Operations Management

Dr. Yee Nwe Htun

Lecturer
Department of Management Studies
Meiktila University of Economics
Evolution of Operations
Management
 The Scientific Management Movement (20th
Century)
 Introduction of the Assembly Line
 Methods-Time Measurement
 Lean Production of Toyota (After World War II)
 Six Sigma of Motorola (1980s)
 ISO 9000 (1987)
 Lean Management (1990)
 Business Process Re-engineering
Benefits of OM
 Giving your company a competitive
advantage
 Increasing your profitability
 Increasing product quality
 Ensuring you comply with government
regulations
 Increased customer satisfaction
 Helps in waste reduction
 Increased teamwork
 Chapter 1
Operations and Productivity
What is OM?

For every enterprise, the production of

goods requires operations
management.
Efficient production of goods and
services requires effective applications
of the concepts, tools, and techniques
of OM.
 Cont’d

Production is the creation of

goods and services
Operations management (OM) is
the set of activities that creates
value in the form of goods and
services by transforming inputs
into outputs
Organizing to Produce Goods and Services
 Every business must perform three major
functions, marketing, production/operations
and finance/accounting.
 These major functions are needed to be
coordinated for an organization’s survival.
 Marketing creates demand (nothings happen
until there is a demand)
 Production/operations – creates the product
 Finance/accounting – tracks how well the
organization is doing, pays bills, collects the
money
Organization Chart for a Manufacturing Organization
The Supply Chain
 A supply chain is a network between a
company and its suppliers to produce and
distribute a specific product to the final buyer.
 A global network of organizations and
activities that supplies a firm with goods and
services.
 The collaboration between all members of
supply chain can efficiency and customer
satisfaction be maximized.
Soft Drink Supply Chain
Why study OM?
 OM is one of three major functions
(marketing, finance, and operations) of any
organization
 We want (and need) to know how goods
and services are produced
 We want to understand what operations
managers do
 OM is such a costly part of an organization
 Cont’d

In a globally competitive business

world, development of increasingly
effective operations is the approach
taken by many companies.
 Options for Increasing Contribution
Marketing Finance OM Option
Option Option
Current Reduce Reduce
Increase Sales
Finance Costs Production
Revenue 50%
50% Costs 20%
Sales $ 100,000 $ 150,000 $ 100,000 $ 100,000
Costs of Goods - 80,000 - 120,000 - 80,000 - 64,000
Gross Margin 20,000 30,000 20,000 36,000
Finance Costs - 6,000 - 6,000 - 3,000 - 6,000
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% - 3,500 - 6,000 - 4,250 - 7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500
What Operations Managers Do
All good managers perform the basic
functions of the management functions
such as-
Planning
Organizing
Staffing
Leading
Controlling
10 Strategic OM Decisions
1. Design of goods and services
What good or service should we offer?
How should we design these products
and services?

2. Managing quality
How do we define quality?
Who is responsible for quality?
3. Process and capacity design
What process and what capacity will
these products require?
What equipment and technology is
necessary for these processes?

4. Location strategy
Where should we put the facility?
On what criteria should we base the
location decision?
5. Layout strategy
 How should we arrange the facility?
 How large must the facility be to meet
our plan?

6. Human resources and job design

 How do we provide a reasonable work
environment?
 How much can we expect our
employees to produce
7. Supply chain management
Should we make or buy this
component?
Who are our suppliers and who can
integrate into our e-commerce
program?
8. Inventory, material requirements
planning, and JIT
How much inventory of each item
should we have?
When do we re-order?
9. Intermediate and short–term
scheduling
Are we better off keeping people on
the payroll during slowdowns?
Which jobs do we perform next?

10.Maintenance
Who is responsible for maintenance?
When do we do maintenance?
The Heritage of OM
Eli Whitney (1800)- credited for the
early popularization of
interchangeable parts, which was
achieved through standardization and
quality control
Frederick W.Taylor (1881)- scientific
management
 Taylor believed that management should be
much more resourceful and aggressive in the
improvement of work methods.
 He was among the first to systematically seek the
best way to produce.
 Another contributions of Taylor was the belief that
management should assume more responsibility
for-
1. Matching employees to the right job
2. Providing proper training
3. Providing proper work methods and tools
4. Establishing legitimate incentives for work to be
accomplished
Significant Events in OM
Operations for Goods and Services

Service
Goods
s

Product
 Goods An inherently useful and a
relatively scarce tangible item (article,
commodity, material, merchandise, supply,
wares) produced from agricultural,
construction, manufacturing or mining.

 Services Economic activities that

typically produce an intangible product
(education, entertainment, lodging,
government, financial, and health services)
 Manufacturers produce both tangible goods
and intangible services.
 The operation activities for both goods and
services are often very similar.
 However, some major differences do exist
between goods and services although
almost all services and almost all goods are
a mixture of a services and a tangible
products.
Characteristics of Services Characteristics of Goods
Intangible Tangible
Produced and consumed Products can usually be kept in
simultaneously inventory
Unique Similar products produced
Limited customer involvement in
High customer interactions
production
Inconsistent product definitions Products Standardized
Often knowledge based that are hard Standard tangible product tends to
to automate make automation feasible
Product typically produced in a fixed
Services dispersed
facility
Many aspects of quality for tangible
Quality may be hard to evaluate
products are easy to evaluate
Reselling is unusual Product often has some residual value
Goods and Services

100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

Percent of Product that is a Good Percent of Product that is a Service

The Productivity Challenge

Productivity is the ratio of outputs

(goods and services) divided by
inputs (resources such as labor and
capital)

Units Produced
Productivity =
Inputs Used
The operations managers’ job is
to improve this ratio of outputs to
inputs.

Improving productivity means

improving efficiency.
 Productivity can be improved in two ways:
Reducing inputs while keeping outputs
constant
Increasing outputs while keeping inputs
constant
 High production may imply only that more
people are working, but it does not imply
high productivity.
 Only through increases in productivity can
labor, capital and management receive
addition payments.
 Cont’d

Downward pressure is placed on

prices when productivity increases
because more is being produced with
the same resources.
Only through increase in productivity
can the standard of living improve.
However, substantial measurement
problems exists.
 Cont’d

Some of these measurement

problems are-
1. Quality
2. External elements
3. Lack of precise units of measure
Productivity measurement is
particularly difficult in the service
sector, where the end product can be
hard to define.
 Inputs
Outputs
Labor
Transformation Goods
Capital
Services
Management

Feedback Loop

The Economic System Adds Value by

Transforming Inputs to Outputs
An effective feedback loop
evaluates performance against a
strategy or standard.

It also evaluates customer

satisfaction and sends signals to
managers controlling the inputs
and transformation process.
Productivity Measurement
Labor hour is a common measure of
input.

Units Produced
Productivity =
Inputs Used

Single-Factor Units Produced

=
Productivity Labor Hours Used
Example
 Collins Title Insurance Ltd. wants to evaluate its
labor and multifactor productivity with a new
computerized title-search system. The company
has a staff of four, each working 8 hours per day
(for a payroll cost of $ 640/day) and overhead
expenses of $ 400 per day. Collins processes and
closes on 8 titles each day. The new computerized
title-search system will allow the processing of 14
titles per day. Although the staff, their work hours,
and pay are the same, the overhead expenses are
now $ 800 per day.
 Labor productivity with old system:

8 titles per day

= 0.25 titles per labor hour
32 labor hours
(4 staffs x 8 hrs)

 Labor productivity with new system:

14 titles per day

= 0.4375 titles per labor hour
32 labor hours
 Multifactor productivity with old system:

8 titles per day

= 0.0077 titles per dollar
$ 640+ 400

 Multifactor productivity with new system:

14 titles per day

= 0.0097 titles per dollar
$ 640+ 800
Increase in Labor Productivity:
(0.4375-0.25)/0.25= 0.75 (75%)

Increase in Multifactor Productivity:

(0.0097-0.0077)/0.0077= 0.26 (26%)
Productivity Variables

1. Labor
2. Capital
3. Management
Key Variables for Improved Labor
Productivity
Basic education appropriate for the
labor force
Diet of the labor force
Social overhead that makes labor
available
Maintaining and enhancing skills in
the midst of rapidly changing
technology and knowledge
Capital
When capital invested per employee
drops, a drop in productivity can be
expected.
Capital investment is seldom a
sufficient ingredient to increase
productivity.
The trade-off between capital and labor
is continually in flux.
Management
 Management is required for ensuring labor and
capital are effectively used to increase
productivity.
 Improvements can be made through the use of
knowledge and the application of technology.
 Knowledge societies are those in which much
of the labor forces has migrated from manual
work to technical and information-processing
tasks requiring ongoing education.
 A country cannot be a world-class competitor
with second-class inputs.
Productivity and the Service Sector
 The service sector provides a special challenge to the
accurate measurement of productivity and productivity
improvement.
 Productivity of the service sector has proven difficult to
improve because service work is:
1. Typically labor intensive (e.g., counseling, teaching)
2. Frequently focused on unique individual attributes or
desires (e.g., investment advise)
3. Often an intellectual task performed by professionals (e.g.,
medical diagnosis)
4. Often difficult to mechanize and automate (e.g., haircut)
5. Often difficult to evaluate for quality (e.g., performance of a
law firm)
Current Challenges in OM
1. Globalization
2. Supply chain partnering
3. Sustainability
4. Rapid product development
5. Mass customization
6. Lean operations
Ethics, Social Responsibility and Sustainability
Challenges facing operations
managers:
Developing and producing safe,
quality products
Maintaining a clean environment
Providing a safe workplace
Honoring community commitments
Stakeholders
 Those in a vested interest in an organization,
including-
 Customers
 Distributors
 Suppliers
 Owners
 Lenders
 Employees
 Community
Sustainability
Creating and maintaining the
conditions under which humans and
nature exist in productive harmony
while fulfilling the social, economic,
and other requirements of present
and future generations
 If operations managers have a moral
awareness and focus on increasing
productivity in this system, the many of the
ethical challenges will be successfully
addressed.
 Organization using few resources
 Employees committed
 Market satisfaction
 Ethical Climate enhancing