Chapter 1

INTRODUCTION TO OPERATIONS
MANAGEMENT AND
PRODUCTIVITY

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Syllabus Content
1. Overview of Operation Management
2. Organizing to Produce Goods and Services
3. Operations for Goods and Services
4. Productivity Challenge
5. New Challenges in Operation Management

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1. Overview of Operation Management (OM)
• OM is a discipline that applies to restaurant like Hard rock café as well
as to factories like Ford and Harley-Davidson Motorcycle
• It doesn’t matter if the application is in an office, a hospital, a
restaurant, a department store, or a factory – the production of goods
and services require OM.
• The efficient (doing the job well: with minimum of resources and waste)
production of goods and services requires effective applications of the
concepts, tools and techniques of OM
The Definitions
• Production : The Creation of goods and services
• Operation Management: Activities that relate to the creation of goods
and services through the transformation
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of inputs to outputs
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2.0 Organizing to Produce Goods and Services
• To create goods and services, all organizations perform three
functions:-
1. Marketing : to generates demand
2. Production/Operation: Creates, produces and delivers products
3. Finance/Accounting: Track how well the organization is doing,
pays the bills, and collects the money

• Operations is one of the three functions that every organizations

performs

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 2.1 Organization Charts for Service Organization
(A) Commercial Bank

Operations Finance Marketing

Teller scheduling Investments
Check Clearing Securities Loans (B) Airline
Real Estates Commercial
Collection
Industrial
Transaction processing
Financial
Facilities design/Layout
Accounting Personal
Vault Operations
Mortgage Operations Finance Marketing
Maintenance
Security
Auditing Trust Ground support Equipment Accounting Traffic administration
Department Maintenance Accounts Payable Reservations
Ground Operations Accounts Receivable Schedule
Facility maintenance General Ledger Tariffs (Pricing)
Catering Finance Sales
Flight Operation Cash Control Advertising
Crew Scheduling International Exchange
Flying
Communications
Dispatching
Management Science

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 2.2 Organization Charts for Manufacturing
Organization
(C) Manufacturing

Operations
Finance/Accounting
Facilities
Construction, Maintenance Disbursements/credits Marketing
Production and inventory control Accounts receivable
Scheduling, materials control Accounts Payable
Quality assurance and control Sales promotion
General Ledger
Supply chain management Advertising
Funds Management
Manufacturing Sales
Money Market
Tooling, fabrication, assembly Market Research
International Exchange
Design Capital Requirements
Product development and design Stock Issue
Detailed product specifications Bond Issue and recall
Industrial engineering
Efficient use of machines, space, and personnel
Process Analysis
Development and installation of production tools
and requirement

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 2.3 Why Study OM?
We Study OM for four reasons:-

1. To learn how people organize themselves for productive enterprise

2. To learn how goods and services are produced

3. To understand what operations managers do

4. Because OM is a costly part of an organization

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 2.4 What OM Managers Do?
• All goods managers perform the basic functions of the management process (planning, organizing,
staffing, leading, controlling)

• The TEN OM Strategic Decision are required of operation managers:-

1. Design of good services
2. Managing quality
3. Process strategy
4. Location strategies
5. Layout Strategies
6. Human resources
7. Supply chain management
8. Inventory management
9. Scheduling
10. Maintenance
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3.0 Operations for goods and services
• Manufacturers produce a tangible product, while service products are often
intangible

• The definition of services: Economic activities that typically produce an

intangible product (e.g: education, entertainment, lodging, government,
insurance, transportation etc) – almost all services and almost all goods are a
mixture of a service and a tangible product

• Service Sector: The segment of the economy that includes trade, financial,
lodging, education, legal, medical, and other professional occupation
- Services now constitute the largest economic sector in
postindustrial societies
- The huge productivity increases in agriculture and manufacturing
allowed mire economic resources to be devoted to services
- Many service jobs pay very well
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 3.1 Differences Between Goods and Services
Characteristic of Services Characteristics of Goods
Intangible Tangible
Produced and consumed simultaneously Product can usually be kept in inventory
Unique Similar product produced
High customer interaction Limited customer interaction
Inconsistent product definition Product standardized
Often knowledge based Standard tangible product tends to make automation
feasible
Service dispersed Product typically produced at a fixed facility
Quality may be hard to evaluate Many aspects of quality for tangible products are
easy to evaluate
Reselling is unusual Product often has some residual value

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4.0 Productivity Challenge
• The creation of goods and services requires changing resources into goods and
services
• The more efficiently we make this change, the more productive we are
• Productivity : is the ratio of outputs (goods and services) divided by the inputs
(resources)
• The OM manager’s jobs is to improve this ratio of output to input (improving productivity
means improving efficiency)
• This improvement can be achieved in two ways:
1. reducing inputs while keeping output constant
2. increasing output while keeping inputs constant
Inputs Outputs
Labor, capital, management Transformation process Goods or services

Feedback loop

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4.1 Productivity Measurement
• Productivity – the ratio of outputs (goods and services) divided by one or more
inputs (such as labor, capital, or management)

Productivity = Unit Produced

Input used

• High production means producing many units, while high productivity means
producing unit efficiently

• Only through increase in productivity can the standard of living of a country improve

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4.1 Productivity Measurement
• Single-factor productivity (Labor Productivity)
- Indicates the ratio of goods and services produced (output) to one resource (input)

Productivity = Unit produced

Input used

For example, it units produced = 1,000 and labor-hours used is 250, then:

Single Factory Activity = Unit Produced = 1,000 = 4 units per labor-hours

Labor-hours used 250

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4.1 Productivity Measurement
• Multifactor productivity (Total Factor Productivity)
- Indicates the ratio of goods and services produced (output) to many or all
resources (input)

Multifactor Activity = Output

Labor + Material + Energy + Capital + Miscellaneous

 also known as total factor productivity

 outputs and inputs are often expressed in dollars

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4.1 Productivity Measurement
• Measurement problems are:

1. Quality may change while quantity of inputs and outputs remain constant

2. External elements may cause an increase or decrease in productivity

3. Precise units of measure may be lacking

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4.2 Productivity Variables
• Productivity increase are dependent on three productivity variables:

1. Labor – contribute about 10% of the annual increase

2. Capital – contributes about 38% of the annual increase
3. Management – contributes about 52% of the annual increase

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4.2 Productivity Variables
1. Labor
- Improvement in the contribution of labor to productivity is the result of a healthier,
better educated, and better-nourished labor force

- Key variables for improved labor productivity are

 Basic education appropriate for an effective labor force –
Diet for labor force
Social overhead that makes labor available, e.g. : transportation and sanitation
Maintaining and enhancing the skills of labor force

- Overcoming shortcoming in the quality of labor is a major challenge. Perhaps

improvement can be found not only through increasing competence labor but also via
better utilized labor with stronger commitment (training, team building, motivation
etc.)
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4.2 Productivity Variables
2. Capital
- Inflation and taxes increase the cost of capital – making capital investment
increasingly expensive
- when the capital invested per employee are drops, we can expect a drop in
productivity
- Using labor rather than capital may reduce unemployment in the short run, but it
also makes economies less productive and therefore lower wages in the long run

3. Management
- Management is responsible for ensuring that labor and capital are effectively used
to increase productivity
- Knowledge society – a society in which much of the labor force has migrated from
manual work to work based on knowledge (ongoing education)
- Education and training are important high cost items – thus OM Managers must
use technology and knowledge effectively
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4.3 Productivity and the Service Sector
• The services sector provides a special challenge to the accurate measurement of
productivity and productivity improvement because:-

1. Typical labor intensive (e.g: counseling, teaching)

2. Frequently focused on unique individual attributes or desires (e.g.:
Investment advice)
3.Often an intellectual task performed by professional (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)

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5.0 Current challenges in Operations Management
1. Globalization – international collaboration

2. Supply-chain partnering – joint ventures, alliances

3. Sustainability – green products, recycle, reuse

4. Rapid product development – design collaboration

5. Mass Customization – Customized product

6. Lean operations – continuous improvement and elimination of waste

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 Thank You

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