Operations Management Notes

Introduction to Operations Management

• Operations Management (OM) is crucial for a country's economic growth.
• Evolved from Production Management, which focused on manufacturing efficiency.
• OM encompasses both manufacturing and service sectors.
• Technological advancements present opportunities and challenges, enhancing manufacturing capabilities.
• Managing service systems is a key challenge in a competitive global environment.
• OM improves business productivity.
• Aims to achieve organizational goals with minimal effort.
• Operation: Transforms inputs into required outputs (services) with requisite quality.
• Management: Combines and transforms resources in the operations sub-system into value-added services.
• Production Management: Management activities involved in manufacturing products.
• Operations Management: Extends the same concepts to services management.

Definitions of Operations Management

• Various definitions emphasize different aspects of OM:
  • Production of goods and services people use daily, enabling organizations to achieve goals through resource efficiency.
  • Interaction and control of processes that transform inputs into finished goods and services.
  • Design, operation, and improvement of production systems.
  • Management of resources to produce goods and services, derived from organizational strategy and mission.
• Joseph G. Monks: Resources flowing within a system, combined and transformed to add value according to management policies.
• Operations managers process inputs into outputs using materials, capacity, and knowledge.
• Scheduling and control are essential to produce required goods/services.
• Control over costs, quality, and inventory levels is necessary.

Key Components of Operations Management

• The definition of operations management contains the following keywords: Resources, Systems, transformation and Value addition Activities.

Resources

• Human, material, and capital inputs to the production process.
• Human resources: Key assets, with increasing focus on planning and controlling activities.
• Material resources: Physical facilities, plant equipment, inventories, and supplies.
• Capital: Vital asset in the form of stock, bonds, taxes, and contributions, regulating resource flow.

Systems

• Arrangement of components to achieve objectives according to plan.
• Business systems: Subsystems of larger social systems.
• Include personnel, engineering, finance, and operations.
• Systems approach recognizes hierarchical management responsibilities.
• Subsystem goals pursued independently lead to sub-optimization.
• Consistent, integrative approach optimizes overall system goals.
• System design: Arrangement of components establishing relationships between inputs, transformation activities, and outputs.
• System control: Actions ensuring activities conform to plans or goals.

Transformation and Value Adding Activities

• Objective: Transform resources into goods and services with higher value.
• Transformation process: Technology applied to inputs.
• Productivity: Effectiveness of production factors in the transformation process.
• Productivity refers to the ratio between values of output per work hour to the cost of inputs.
• Overall ratio must be greater than 1 to add value.
• Operations managers improve transformation efficiency and increase the ratio.
• Value-added is the difference between the cost of inputs and the value/price of outputs.

The Conversation Process (Schematic model for operations system)

• The conversation process includes feedback and environment.

Input Transformation Output Relationship

• Hospital:
  • Input: Patient
  • Resources: MDS, nurses medical supplies, equipment, food, bed etc
  • Transformation: Health care (physiological)
  • Output: Healthy individuals
• Restaurant
  • Input: Hungry customer
  • Resources: Food, chief waiters
  • Transformation: Well-prepared, well-served food
  • Output: Satisfied customers
• Automobile Factory
  • Input: Sheet steel, engine parts
  • Resources: Tools, equipment, workers
  • Transformation: Fabrication and assembly of car
  • Output: High-quality cars
• College
  • Input: High school graduates
  • Resources: Teachers, books, classrooms
  • Transformation: Imparting knowledge and skills, information
  • Output: Educated individuals
• Department Store
  • Input: Shoppers
  • Resources: Displays, stocks of goods, sales clerks
  • Transformation: Attract shoppers, promote products
  • Output: Sales to satisfied customers

Why Study Operations Management?

1. OM is a major function in any organization, related to all business functions (marketing, finance, accounting).
2. Understanding how goods and services are produced.
3. Understanding what operations managers do.
4. OM is a costly part of an organization, offering opportunities to improve profitability and service.

Historical Development of Operations Management

• Recognized as an important factor in economic growth for over two centuries.
• Adam Smith (18th century): Specialization of labor.
• F.W. Taylor (early 20th century): Scientific management.
• 1930s-1950s: Production Management focused on economic efficiency.
• Psychologists and social scientists studied people and human behavior at work.
• Economists, mathematicians, and computer specialists contributed analytical approaches.
• 1970s: Shift to service sector and emphasis on synthesis in management practices.

Historical Summary of Operations Management

• 1776: Specialization of labor in manufacturing - Adam Smith
• 1799: Interchangeable parts, cost accounting - Eli Whitney & 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 - Frederick W.Taylor
• 1900: Motion of study of jobs - Frank B. Gilbreth
• 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
• 1940: Operations research applications in World War II - P.M.Blacker & others
• 1946: Digital Computer - John Mauchlly and J.P.Eckert
• 1947: Linear Programming - G.B.Dantzig, Williams & others
• 1950: Mathematical programming, on-linear and stochastic processes - A.Charnes, W.W.Cooper & others
• 1951: Commercial digital computer: large-scale computations available - Sperry Univac
• 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 & G. Wright
• 1980: Quality and productivity applications from Japan: robotics, CAD-CAM - W.E. Deming & J.Juran

Manufacturing Operations and Service Operations

Manufacturing Operations

• Transformation of raw materials into finished goods or intermediate processes.
• Production of a tangible output (e.g., automobile).

Service Operations

• Services are deeds, processes, and performances.
• A time-perishable, intangible experience performed for a customer as a co-producer.
• Service enterprises facilitate production/distribution of goods, support other firms, and add value to personal lives.

Similarities and Differences

• Similar in terms of design and operating decisions (e.g., facility size, location, scheduling).
• Manufacturing is product-oriented; service is act-oriented.
• Differences:
  • Nature and customer contact.
  • Uniformity of input.
  • Labor content of jobs.
  • Uniformity of output.
  • Measurement of productivity.

Characteristics Distinguishing Manufacturing and Service Operations

1. Nature and Customer Contact: Service has higher customer contact; performance occurs at consumption point. Manufacturing separates production and consumption.
2. Uniformity of Inputs: Services have more variability in inputs than manufacturing. Manufacturing can control variability for low variability.
3. Labor Content of Jobs: Services require high labor content due to on-site consumption and output variation. Manufacturing is more capital intensive.
4. Uniformity of Output: High mechanization generates products with low variability in manufacturing. Service output is more variable.
5. Measurement of Productivity: Straightforward in manufacturing due to uniformity. Difficult in services due to demand intensity and service requirements.
6. Quality Assurance: Challenging in services because production and consumption occur simultaneously. Input variability affects output quality.

General Differences

Operations Decision Making

• Decisions range from simple to complex, blending objective and subjective data.
• Quantitative methods add objectivity.

Major Decision Areas

• Strategic (long term) decisions
• Tactical (intermediate term) decisions
• Operational planning and control (short term) decisions

Strategic (Long Term) Decisions

• Involve significant effort and are periodical.
• Include product design, process design and selection, and location decisions.
• Address questions like:
  • How will we make the product?
  • Where do we locate facilities?
  • How much capacity is needed?
• Strategic decisions affect long-range effectiveness and must align with corporate strategy.

Tactical (Intermediate Term) Decisions

• Efficiently schedule material and labor within strategic constraints.
• Address questions like:
  • How many workers do we need?
  • When do we need them?
  • Should we work overtime?
  • When should materials be delivered?
  • Should we have finished goods inventory?

Operational Planning & Control (Short Term) Decisions

• Narrow and short term.
• Address questions like:
  • What jobs do we work on today/this week?
  • Whom to assign to what tasks?
  • What jobs have priority?

Characteristics of Decisions

• Range from judgments to complex analyses.
• Judgment incorporates knowledge, experience, and common sense.
• Appropriateness depends on:
  • Significance or lasting impact of decisions.
  • Time availability and cost of analysis.
  • Complexity of decision.

Information Environment of Decisions

• Business decision-makers work with incomplete and uncertain data.
• Decisions are made along a continuum from complete information to no information.
• Certainty requires data on all elements. Large samples provide more certainty.

Framework for Decision-Making

1. Defining the problem.
2. Establish decision criteria.
3. Formulate a model.
4. Generate alternatives.
5. Evaluate alternatives.
6. Implement and monitor.

Defining the Problem

• Identify relevant variables and cause of the problem.
• Careful definition is crucial.

Establish Decision Criteria

• Reflects goals and purpose of work efforts.
• May include multiple goals like employee welfare, productivity, stability, market share, growth, and social objectives.

Formulation of a Model

• Describes essence of a problem by abstracting relevant variables.
• Simplifies or approximates reality.
• Requires formulating a model and collecting relevant data.
• Mathematical and statistical models are most useful.

Generating Alternatives

• Involves varying the values of parameters.
• Mathematical and statistical models are easily modified.

Evaluation of Alternatives

• Objective, based on precisely defined criteria.
• Selects the alternative that most closely satisfies the criteria.
• Models like LPP automatically find maximizing or minimizing solutions.

Implementation and Monitoring

• Essential for completing managerial action.
• Requires convincing other managers and follow-up procedures to ensure appropriate action.
• Includes analysis and evaluation of the solution along with recommendations for changes.

Productivity Measurement

• Defined as utilization of resources (material, labor).
• Ratio of output to input.
• Related to quality, technology, and profitability.
• Improved by controlling inputs, improving processes, and enhancing technology.
• Measured at firm, industry, national, and international levels.

Modern Dynamic Concept of Productivity

• Multidimensional phenomenon.
• Productivity energized by competition.
• Cycle: competition → higher productivity → better value for customers → higher market share → still keener competition.
• Relates design and products to customer needs, leading to improved quality of life, higher competition, and better designs.

Factor Productivity and Total Productivity

• Factor productivity: Measured separately for each input resource.
• Total productivity: Measured for all factors of production together.
• Factor productivity at firm/industry levels.
• Total productivity at national/international levels.
• Productivity of materials: Output units per unit material consumed.
• Productivity of operatives: Output units per man-hour.

Productivity Measurement Equations

• $Productivity = \frac{Output}{Input}$
• Partial Measures:
  • $Productivity = \frac{Output}{Labor}$
  • $Productivity = \frac{Output}{Capital}$
  • $Productivity = \frac{Output}{Materials}$
  • $Productivity = \frac{Output}{Energy}$
• Multifactor Measures:
  • $Productivity = \frac{Output}{Labor + Capital}$
  • $Productivity = \frac{Output}{Labor + Capital + Material}$
• Total Measures:
  • $Productivity = \frac{Output}{All Inputs}$

Productivity Comparisons

• Comparing a company with similar operations or using industry data.
• Measuring productivity over time within the same operations.

Productivity Analysis

• Trend analysis: Studying productivity changes over time.
• Horizontal analysis: Studying productivity compared to similar firms.
• Vertical analysis: Studying productivity compared to different industries/firms.
• Budgetary analysis: Setting productivity norms for a future period.

Factors Affecting Productivity

1. Capital/labor ratio: Investment in plant, machinery, and tools.
2. Scarcity of resources: Energy, water, metals.
3. Workforce changes: Labor turnover.
4. Innovations and technology.
5. Managerial factors: Planning and managerial skills.
6. Quality of work life: Organizational culture, motivation, and employee satisfaction.

Key Points for Improving Productivity

1. Develop productivity measures for all operations.
2. Look at the system as a whole.
3. Develop methods for improvement (worker ideas, studying other firms).
4. Establish reasonable goals.
5. Support and encourage productivity, consider incentives.
6. Measure improvements and publicize them.

Scope of Operations Management

• Conversion of inputs into outputs using physical resources.
• Providing desired utilities to the customer while meeting organizational objectives.
• Focus on ‘conversion by using physical resources’.

Activities under Production and Operations Management

• Product design
• Process design
• Production planning and control
• Quality control
• Materials management
• Plant layout & Material handling
• Location of facilities
• Maintenance management
• Production operations management