prospects and security

because of increased productivity and healthy
industrial atmosphere.
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 Functions of PM Department
• Material
• Method
• Loading and Scheduling
• Routing
• Dispatching
• Expediting or follow up
• Inspection
• Evaluation

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 Types of Production Systems
• Job Production: Here products are manufactured to meet the
requirements of a specific order. It can be further classified as:

– The job produced only once

– The job produced at irregular intervals
– The job produced periodically at regular intervals

• Batch Production: It is the manufacture of number of identical

products either to meet the specific order or to satisfy the demand.

– A Batch produced only once

– A Batch produced at irregular intervals as per customer order or
when the need arises
– A Batch produced periodically at known intervals

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• Continuous Production: It is a specialized
manufacture of identical products on which the
machinery and equipment is fully engaged. It is
normally associated with large quantities and high
rate of demand.

– Mass Production
– Flow Production

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Trends in OM
• Service sector growth
• Productivity
Improvement
• Global
competitiveness
• Demands for higher
quality
• Huge technology
changes
• Time based
competition
• Work force diversity
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• Service Sector Growth: The number of jobs in
service producing industries rose from 60% to 80%
of the total jobs. Manufacturing and other goods
producing industries currently account for the
remaining 20%.
• Productivity Changes: Productivity is defined as
the value of outputs (services and products)
produced divided by the values of input resources
(wages, cost of equipment etc.)
Output
Productivity =
Input
Labour Productivity
Machine Productivity
Multifactor productivity 25
Question: Calculate the labour and multifactor
productivity respectively for the following operations:
• 3 employees process 600 insurance policies in a
week. They work 8hours / day, 5 days / week.
• A team of workers make 400 units of a product,
which is valued by its standard cost of Rs. 10 each.
The accounting department reports that for this job
the actual costs are Rs. 400 for labour, Rs. 1000 for
materials and Rs. 300 for overhead.

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• Global Competition: Today, to prosper businesses
must view customers, suppliers, facility locations
and competitors in global terms. Most products are
composites of materials and services all over the
world.

• Competition based on Quality, Time and

Technology: Another trend in managing processes
has been an increasing emphasis on competing on
the basis of quality, time and technological
advantage.

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 OM Decisions
Strategic decisions

• Strategic Decisions – set the direction for the entire

company; they are broad in scope and long-term in
nature. These decisions are of strategic
importance and have long-term significance for the
organization.

• Examples include deciding:

– the design for a new product’s production process
– where to locate a new factory
– whether to launch a new-product development plan

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 OM Decisions
Operating Decisions

• These decisions are necessary if the ongoing production

of goods and services is to satisfy market demands and
provide profits.

• Examples include deciding:

– how much finished-goods inventory to carry
– the amount of overtime to use next week
– the details for purchasing raw material next month
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 OM Decisions
Control Decisions
• These decisions concern the day-to-day activities of
workers, quality of products and services, production and
overhead costs, and machine maintenance.
• Examples include deciding:
– frequency of preventive maintenance
– new quality control acceptance criteria

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OM Decisions

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Historical Development of OM

• Industrial Revolution
• Post Civil war Period
• Scientific Management
• Human Relations and Behaviorism
• Operations Research
• Service Revolution

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 The Industrial Revolution
• The industrial revolution developed in England in the 1700s.

• The steam engine, invented by James Watt in 1764, largely

replaced human and water power for factories.

• Adam Smith’s publication The Wealth of Nations in 1776

touted the economic benefits of the specialization of labor.

• Thus the late-1700s factories had not only machine power but
also ways of planning and controlling the tasks of workers.

• The industrial revolution spread from England to other

European countries and to the United Sates.

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 The Industrial Revolution
• In 1790 an American, Eli Whitney, developed the
concept of interchangeable parts.

• The first great industry in the US was the textile industry.

• In the 1800s the development of the gasoline engine and

electricity further advanced the revolution.

• By the mid-1800s, the old cottage system of production

had been replaced by the factory system.

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 Post-Civil War Period
• During the post-Civil War period great expansion of
production capacity occurred.

• By post-Civil War the following developments set the

stage for the great production explosion of the 20th
century:
– increased capital and production capacity
– the expanded urban workforce
– new Western US markets
– an effective national transportation system

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 Scientific Management
• Frederick Taylor is known as the father of scientific
management. His shop system employed these steps:

– Each worker’s skill, strength, and learning ability were

determined.
– Stopwatch studies were conducted to precisely set
standard output per worker on each task.
– Material specifications, work methods, and routing
sequences were used to organize the shop.
– Supervisors were carefully selected and trained.
– Incentive pay systems were initiated.

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 Scientific Management
• In the 1920s, Ford Motor Company’s operation
embodied the key elements of scientific management:

– standardized product designs

– mass production
– low manufacturing costs
– mechanized assembly lines
– specialization of labor
– interchangeable parts

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 Human Relations and Behaviorism
• In the 1927-1932 period, researchers in the Hawthorne
Studies realized that human factors were affecting
production.

• Researchers and managers alike were recognizing that

psychological and sociological factors affected
production.

• From the work of behaviorists came a gradual change in

the way managers thought about and treated workers.

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 Operations Research
• During World War II, enormous quantities of resources
(personnel, supplies, equipment, …) had to be deployed.

• Military operations research (OR) teams were formed to

deal with the complexity of the deployment.

• After the war, operations researchers found their way

back to universities, industry, government, and
consulting firms.

• OR helps operations managers make decisions when

problems are complex and wrong decisions are costly.

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 The Service Revolution
• The creation of service organizations accelerated sharply after
World War II.

• Today, more than two-thirds of the US workforce is employed in

services.

• About two-thirds of the US GDP is from services.

• There is a huge trade surplus in services.

• Investment per office worker now exceeds the investment per

factory worker.

• Thus there is a growing need for service operations management.

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 The Computer Revolution
• Explosive growth of computer and communication technologies

• Easy access to information and the availability of more information

• Advances in software applications such as Enterprise Resource

Planning (ERP) software

• Widespread use of email

• More and more firms becoming involved in E-Business using the

Internet
• Result:

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Business Information Flow

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 OM Across the Organization

• Most businesses are supported by the functions of

operations, marketing, and finance

• The major functional areas must interact to achieve

the organization goals

• Marketing is not fully capable of meeting customer

needs if they do not understand what operations can
produce

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 OM Across the Organization -
continued
• Finance cannot judge the need for capital investments if
they do not understand operations concepts and needs

• Information systems enables the information flow

throughout the organization

• Human resources must understand job requirements

and worker skills

• Accounting needs to consider inventory management,

capacity information, and labor standards

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