Three key functions in a business are marketing, operations, and finance. Marketing assesses customer needs, operations manages production/services, and finance handles budgets and funding. These functions interface on product design, forecasting, scheduling, and quality decisions. Operations management involves transforming inputs into outputs through a controlled system using resources according to policies. It aims to efficiently produce goods/services at low cost while improving customer service and reducing waste. Measuring productivity as output over input helps improve competitiveness through cost reductions and market expansion.

3. Three Functions in a Business
• Marketing
• Marketing people are responsible to assess the
needs and wants of customers and communicates
these needs to operations and design people
• Operations
• Operations people can supply information about
the capacity and judge the manufacturing or service
lead time
• Finance
• Must cooperate in budgeting, economic analysis of
investment proposals and provisions of funds

4. The Key functions of a business
• In general marketing, operations and finance
people interface on:
– Product and service design
– Forecasting
– Setting realistic schedules
– Decisions of quality and quantity and so on

5. What is Operations Management?
• OM is composed of two words:
–Operations
– Management
• Production/Operations
–is an intentional act of producing something
in an organized manner.
– is the creation of goods and services
– is the act of transformation i.e. inputs are
processed and transformed into some
outputs.

6. Cont’d …
• Management
– is the art and science concerned with planning,
directing and controlling the work of human
beings towards a common aim.
• Combining these two concepts we can say
that ‘the management of the transformation
process of the inputs into outputs is operation
or production management

7. Cont’d…
• Operations management is about getting the
day to day work done quickly, efficiently ,
without errors and at lowest cost.
• The primary objectives of Operations
management:
– Make a process work right
– Improve customer service
– Reduce wastage/cost

8. Cont’d …
In a more comprehensive manner - operations
management is the activity whereby resources in a
defined system, are combined and transformed in
a controlled manner to add value in accordance
with policies communicated by management.
• Key concepts in the above definition:
– Resources
– Systems
– Transformation
– Managerial policy

9. The first key element is resources
• There are two types of resources
• Transforming resources – like staff and facility
• Transformed resources - which give the operation system
its purpose or goal like
– Physical – manufacturing
– By location – transportation
– By ownership- Retail
– By physiological state – health services
– By psychological state – entertainment
– Information with ppty- accountant

10. The second Key element is System
• What is a system?
• A system is arrangement of interdependent,
interactive and interrelated components
designed to achieve an objective according
to the plan.
• What are the two major working principles of
a system?
• Synergy
• Entropy

11. The third key element is value addition
• Add value/Tramsformation
• The essence of operations function is to add
value during the transformation process

12. 12
OM’s Transformation Process

13. Discussion Question
• Some managers view operations function as a
“black box” which takes raw materials and
transform into goods and services without
considering the need to consider the external
environment.

14. Role of Operations Manager
• Operations manager should:
–Understand the overall objectives of the
organization
–Develop the operation plan of the
organization and control the function
–Assume responsibility in the design of
goods/services and jobs
–Explain their own plans to the other functions
–Improve the Operation

15. Discussion Question
Why study operations management?

16. Why Study OM?
• Why you need to study operations management?
–Operations management activities are at the
core of all business organizations.
–More of all jobs are in operations
management related areas.
–Activities in all of the other areas of business
organizations are all interrelated with
operations management activities.
–Operations management has been recognized
as an important factor in a country’s well
being.

17. Cont’d …
 It plays an important role in the society
in which we live:
 Higher standard of living
 Better quality goods and services
 Concern for the environment
 Improved working conditions

18. HISTORICAL EVOLUTION OF OPERATIONS
MANAGEMENT
• Systems for production have existed since ancient times:
– The Great Wall of China
– The Egyptian Pyramids and
– The ships of Spanish empire
– The Aksumit Obelisks
– The rock- hewn churches of Lalibela
– The Palace of Emperor Faciledes
– The well of Harrer
• Major indicators for the prevalence of well organized
production

19. Cont’d
• The evolution of operations management can
be classified into three periods:
– Before 1930’s – manufacturing management
– From 1930’s-1950’s- Production management
– Since 1970’s – Operations management
• The name of the evolution of operations
management and its evolution as a discipline is
parallel

20. Cont’d …
• Before 1930’s –
– The traditional view of manufacturing management
began in the eighteenth century when Adam Smith
recognized the economic benefits of specialization
of labor.
– He recommended breaking jobs down into subtasks
and reassigning workers to specialized tasks then
they would become highly skilled and efficient.
– Objective- narrowing the scope of work a worker
need to be assigned
– Interchangeable parts (Eli Whitney, 1970s)

21. Cont’d …
-Efficiency school of thought
• The belief that rationality on the part of
management will yield economic efficiency.
–To determine how efficient labor is in a
given situation, management sets a
standard
–scientific analysis of work tasks
–Application of techniques to work tasks
– Physical aspects of work environment

22. Historical Evolution of OM…
• From the school of efficiency
– Henry Gant introduced the concept of task and
bonus plan and Scheduling
– The Gilbreth’s introduced the principles of motion
economy that could be applied to incredibly small
portion of tasks
• The school of process management (1900s)-
according to this school management is
viewed as a continuous process of planning,
organizing and controlling

23. Historical Evolution of OM…
• Production Management becomes the
acceptable term from 1930s to 1950s.
– At this time, however, management also began
discovering that workers have multiple needs,
not just economic needs
– Henry Ford – introduced the concept of Mass
production and Assembly line
– The different types of quality control tools like
inspection, SQC and DOE were introduced
– The school of decision making analysis with
different mathematical tools were emerged
during this time.

24. Historical evolution of OM…
• After 1970s the name production
management was transformed into operations
management. During this era two distinct
changes were occurred:
– The Service Revolution
– An emphasis on synthesis, rather than
just analysis, in management practices.

25. Summary of the HDOM
Date Contribution Contributor
1776 Specialization of labor in
manufacturing
Adam Smith
1799 Interchangeable parts, cost
accounting
Eli Whitney 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 study of jobs Frank B. Gilbreth

26. Summary of the HDOM .. cont
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
Walter A. Shewhart
1935 Statistical sampling
applied to quality control;
inspection sampling plans
H. F. Dodge and
H. G. Romig

27. Summary of the HDOM … cont
1940 Operations research applications in
World War II
P. M. S. Blacket
and others
1946 Digital computer John Mauchly
and J. P. Eckert
1947 Linear programming George B. Dantzig,
William Orchard Hays,
and others
1950 Mathematical programming, nonlinear and
stochastic processes
A. Charnes, W. W.
Cooper, H. Raiffa,
and others
1951 Commercial digital computer; large-scale
computations available
Sperry Univac

28. Summary of the HDOM … cont
1960 Organizational behavior; continued study of people
at work
L. Cummings, L. Porter,
and others
1970 Integrating operations into overall strategy and policy
Computer applications to manufacturing, scheduling,
and control, material and O. Wright
requirements planning (MRP)
W. Skinner J. Orlicky and
O. Wright
1980 Quality and productivity applications from Japan;
robotics,
computer-aided design and manufacturing (CAD/CAM)
W. E. Deming and J. Juran

29. Factors driving the Continued dev.t OM…
Globalization of the Economy – markets and
companies are becoming global in nature
- Being a global, multinational or transnational company
may largely require efficiency and Effectiveness.
- Due to fierce Competition, importance of
manufacturing for the domestic economy is declining
- The current battle ground for market place dominance
is speed objective
Empowerment – cost- effective- operation
But requires good Knowledge and skill of operation workers

30. Factors driving the Continued dev.t OM…
Rapid expansion of advanced technologies
Scarcity of operations resources
Social responsibility issues
Total Quality Management
The necessity for Operations manager to have external
orientation
Requires the involvement of every personnel
Continued growth of the service sector

31. Discussion Question
1. Can there be any difference between public
and business organizations in the application
of operations management?
2. What basic differences and similarities can
exist between the operations system of
goods and services?

32. Production of goods Vs Delivery of
Services
• Manufacturing and service are often different
in terms of what is done but quite similar in
terms of how it is done?
• Both involve design and operation decisions
– What size factory is needed? For Manufacturing
– What size building is needed? For service
– Location, Scheduling, control operation and
allocate resources

33. Difference between the operations
system of a service and manufacturing
…
• Quality Assurance is more challenging in services
• Measurement of productivity is more challenging in service
operations
• Service operations are much more slow and awkward
• Manufacturing systems have more inventory on hand than
service firms
• Higher labor content in services due to on site consumption
and variability of inputs
• Product designs are often easier to patent than service design
• Service by nature involves higher degree of customer contact.
Performance of a service typically occurs at the point of
consumption

34. 34
Goods & Services
• Services
– Intangible product
– Product cannot be
inventoried
– High customer
contact
– Labor intensive
• Manufacturing
– Tangible product
– Product can be
inventoried
– Low customer
contact
– Capital intensive

35. PRODUCTION Vs PRODUCTIVITY
• Production is an organized activity of
transforming raw materials into finished
products which have higher value.
• Production in an industry can be increased by:
– Employing more labor
– Installing more machinery, and
– Putting in more materials, regardless of the cost of
production.
• But increase of production does not necessarily
mean increase in productivity

36. Cont’d …
 Higher productivity results when we put in a
production system an element of efficiency with
which the resources are employed.
Productivity The reduction in wastage of resources
such as labor, machines, materials, power, space,
time, capital, etc.
It implies development of an attitude of mind and
a constant urge to find better, cheaper, easier,
quicker, and safer means of doing a job,
manufacturing a product and providing service

37. Cont’d …
• Higher productivity leads to:
–a reduction in cost of production
–reduces the sales price of an item
–expands markets and
–enables the goods to compete
effectively in the world market.

38. Cont’d …
• In general by enabling an increase in the
output of goods or services for existing
resources:
– productivity decreases the cost of goods per unit,
and
– makes it possible to sell them at lower prices,
thus benefiting the consumers
– while at the same time leaving a margin for
increase in the wages of the workers.

39. Cont’d …
• The strength of a country
• Prosperity of its economy
• Standard of living of the people and
• The wealth of the nation are very largely
determined by the extent and measure of its
production and productivity.
• Thus due to their poor productivity some
countries lose their market position

40. Discussion question
• Why does some countries
achieve the highest productivity
and others not?

41. Negative Impact on Productivity
• A low propensity to save and high propensity to
consume, which affects capital formation and
attract foreign goods
• An increasing demand for service
• An emphasis for short term objectives
• Need for increasing government regulations
which adds the administrative burden of the
countries
• Management
• Technology

42. Example
• Productivity growth in USA in1970’s and
1980’s lagged behind other leading countries
most notably Japan, Korea, UK and West
Germany. Although US productivity was
among the highest, it was losing the ground to
other nations.

43. Causes for lagging productivity gain
• Management problems – foreign managers
were in a better position to deal with quality
and productivity improvements
• Difficulty to measure the productivity of white
collar workers
• Weakness in technological practices
• Quality differences

44. Discussion question
• Now a days researchers conclude that the
American economy is losing its competitive
edge due to low productivity? Thus it requires
manufacturing renaissance. Do you agree with
this issues?

45. Improving productivity
• Develop productivity measures to all operations.
• Look at the system as a whole
• Develop methods for achieving productivity
improvements
• Make it clear that management supports and
encourages productivity improvement
• Measure improvements and publicize them
• Do not confuse efficiency with productivity

46. How do we measure Productivity?
• The ratio between output and one of these
factors of input is usually known as productivity
of the factor considered.
• Productivity may also be considered as a
measure of performance of the economy as a
whole. Mathematically,
– Productivity = Output Value/Input Value
– Factor Productivity = Output due to the factor/Input
factor employed

47. Cont’d …
• In order to assure that productivity
measurement captures what the company is
trying to do with respect to customer
satisfaction and quality, some firms redefined
productivity as:
– Productivity = Effectiveness or value to
customer/Efficiency or cost to producer

48. Cont’d …
• Productivity measurement is the ratio of
organizational outputs to organizational
inputs. Thus productivity ratios can be:
—Partial productivity measurement
—Multi-factor productivity measurement
—Total productivity measurement

49. Cont’d …
1. Partial Productivity Measurement
–Partial productivity measurement is used
when the firm is interested in the productivity
of a selected input factor. It is the ratio of
output values to one class of input.
–PPM = outputs/labor input or
Outputs/Material Input or Outputs/Capital

50. Cont’d …
2. Multi-factor Productivity Measurement
–This productivity measurement technique is
used when the firm is interested to know
the productivity of a group of input factors
but not all input factors.
–MFPM =Outputs/Labor + Capital or
Outputs/Labor + Material

51. Cont’d …
3. Total (Composite) Productivity Measures
–A firm deals about composite productivity
when it is interested to know about the overall
productivity of all input factors.
–This technique will give us the productivity of
an entire organization or even a nation.
–TPM =Outputs/Inputs or Goods and services
provide/All resources Used

53. Chapter Two
Operations strategy
and
Competitiveness

54. What is Strategy?
• Strategy is the direction and scope of an
organization over the long-term, which achieves
advantage in a changing environment through
its configuration of resources with the aim of
fulfilling stakeholder expectations.
• Strategy involves the interplay of three
elements: external environment, resources and
objectives

55. Levels of strategy
• There are three levels of strategy:
–The corporate level strategy
–Business level strategy
–Functional strategy

56. Strategy development
• The business strategy of a company can be
developed after considering factors like:
–Mission of the company
–Environmental scanning
–Core competencies

57. Operations strategy
• Operations strategy is the plan that specifies the
design and use of resources to support the
business strategy.
• Operations strategy can be truly effective if it is
linked with organizational strategy
• Operations strategy deals with:
– Products, processes, methods, operating resources,
quality, costs, lead times and scheduling

58. Importance of operations strategy
• Operations strategy did not come into the
forefront until 1970 due to few factors:
– Mass production
– Had no series competitors
– Were selling what they wanted
• But in 1970 and 1980’s the Japanese companies
began offering products with superior quality
with lowest cost and US companies lost their
market share to Japanese counter parts.

59. Example
• For instance in 1950’s the total market share of
US based automobile industries accounts 50%
whereas the Japan’s firms accounts only 1% of
the world automobile market. In 1960’s the
Japan’s firm market share increased to 24%
whereas the US companies’ market share went
down to 22%.

60. Productivity, competitiveness and
strategy
• Productivity relates to how effective an
organization is in use of its resources
• Competitiveness relates to how effective an
organization in the market place compared
with other organizations that offer similar
products or services
• Strategy shapes the plans that determine the
direction an organization takes I pursuing
goals.

61. Causes of US companies poor
competitiveness
• Decision making was based on short term
horizon
• Certain strategic weaknesses that failed to
recognize the threats posed by foreign
competitors :
– neglected manufacturing functions
– underinvestment in physical and human capital
• Lack of cooperation among departments

62. Competitive Priorities
• There are four major groups of competitive
priorities: cost, quality, time and flexibility
1. Cost - the role of operation strategy is to
develop a plan for the use of resources to
support such kind of competition

63. Cont’d …
• The Operation function must focus on:
– Cutting costs on the system such as materials,
labor and facilities
–Study the operation system carefully to
eliminate waste
–Offering training to employees to maximize
productivity and minimize scrap
–Automating the operations system of the
company so that productivity will be
increased

64. Example - the south west airline
compete on cost
• Its operation function is designed to support cost
strategy
– Facilities are streamlined
– Only one type of airplane is used
– Short flight routs
– All unnecessary costs are eliminated
– Employees are trained to perform many functions
• Because of this strategy south west has been a
model for the airline industry for many years

65. Cont’d …
2. Quality - as a competitive priority has two
dimensions:
– High performance design
– Product and service consistency
• A company that competes on this dimension
needs to implement quality in every area of the
organization
– Product design
– Process Design

66. Cont’d …
3. Time - Companies in all industries are
competing to deliver high-quality products
in as short a time as possible.
–The job of the operations function is to
critically analyze the system and combine or
eliminate processes in order to save time.
–Use technology to speed up processes and
flexible work forces to meet peak demands

67. Cont’d …
4. Flexibility- the ability of a company to readily
accommodate the changes in the environment
can be a winning strategy.
• There are two dimensions of flexibility.
– Product mix flexibility
– Volume flexibility
• To carry out this strategy, flexible companies
tend to have
– More general-purpose equipment
– Skilled and semiskilled workers

68. Cont’d …
• Since it is difficult to focus on all priorities. It is
advisable to distinguish between order winners
and order qualifiers.
• Order qualifiers
• Order winners
• Translating competitive priorities into
operations requirement
• Structure
• Infrastructure

69. Case 1: A bank manager
• The managing director of a bank believes that improved
customer service is the best way for us to differentiate
ourselves from competitors and attract new customers.
We can offer our customers better service by reducing
waiting time in teller lines from an average of six
minutes to an average of three. By opening for business
at 8:30 instead of 9:00, and by remaining open for an
additional hour beyond our current closing time, we
will be better able to accommodate the busy schedules
of our customers. These changes will enhance our
bank’s image as the most customer-friendly bank in
town and give us the edge over our competition.
• Critically evaluate the argument of the bank manager.