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Operations Management Amity College
Operations and
Productivity

2. 1 - 2Operations Management Brixton College
 First opened in 1971
 Now – 129 restaurants in over 40 countries
 Rock music memorabilia
 Creates value in the form of good food
and entertainment
 3,500+
custom meals per day in Orlando
 How does an item get on the menu?
 Role of the Operations Manager

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 Definition of Operations Management (OM)
 Organizational Functions
 Why Study OM?
 A brief history of operations management
 The future of the discipline
 Goods Versus Services
 Measuring productivity
 Career opportunities in operations
management

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Operations management (OM)Operations management (OM)
is the set of activities that
create value in the form of
goods and services by
transforming inputs into
outputs

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 Operations management focuses on
carefully managing the processes to
produce and distribute products and
services. Major, overall activities often
include product creation, development,
production and distribution.
 It is the management of that part of the
organization that is responsible for
producing goods and/or service.
 Example: Bhageshwor Nursing, Wai-wai

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Table 1.1
Sales $100,000 $150,000 $100,000 $100,000
Cost 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
Finance/
Marketing Accounting OM
Option Option Option
Increase Reduce Reduce
Sales Finance Production
Current Revenue 50% Costs 50% Costs 20%

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 Essential functions:
1.1. MarketingMarketing – generates demand
2.2. Production/operationsProduction/operations – creates the
product
3.3. Finance/accountingFinance/accounting – tracks how
well the organization is doing, pays
bills, collects the money
4.4. Human ResourcesHuman Resources – provides labor,
wage and salary administration and
job evaluation

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 Operations functions consists of all the
activities directly related to producing
good or providing services.
 It is the core of any organization as it is
responsible for the creation of an
organization’s goods or services.

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Value Added
Inputs
Land
Labor
Capital
Information
Control
Transformatio
n/Conversion
Process
Feedback
Outputs
Goods
Services
Feedback
Feedback

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 Value Added is the term used to
describe the difference between the
cost of inputs and the value or price of
outputs. Value addition differs in both
service and product and profit and non-
profit organization
 Companies critically examine their
business productivity by the value added
to their product or service.
Eliminating/Improving operations
decreases the cost of inputs or
processing thereby increasing value.

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 Budgeting: Budgets need to be
prepared periodically.
 Economic analysis of investment
proposals
 Provision of funds
Operations Management Brixton College

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 Buying/Selling
 Creating Demand
 Selling what is produced and helping to
produce what is sellable.
Operations Management Brixton College

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Figure 1.3

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 Global focus
 Just-in-time
 Supply-chain
partnering
 Rapid product
development,
alliances
 Mass
customization
 Empowered
employees, teams
ToToFromFrom
 Local or national focus
 Batch shipments
 Low bid purchasing
 Lengthy product
development
 Standard products
 Job specialization

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 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction

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 Intangible product
 Produced and
consumed at same time
 Often unique
 High customer
interaction
 Inconsistent product
definition
 Often knowledge-based
 Frequently dispersed

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Basic Management FunctionsBasic Management Functions

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 Planning the geographical location of the plant
 Purchasing Production Equipments
 Layout of Equipment
 Designing production processes and equipments
 Product Design
 Designing Production work and establishing work standards
 Capacity Planning
 Production Planning and scheduling
 Production Control and monitoring productivity
 Inventory Management
 Supply Chain Management
 Quality Control
 Health and Safety
 Industrial Relations

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 Strategic Decision Making (Top Level)
 Participation in implementation of ERP
 Automation of company equipments as per the requirement.
 Adherence to government policy.
 Participation in product design and development.
 Alliances and long-term relation with suppliers
 Technology management and transfer of technology in case
of JV or merger with local or MNC’s
 Be an internal auditor for certification of ISO 9000 and ISO
14000 series.

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 Every company sets it’s goals and target to be achieved. The
company has a purpose for it’s existence and also objectives.
 The hierarchy defines the companies objective. Therefore,
successful achievement of sub-goals leads to achievement of
the organizations objective.
 “Bottle-neck is always at the top, so the success of a company
depends on the avoidance and clearance of bottle-neck.”
 Thus, objectives need to be clearly defined , properly structured
and explicitly stated.
 Core objective of any organization is to produce in required
quantity, quality at the stipulated time with minimum cost
incurred.
 Quality, Quantity, Time at minimum cost would increase the
value of the product or the service rendered.
 Can be subdivided as : Performance and Cost

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 Efficiency: Output per unit of input, efficiency refers to
how well you do something.
 Effectiveness: Effectiveness refers to how useful it is.
 Efficiency is doing things right; effectiveness is doing the
right things.”
 Doing the Right Things is More Important than Doing
Things Right

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 For example, if a company is not doing well and
they decide to train their workforce on a new
technology. The training goes really well - they
train all their employees in avery short time and
tests show they have absorbed the training well.
But overall productivity doesn't improve. In this
case the company's strategy was efficient but not
effective.

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 Quality: The extent to which a product or
service satisfies the customer
 Lead Time or Throughput Time: Time
during conversion process. Hotel Kalash
 Capacity Utilization: The percentage of
labor, equipment and other factors that
have been beneficially used.
 Flexibility: Extent of flexibility of the
conversion process.
08/10/18

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 Customer satisfaction with high quality
product/ service needs to be considered
with reduction in cost of production of
the goods/service.
 Two Types of Cost:
› Explicit Cost: Visible Cost
› Implicit Cost: Invisible Cost
08/10/18

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Explicit Cost Implicit Cost
Material Cost Cost of Carrying Inventory
Direct and Indirect Labor Cost Cost of stock outs, shortages, back-
logging, lost sales
Scrap and rework cost Cost of delayed deliveries
Maintenance Cost Cost of material handling
Cost of Inspection
Cost of grievances or
dissatisfaction
Downtime Cost
Opportunity Cost.
08/10/18

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 1776 -Specialization of labor in manufacturing -Adam
Smith
 1799 -Interchangeable parts, cost accounting -Eli Viihitney
and others
 1832 -Division of labor by skill; assignment of jobs by skill;
basics of time study -Charles Babbage
 1900- Scientific management time study and work study
developed; dividing planning and doing of work
-Frederick W. Taylor
 1900- Motion of study of jobs -Frank B. Gilbreth

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 1901- Scheduling techniques for employees, machines
jobs in manufacturing -Henry L. Gantt
 1915 -Economic lot sizes for inventory control -F.W. Harris
 1927 -Human relations; the Hawthorne studies -Elton Mayo
 1931 -Statistical inference applied to product quality:
quality control charts -W.A. Shewart
 1935 -Statistical sampling applied to quality control;
inspection sampling plans -H.F. Dodge &H.G. Roming

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 1940- Operations research applications in World War ll
-P.M. Blacker and others.
 1946- Digital computer -John Mauchlly and J.P. Eckert
 1947-Linear programming -GB. Dantzig, Williams & others
 1950- Mathematical programming, on-Iinear and
stochastic processes –A. Charnes, W.W. Cooper & others
 1951- Commercial digital computer; large s-cale
computations available. -Sperry Univac

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 1960- Organizational behavior; continued study of
people at work -L. Cummings, L. Porter
 1970- Integrating operations into overall strategy
and policy. Computer applications to
manufacturing. Scheduling and control. Material
requirement planning (MRP)-W. Skinner J. Orlicky
and G. Wright
 1980-Quality and productivity applications from
Japan robotics. CAD-CAM -W.E. Deming and J.
Juran

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 History of Production exists from the early days of
civilization.
 Everything from product design, quality control, to
distribution was simple and done through
experience.
 The scientific and proper production management
saw it’s beginning from the industrial revolution in
the 1700’s.
 Prior to that, every thing was done manually,
design, technique and concept was in the minds
rather than in equipment.
08/10/18

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 It is the process of handcrafting product/services
for individual customers.
 Every piece manufactured was unique, hand
worked and developed entirely by one person
responsible for the product development.
 Availability of raw material initiated the series of
industrial inventions that revolutionized the way of
working.
 Mechanical equipments replaced the labor,
08/10/18

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 The industrial revolution spread from
England to other European countries and to
the United Sates.
 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.

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 Eli Whitney and team after the
introduction of the interchangeable
parts concept shifted manufacturing
from one at a time to volume
production.
 It involved the production of standard
product like firearms, watches, sewing
machine and others.
08/10/18

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 Cost Accounting and other accounting
tools though they were introduced by
the 1800’s scientific management
theories were non-existent until the early
1900’s.
 F.W.Taylor also known as the father of
scientific management introduced the
concept of scientific management
based on observation, measurement
and analysis.
08/10/18

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 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.

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 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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 The specialization theory was devised by Adam
Smith.
 The specialization theory is better known as
division of labour.
 The theory was created for specialized
knowledge of a particular trade or task, also
known as self interest.
 Division of labour involved in the production of
a particular product leads to increased
productivity

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 Today specialization can be seen in companies
and businesses.
 Kellogg specializes in cereals.
 Coca-Cola specializes in soft drinks.
 Hershey’s specializes in candy.
 Apple specializes technology.

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 Motion of study of jobs was devised by
Frank B. Gilbreth
 Motion study involves the analysis of the
basic hand, arm, and body movements
of workers as they perform work.

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 Human relations theory is characterized byHuman relations theory is characterized by
a shift in emphasis from TASK to WORKERa shift in emphasis from TASK to WORKER
 Need for attention
 Social interaction
 Individual achievement
 Intended as a move away from the
“organization as machine” metaphor
 Management recognizes employees as
humans with needs rather than cogs of a
machine

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 “The Hawthorne Studies were conducted from
1927-1932 at the Western Electric Hawthorne Works
in Chicago, where Harvard Business School
Professor Elton Mayo examined productivity and
work conditions.”
 “Mayo wanted to find out what effect fatigue and
monotony had on job productivity and how to
control them through such variables as rest breaks,
work hours, temperatures and humidity.”

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 It was the Americans that took the lead
and became the experts of Mass
Production.
 Human Relation Movement, Hawthrone
Studies, Herzberg Theory, Maslow,
McGregor were all developed during this
period.
08/10/18

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 Japanese lead the word economy and
technology market in the 1970’s. They
were leaders of consumer electronics
and automobiles.
 Major Focus on:
› Quality Comes First
› Improve product and process quality
continuously
› Eliminate all forms of waste.
08/10/18

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 Mass Production produces volume but adaptation
with change in demand is difficult for the
companies.
 Today the market is characterized by Product
Proliferation, Shortened Product life cycle, product
development, segmented market, customized
product and others.
 The Japanese concept of Just in Time has
changed the market from mass production to lean
production.
 TQM is the major reason for the success of the
organizations.
08/10/18

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 With the increase in manufacturing
industries throughout the world,
environment degradation has been a
major issue of discussion
 Recycle, Green Concept, Water safety
08/10/18

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 B2B
 B2C
 C2B
08/10/18

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 Comparison between Service and Manufact
08/10/18

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 Global Market Place
 Operations Strategy
 Total Quality Management
 Flexibility
 Time Reduction
 Technology
 Worker Involvement
08/10/18

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 Re-engineering
 Environmental Issues
 Corporate downsizing or Right Sizing
 Supply Chain Management
 Lean Production
 Change of Focus from seller to buyer
 Ethical Production
08/10/18

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Challenges facingChallenges facing
operations managers:operations managers:
 Developing and producing safe,
quality products
 Maintaining a clean environment
 Providing a safe workplace
 Honoring stakeholder commitments

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Productivity is the ratio of outputs (goods
and services) divided by the inputs
(resources such as labor and capital)
The objective is to improve productivity!The objective is to improve productivity!
Important Note!
Production is a measure of output
only and not a measure of efficiency

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Feedback loop
Outputs
Goods
and
services
Transformation
Economic system
transforms inputs to outputs
/CONVERSITION PROCESS
Inputs
Labor,
capital,
management
Figure 1.6
Random Disturbances

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 Measure of process improvement
 Represents output relative to input
 Only through productivity increases
can our standard of living improve
Productivity =
Units produced
Input used

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Productivity =
Units produced
Labor-hours used
= = 4 units/labor-hour
1,000
250
Labor ProductivityLabor Productivity
One resource input  single-factor productivity

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Output
Labor + Material + Energy
+ Capital + Miscellaneous
Productivity =
 Also known as total factor productivity
 Output and inputs are often expressed
in dollars
Multiple resource inputs  multi-factor productivity

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Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old System:Old System:
=
Old labor
productivity
8 titles/day
32 labor-hrs

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Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old System:Old System:
8 titles/day
32 labor-hrs
=
Old labor
productivity = .25 titles/labor-hr

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Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
32 labor-hrs
=
Old labor
productivity
=
New labor
productivity
= .25 titles/labor-hr
14 titles/day14 titles/day
32 labor-hrs32 labor-hrs

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Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
32 labor-hrs
=
Old labor
productivity = .25 titles/labor-hr
14 titles/day
32 labor-hrs
=
New labor
productivity
= .4375 titles/labor-hr

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Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
=
Old multifactor
productivity
8 titles/day
$640 + 400

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Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
$640 + 400
=
Old multifactor
productivity
= .0077 titles/dollar

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Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
$640 + 400
=
Old multifactor
productivity
=
New multifactor
productivity
= .0077 titles/dollar
14 titles/day14 titles/day
$640 + 800$640 + 800

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Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
$640 + 400
14 titles/day
$640 + 800
=
Old multifactor
productivity
=
New multifactor
productivity
= .0077 titles/dollar
= .0097 titles/dollar

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1.1. QualityQuality may change while the quantity
of inputs and outputs remains constant
(HDTV, iphones)
2.2. External elementsExternal elements may cause an
increase or decrease in productivity
(using more reliable electric power
system)
3.3. Precise unitsPrecise units of measure may be lacking

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1.1. LaborLabor - contributes
about 10% of the
annual increase
2.2. CapitalCapital - contributes
about 38% of the
annual increase
3.3. ManagementManagement -
contributes about
52% of the annual
increase

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1. Basic education appropriate for the labor
force
2. Diet of the labor force
3. Social overhead that makes labor
available such as transportation and
sanitation
 Challenge is in maintaining and
enhancing skills in the midst of rapidly
changing technology and knowledge

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1. Typically labor intensive (teaching,
counseling)
2. Frequently focused on unique individual
desires (customer representatives in banks)
3. Often an intellectual task performed by
professionals
4. Often difficult to mechanize
5. Often difficult to evaluate for quality

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 Customer Service
› Providing right thing at a right price at the
right time
› Manufacturing of goods of given,
requested or acceptable specificaiton
› Supply goods of given, requested or
acceptable specification
› Service Treatment of given requested or
acceptable specification

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 Resource Utilization
› Obtaining maximum effect from resources,
minimization of loss and underutilization.

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 Short Term Period
 Long Term Period

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Product Life Cycle
Sales /
Revenue
Time
Start up Growth Maturity Decline

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 Intermittent Production System
 Continuous Production System

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 Goods and services produced to fulfill
the orders of customer.
 No inventory
 Flexible production facility
 Furniture, Hospital, Work shop

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 Characteristic
› Production in small quantity
› Unbalanced work load on work centers
› High skill manpower to carry out varied
designed works
› High process inventories
› Frequent change in planning, scheduling
› Highly flexible
› High unit cost

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 Classification:
› Job or Unit Production System
 Single Unit or single job completed by an
individual or a group
 Furniture
› Batch Production System
 Large amount or batch job/unit completed
by a group in accordance with the
demand of customer.
 pharmaceuticals, books

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 Production carried out in accordance
with sales forecast and stock position.
 Importance given to planning
scheduling and controlling
 FMCG, beers