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Bonga UniversityCollege of Business and EconomicsDepartment of ManagementOperation Management Hand outCourse code: (MGMT 3183)Prepared by: Alemgenet H. (MBA)Academic Year 2019/20201

CHAPTER ONENATURE OF OPERATIONS MANAGEMENTChapter Outline:1.1.Introduction What is operations? What is operations Management? Organizing to produce goods and service Why study OM?1.2.Historical Development of OM1.3.Manufacturing Operations and Service Operations Manufacturing Operations Service Operations1.4.Operations Decision Making1.5.Productivity MeasurementLearning ObjectivesWhen you complete this chapter, you should be able to: Define operations management Identify the three major functional areas of organizations and describe how they interrelate Compare and contrast service and manufacturing operations Describe the key aspects of operations management decision making Briefly describe the historical evolution of operations management understand single and multifactor productivity1.1. Introduction1.1.1. DefinitionOperations (production): is that part of a business organization that is responsible for producinggoods and/ or services.Goodsare physical items that include raw materials, parts, andsubassemblies. Operations is those activities concerned with the acquisition of raw materials theirconversation into finished product, and the supply of that finished product to the customer.2

Services are activities that provide some combination of time, location, form, or psychologicalvalue. Operation is what the company does.Examples: goods and services are found all around you. Every book you read, every video youwatch, every e-mail you send, every telephone conversation you have, and every medical treatmentyou receive involves the operations function of one or more organizations. So does everything youwear, eat, travel in, sit on, and access the Internet with. The operations function in business canalso be viewed from a more far-reaching perspective.Operations management: is the set of activities that creates value in the form of goods andservices by transforming inputs into outputs. In manufacturing firms, the production activities thatcreate goods are usually quite obvious. In them, we can see the creation of a tangible product suchas Sony TV or a Harley-Davidson motorcycle. In an organization that does not create a tangiblegood or product, the production function may be less obvious. We often call these activitiesservices.Operation Management: is the management of systems or processes that create goods and/orprovide services. Or Operation Management- is the design, operation, and improvement of thosesystems that create and deliver the firms primary products and services, like marketing and finance.Operation Management is functional field of business with clear line management responsibility.The business function responsible for planning, coordinating, and controlling the resources neededto produce a company’s products and services. Every organization has OM function Service orManufacturing, For profit or Not for profit.Operation Management Adds Value which means the difference between the costs of inputs andthe value of prices of outputs.Value addedInputsOutputsLandTransformation/Conversion edbackControl3

1.1.2. Organizing to produce goods and servicesTo create goods and services, all organizations perform three basic functions. These functionsare the necessary ingredients not only for production but also for an organization’s survival.They are:1. Marketing: which generates the demand, or at least takes the order for a product orservice (nothing happens until there is sale).2. Production/operation: which create product3. Finance/accounting: which tracks how well the organization is doing, pays the bills, andcollects the ProductionSales promotionFacilitiesConstruction; maintenanceProduction and inventory controlScheduling; materials controlQuality assurance and controlFinance /accountingAdvertisingDisbursements/ creditsSalesReceivablesPayablesGeneral ledgerMarket researchSupply chain managementCapital requirementsManufacturingStock issueBond issue and recallTooling; fabrication; assemblyDesignProduct development and designDetailed product specificationsIndustrial engineeringEfficient use of machines, space, gure 1.2: The three basic functions of business organizations4

1.1.3. Why study OM?We study OM for the following reasons:1. OM is one of the three major functions (marketing, finance, and operations) of anyorganization, and it is integrally related to all the other business functions. All organizationmarket (sell), finance (accounting), and produce (operation), and it is important to know howthe OM activity functions. Therefore, we study how people organize themselves for productiveenterprise.2. We want (and need) to know how goods and services are produced.3. We want to understand what operations managers do. By understanding what these managers do, youcan develop the skills necessary to become such a manager.Operation managers have basicmanagement function (planning, organizing, staffing, directing, and controlling This will help youexplore the numerous and lucrative career opportunities in OM. These career opportunities are: Operations manager Time study analyst Production analyst Inventory manager Production manager Quality analyst Industrial engineer Quality manager4. OM is such a costly part of an organizationExample:Fisher technologies is a small firm that must double its dollar contribution to fixed cost and profit in orderto be profitable enough to purchase the next generation of production equipment. Management hasdetermined that if the firm fails to increase contribution, its bank will not make the loan and the equipmentcannot be purchased. If the firm cannot purchase the equipment, the limitations of the oldequipment will force fisher to go out of business and, in doing so, put its employees out of workand discontinue producing goods and services for its customers. Three strategic option (marketing,finance/accounting, and operations) proposed for the firm. The first option is a marketing option, where good marketing management may increase salesby 50%. The second option is a finance/ accounting option, where finance costs are cut in half throughgood financial management. The third option is an OM option, where management reduces production costs by 20%.Which one is the best option that yield the greatest improvement in contribution?5

Given: Current financial contributionSales 100,000Cost of Goods– 80,000Gross Margin20,000Finance Costs– 6,000Subtotal14,000Taxes at 25%– 3,500Contribution 10,500Solution:Options for Increasing ContributionMarketingoptionCurrentSalesCost of GoodsGross MarginFinance CostsSubtotalTaxes at 25%Contribution 100,000– 80,00020,000– 6,00014,000– 3,500 10,500Increase SalesRevenue 50% 150,000– 120,00030,000– 6,00024,000– 6,000 18,000Financial/AccountingOptionReduce FinanceCosts 50% 100,000– 80,00020,000– 3,00017,000– 4,250 12,750OM OptionReduce ProductionCosts 20% 100,000– 64,00036,000– 6,00030,000–7,500 22,5001.1.4. The Activities of Operations ManagementOperations managers have some responsibility for all the activities in the organization whichcontribute to the effective production of goods and services. And while the exact nature of theoperations function’s responsibilities will, to some extent, depend on the way the organization haschosen to define the boundaries of the function, there are some general classes of activities thatapply to all types of operation. Understanding the operation’s strategic objectives. The first responsibility of anyoperations management team is to understand what it is trying to achieve. This meansdeveloping a clear vision of how the operation should help the organization achieve its longterm goals. It also means translating the organization’s goals into their implications for theoperation’s performance objectives, quality, speed, dependability, flexibility and cost.6

Developing an operations strategy for the organization. Operations management involveshundreds of minute-by-minute decisions, so it is vital that operations managers have a set ofgeneral principles which can guide decision making towards the organization’s longer-termgoals. This is an operations strategy. Designing the operation’s products, services and processes. Design is the activity ofdetermining the physical form, shape and composition of products, services and processes.Although direct responsibility for the design of products and services might not be part of theoperations function in some organizations, it is crucial to the operation’s other activities. Planning and controlling the operation. Planning and control is the activity of deciding whatthe operations resources should be doing, then making sure that they really are doing it. Improving the performance of the operation. The continuing responsibility of all operationsmanagers is to improve the performance of their operation.1.1.5. Operation Management Critical Decisions Design of goods and services: What good or service should we offer?How should we design these products and services? Managing quality: How do we define quality? Who is responsible for quality? Process and capacity design: What process and what capacity will these products require?What equipment and technology is necessary for these processes? Location strategy: Where should we put the facility? On what criteria should we base thelocation decision? Layout strategy: How should we arrange the facility? How large must the facility be to meetour plan? Human resources and job design: How do we provide a reasonable work environment? Howmuch can we expect our employees to produce? Supply chain management: Should we make or buy this component? Who are our suppliersand who can integrate into our e-commerce program? Inventory, material requirements planning, and JIT: How much inventory of each itemshould we have? When do we re-order? Intermediate and short–term scheduling: Are we better off keeping people on the payrollduring slowdowns? Which jobs do we perform next? Maintenance: Who is responsible for maintenance? When do we do maintenance?7

1.2. Historical Development of operation ManagementThe field of OM is relatively young, but it history is rich and interesting. Our lives and the OMdiscipline have been enhanced by the innovations and contributions of numerous individuals.Eli Whitney (1800) is credited for the early popularization of interchangeable parts, which wasachieved through standardization and quality control. Through a contract he signed with the U.S.government for 10,000 muskets, he was able to command a premium price because of theirinterchangeable parts.Frederick W. Taylor (1881), known as the father of scientific management, contributed topersonnel selection, planning and scheduling, motion study, and the now popular field ofergonomics. One of his major contributions was his belief that management should be much bemore resourceful and aggressive in the improvement of work methods. Taylor and his colleagues,Henry L. Gantt and Frank Lillian Gilbreth, were among the first to systematically seek the bestway to produce.Another of Taylor’s contributions was the belief that management should assume moreresponsibility for:1. Matching employees to the right job.2. Providing the proper training.3. Providing proper work methods and tools4. Establishing legitimate incentives for work to be accomplished.By 1913, Henry Ford and Charles Sorensen combined what they knew about standardized partswith the quasi – assembly lines of the meatpacking and mail – order industries and added therevolutionary concept of the assembly line, where men stood still and material moved.Quality control is another historically significant contribution to the field of OM. Walter Shewhart(1924) combined his knowledge of statistics with the need for quality control and provided thefoundations or statistical sampling in quality control.8

Table 1.1: summarize the historical development of OM.EraIndustrialRevolutionEvents/ConceptsSteam engineDivision of laborInterchangeable partsPrinciples of scientific managementScientificTime and motion studiesManagement Activity scheduling chartMoving assembly lineHawthorne studiesHumanMotivation 960s19471951theory, 1950sLinear programmingDigital computerSimulation, waiting linedecision theory, PERT/CPMJIT (just-in-time)TQM (total quality management)OriginatorJames WattAdam SmithEli WhitneyFrederick W. TaylorFrank and Lillian GilbrethHenry GanttHenry FordElton MayoAbraham MaslowFrederic HerzbergDouglas McGregorGeorge DantzigRemington RandOperations research groups1970s1980sStrategy and operations1980sBusiness process reengineering1990sSix Sigma1990sTaiichi Ohno (Toyota)W. Edward Deming, JosephJuranWickham Skinner, RobertHayesMichael Hammer, JamesChampGE, Motorola1.3. Manufacturing Operations and Service OperationsProduction of Goods Versus Delivery of Services Goods are physical items that include raw materials, parts, subassemblies, and finalproducts. E.g. Automobile, Computer, Oven, Shampoo Services are activities that provide some combination of time, location, form orpsychological value. E.g. Air travel, Education, Haircut, Legal counsel Production of goods –tangible output9

Delivery of services –an act Service job categories-Government, Wholesale/retail, Financial services, Healthcare,Personal services, Business services, Education.Characteristics of GoodsTangible productCan be inventoriedConsistent product definitionLow customer interactionProduction usually separates from consumptionCharacteristics of ServiceIntangible product: services are usually intangible (for example, your purchase of a ride inan empty airline seat between two cities) as opposed to a tangible good.Produced and consumed at same time: there is no stored inventory. For instance, the beautysalon produces haircut that is “consumed” simultaneously, or the doctor produces an operationthat is “consumed” as it is produced. We have not yet figured out how to inventory haircuts orappendectomies.Often unique: your mix of financial coverage, such as investments and insurance policies maynot be the same as anyone else’s just as the medical procedure or a haircut produced for you isnot exactly like anyone else’s.High customer interaction: services are often difficult to standardize, automate, and make asefficient as we would like because customer interaction demands uniqueness.Often knowledge-based: as in the case of educational, medical, and legal services, andtherefore hard to automate.Frequently dispersed: Dispersion occurs because services are frequently brought to theclient/customer via local office, a retail outlet, or even a house call.Having made the distinction between goods and services, we should point out that in many cases,the distinctions is not clear – cut. In reality, almost all services and almost all goods are a mixtureof a service and a tangible product. Even services such as consulting may require a tangible report.Similarly, the sale of most goods includes a service. For instance, many products have the servicecomponents of financing and delivery (e.g., automobile sales). Many also require after – saletraining and maintenance (e.g., office copiers and machinery). “service” activities may also be an10

integral part of production. Human resource activities, logistics, accounting, training, field service,and repair are all service activities, but they take place within a manufacturing organization.When a tangible product is not included in the service, we may call it a pure service. Althoughthere are not very many pure services, in some instances counselling may be an example. Figure1.2 shows the range of services in a product. The range is extensive and shows the pervasivenessof service d carpetingFast food mealRestaurant meal/auto repairHospital careAdvertising agency/investment managementConsulting rcent of product that is servicePercent of product that is goodFigure 1.2 most goods contain a service, and Most services contain a GoodAttributes of goods and servicesAttributes of Goods(tangible product)Product can be resoldAttributes of Services(intangible product)Reselling a service is unusual.Product can be inventoried.Many services cannot be inventoriedSome aspects of quality are measurableMany aspects of quality are difficult tomeasure.Selling is distinct from productionSelling is often a part of the serviceProduct is transportableProvider, not product, is often transportable11

Site of facility is important for costSite of facility is important for customercontactOften easy to automateService is often difficult to automate.Revenue is generated primarily fromRevenue is generated primarily from thethe tangible productServiceTable 1.2 attributes of Goods and service1.4. Operation Decision MakingThousands of business decisions are made every day. Not all the decisions will make or break theorganization. But each one adds a measure of success or failure to the operations. Hence decisionmaking essentially involves choosing a particular course of action, after considering the possiblealternatives.Operations decision range from simple judgments to complex analyses, which also involvesjudgment. Judgment typically incorporates basic knowledge, experience, and common sense. Theyenable to blend objectives and sub-objective data to arrive at a choice.1.4.1. Framework for Decision-MakingAn analytical and scientific framework for decision implies the following systematic steps: Defining the problemDefining the problem enables to identify the relevant variables and the cause of the problem.Careful definition of the problem is crucial. Finding the root cause of a problem needs somequestioning and detective work. If a problem defined is too narrow, relevant variable may beomitted. If it is broader, many tangible aspects may be included which leads to the complexrelationships. Establish the decision criteriaEstablish the decision criterion is important because the criterion reflects the goals and purpose ofthe work efforts. For many years’ profits served as a convenient and accepted goal for manyorganizations based on economic theory. Nowadays organization will have multiple goals such asemployee welfare, high productivity, stability, market share, growth, industrial leadership andother social objectives.12

Formulation of a modelFormulation of a model lies at the heart of the scientific decision-making process. Model describesthe essence of a problem or relationship by abstracting relevant variables from the real-worldsituation. Models are used to simplify or approximate reality, so the relationships can be expressedin tangible form and studied in isolation. Modeling a decision situation usually requires bothformulating a model and collecting the relevant data to use in the model. Mathematical andstatistical models are most useful models for understanding the complex business of the problem.Mathematical models can incorporate factor that cannot readily be visualized. With the aid ofcomputers and simulation techniques, these quantitative models flexible. Generating alternativesAlternatives are generated by varying the values of the parameters. Mathematical and statisticalmodels are particularly suitable for generating alternatives because they can be easily modified.The model builder can experiment with a model by substituting different values for controllableand uncontrollable variable. Evaluation of the alternativesEvaluation of the alternatives is relatively objective

3 Services are activities that provide some combination of time, location, form, or psychological value. Operation is what the company does. Examples: goods and services are found all around you. Every book you read, every video you watch, every e-mail you send, every tel

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